At the Law Offices Of John Anastasio in Stuart, Florida, John Anastasio works as a foreclosure defense attorney. After graduating from Seton Hall University School of Law, he was admitted to the Florida Bar in 1987. Here, he explains what promissory notes are and the impact they’ve had on the current housing crisis.
Promissory notes are essentially a form of commercial paper, formerly known as negotiable instruments. They have a lot to do with the banking system and the mortgages that everyone received during the boom years, for the most part.
The reason promissory notes have come up more often in mainstream media, now, is because of something called the “lost note defense” that is being mentioned on television a lot. Bankers, and the lawyers that represent them, spend a lot of time saying this lost note defense is nonsense—they don’t want people talking about this type of thing and saying that they lost the original notes while they were cooking the books. But, in actuality, it’s not that physical piece of paper, per se, that we’re talking even about. There is actually something more important going on with promissory notes right now.
A promissory note, with a few exceptions, is like a bank check. So, on the front of every bank check you have got a lot of things written, including the payor and the payee as well the amount the check was written for. But the front of the check is not the only important part of the check. You have got to flip a check over to endorse it, too.
So what we’re talking about now, especially in terms of the lost note defense, is the endorsement of the promissory notes. In order to move through commerce, promissory notes have to be endorsable. In fact, they have even developed a term for when a promissory note runs out of room for endorsements as it moves through commerce from one party to another. You can attach one or more pieces of paper to the back to continue endorsing it if you run out of room on the original note. And with these promissory notes being bought and sold so frequently, that commonly happened.
But, to continue my analogy here that a promissory note is like a check—which for all practical purposes, it is—then, the problem we’re having now is banks coming in with the copy of the promissory note but not the original note itself. When a bank does that, and tries to force a homeowner to pay back a mortgage based on that copied note, than that is just like a person going into a bank and asking to cash a copy of a check. The bank simply wouldn’t do it.
The reason the bank wouldn’t cash a copy of a check is because a copy of a check doesn’t show the back side. And without seeing the back of the check, you have no way of knowing who endorsed it and who actually owns it. Paying off a mortgage based on a copy of the original promissory note is similar to that in a lot of ways.
Without knowing who the promissory note has been endorsed to most recently, the homeowner has no way of knowing whether he is even paying back the right bank. It is entirely possible that the actual owner of the note—the last person to have endorsed it on the back—could come forward at a later date and demand that he be paid back for the mortgage, even if the homeowner has already made payments to a different company.
If a bank wouldn’t be willing to cash a $100 check based on a copy, why should homeowners be willing to pay back a quarter-million promissory note based on a copy? That’s why having the original note is so important.
Right now the courts are just ramming these things through, never bothering to insist that the people holding the promissory notes produce the note itself. So homeowners could be left holding the bag twice. These things get complicated, as you can see, easily.
Unless you are working for a bank, there is little chance you would know the ins and outs of how promissory notes work. After law school, most lawyers don’t want to touch this topic because they think it’s boring. But if you are a foreclosure defense attorney—or at least a competent attorney—then you need to know this stuff. You need to know the ins and outs of the Uniform Commercial Code. And on top of that, you need to be able to explain these things in a way that clients and judges can understand.
As a lawyer, being able to present your case in a way that a judge and jury understands is critical. That’s why I think it’s so important that lawyers know these foreclosure laws and regulations inside out, and that is why I have taken so much time to make sure I have a thorough understanding of how all of this works—all in an effort to give my clients the best chances of success in their cases.
