Alert November 13, 2012

Ohio Supreme Court Rules that Lender Must Hold Both Note and Mortgage Prior to Commencing Foreclosure

The Supreme Court of Ohio, in dismissing a foreclosure action filed by Freddie Mac, ruled that a lender or servicer must obtain an assignment of the promissory note and mortgage prior to initiating foreclosure on a defaulted borrower. The Court addressed the question as one of standing, holding that “[s]tanding is…determined as of the filing of the [foreclosure] complaint,” and therefore a party cannot cure a standing defect by taking assignment of the note and mortgage after a foreclosure action has been initiated.

This case once again highlights the importance of complying with state-specific requirements for conducting foreclosures, which can vary widely from one jurisdiction to another. While likely to attract attention for its outcome, the opinion may be of limited import, beyond its clarification of the pre-requisites for a valid foreclosure under Ohio law.  Many plaintiffs raise procedural challenges to foreclosure in the belief that a successful suit will relieve them of their obligations under their promissory notes. The Ohio Supreme Court explicitly rejected any such notion, noting that its dismissal of the foreclosure action was without prejudice to Freddie Mac because defects in the foreclosure process do not impact the borrower’s indebtedness or continuing default. Having received assignment of both the note and mortgage, Freddie Mac will have standing to initiate a new foreclosure, should the borrowers fail to cure their on-going default.