Not Dead Yet: The Surprising Survival of Negotiability
40 Pages Posted: 11 Jun 2021
Date Written: June 1, 2013
Over and over, legal scholars have argued that the law governing negotiable instruments as applied to residential mortgages is aged and decrepit to the point of irrelevance, and now only serves to curse the present with a set of useless rules almost mindlessly preserved through codification in the UCC. Worse yet, as we charge into the age of electronic documents, scholars claim that negotiability based on the physical preservation of paper documents signed with wet ink will become even more foolhardy and archaic. At the same time, the law of negotiable instruments has entered into a startlingly vibrant era, with the subprime crash causing the Great Recession and leaving countless home loans in default and subject to foreclosure. In dealing with the resulting foreclosure crisis, even the most abstruse points of negotiability are regularly argued throughout the United States. While legal scholars consider aspects of negotiability such as indorsements in blank and allonges as archaic as prehistoric insects trapped in amber, today, these recondite points of negotiable instruments law are the subject of Congressional inquiry, federal and state legislation, newspaper articles and public debate. Webpages on how to avoid foreclosure devote extensive content to the arcana of negotiable instruments law. Courts, too, have been increasingly focused on formerly almost unnoticed aspects of negotiability, such as the use and defects of allonges.
This article discusses how the subprime crisis and resulting tsunami of foreclosures have put negotiable instrument law as applied to residential mortgages through a massive stress test, and how it has been found wanting. It discusses various criticisms of negotiability, including the harm caused by the holder-in-due-course doctrine. It discusses the challenges that the financial industry faces in complying with the requirements of negotiable instrument law, including retaining original copies of residential loan notes and complete chains of indorsements, including allonges affixed to those notes. The article discusses the financial risk to the owners of loans where those rules are not scrupulously observed and also the benefits to lenders and buyers of notes of negotiable instrument law, and the methods they use to protect themselves from risk. The article concludes with recommendations for reform to retain the benefits of negotiability without the harm to borrowers that negotiable instrument law causes.
Keywords: Securitization, Negotiable Instruments, Foreclosure, Subprime, Mortgages
JEL Classification: G01, G21, G28, K36
Suggested Citation: Suggested Citation