Allan C. Brown Realtor®

 

 

 

 

 

 

 

 

 

 

What Happens When Title Liens are Found?

Question: Because of the low interest rates, we recently refinanced our house. We purchased the property in 1995, when mortgage interest rates were high. The new rate is considerably lower and we are saving a lot of money on a monthly basis. However, when we went to settlement on the refinance loan, our settlement attorney told us that there were two unreleased mortgages showing up on the title search. They belonged to the couple that sold us the house.

Apparently, when we purchased the house, the title company handling that transaction did not release those mortgages. Fortunately, the title insurance company agreed to indemnify our title attorney and we were able to complete the refinance transaction.

Does this mean that those old mortgages will no longer show up on the land records? Obviously, we do not want to go through this same process in the future, should we decide to refinance again -- or when we sell the property.

Answer: Unfortunately, those old mortgages are still on the books, and although not critical, you may want to explore having them removed from land records.

Let's explain the mortgage process. You purchase a house (or a condominium) for $200,000, and get a conventional loan in the amount of $160,000. This means that you have put down $40,000 of your own money. This is called an 80 percent loan-to-value (LTV) mortgage.

At settlement, you will sign two important legal documents required by your lender: a "promissory" note and a "deed of trust." As an aside, you will also sign a host of other documents, but that is the subject of another column.

The "promissory" note is a legal document, which spells out the terms of your loan repayment. Your original loan was $160,000, amortized over 30 years, at an interest rate of 7 percent. The monthly payment -- for principal and interest only -- was $1,064.48. The promissory note simply states that you acknowledge borrowing $160,000, and agree to repay this loan at 7 percent, on a monthly basis. The note also spells out the penalty (late charge) should you not make each and every payment on a timely basis.

Finally, the promissory note also permits the mortgage lender to accelerate the remaining balance due on the note should you be in default on any one of the monthly payments.

Sometimes, a promissory note will provide that the lender must give you written notice that you are delinquent, because declaring you in default on the note. Acceleration is important from a lenders point of view. They do not want to take you to Court each and every month that you are in default, but instead want the right to call the entire then outstanding balance due, and take legal action against you to collect on the promissory note.

The "deed of trust" is the mortgage document. In order to assure the lender that their loan is secured, the borrower signs a deed of trust, which has the effect of giving certain rights to a trustee (or trustees) selected by the lender. In some states, a deed of trust actually conveys legal title in the property to these trustees, giving them the right to immediately foreclose on the property should the borrower be in default. In the majority of states, however, the deed of trust only gives the lender a lien on the property; title remains with the borrower.

Recently, as an example, the District of Columbia enacted wide-sweeping reforms in the area of mortgage foreclosure, and changed existing law from a "title" theory jurisdiction to a "lien" theory jurisdiction. Although this is a highly technical and complex issue, it is an important protection for consumer-homeowners in the District.

Trustees under a deed of trust have two basic functions. If the borrower pays off the loan, the trustees are required to release the deed of trust from the land records. Different states have different procedures for accomplishing this release; regardless of what form is used, a paid off mortgage must be released from land records.

On the other hand, if the borrower goes into default, the trustees have the right to foreclose on the property. In some states, the trustees have to go to Court and obtain a Judge's approval to proceed with the foreclosure. This is known as a "judicial foreclosure". In other states, the trustees have the right to advertise the property with a local auctioneer and sell the property under a trustee’s deed to a successful bidder. This is known as a "non-judicial" foreclosure.

If the borrower objects to the process, and believes that he/she has defenses (for example they are not in default), the burden is on the borrower to go to Court to attempt to stop the non-judicial foreclosure.

Now that you understand the complexities of the mortgage process, let's go back to your question. When you purchased your house, your seller had two outstanding mortgages. They should have been released from the land records by the title company that conducted your settlement.

You were fortunate when you refinanced to get the title insurance company to indemnify your new lender, so that your new loan could be put in place. However, those two outstanding deeds of trust still remain on the books.

Is it critical that you take some action to have those two deeds of trust released from land records? Not really, but I can assure you that when you attempt to refinance again -- or sell the property -- you will have the same hassles and have to go through the same hoops in order to move forward. And I suspect that most purchasers of your house will not want to have these two trusts continue to remain on the land records, and will probably insist that you take appropriate action to have them released.

Thus, it is strongly recommended that you take action now, while it is fresh in your mind. How do you go about having those deeds of trust released? If the title company where you went when you first purchased the house is still in business that would be your first step. Obtain from the new settlement attorney a copy of the title search when you refinanced the property, and send that with a letter to the first title company. Tell them that they had the legal obligation to have those deeds of trust released, and that you are demanding that they take immediate action.

In most cases, this should be a relatively simple task for that old title company. We know they paid off the old mortgages, and thus they may have the cancelled promissory notes in their settlement files. Usually, when a title company conducts a settlement, it pays off outstanding obligations, and it often takes weeks (if not months) before the old lender acknowledges that payment. The old lender normally marks the original promissory note "paid and cancelled" and returns it to the settlement attorney. Once the attorney receives that cancelled note, he/she can prepare the appropriate release and have it recorded on the land records.

However, if the original settlement company is no longer in business, you should contact the title insurance company that issued you a title insurance policy when you first bought your house. The outstanding deeds of trust are liens (clouds) against your title, and that is what title insurance is supposed to clear up. You were required to obtain a title insurance policy and should take advantage of the benefits of that policy.

People make mistakes; it is human nature. I suspect that when you first purchased your house, the title attorney just did not get around to having those old deeds of trust released from land records. It's not a big deal, but it is something you should address -- and resolve -- as soon as possible.

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