As we continue our conversation this month on some things to look out for when selling or purchasing a home, I am going to discuss old mortgages that show up on your title report and how they might affect the sale.
Chances are, when you bought your home, the prior owner had a mortgage that had to be paid off at closing. It was duty paid, and you received your “title insurance” and the keys to your home, and all was good, until you refinanced or decided to sell. Now, your lawyer is telling you you have an “open prior mortgage” that has to be taken care of prior to closing.
What this means generally is that, even though the prior owner of your home paid off their mortgage, the lender failed to properly record the satisfaction of that mortgage with the County Clerk (or City Registrar). The problem arises because when you sell, you give your purchaser “title, free and clear” and an unsatisfied mortgage is a cloud on title.
If you bought title insurance, and can find your policy, it is a simple solution. We simply send a copy of the title policy to the purchaser’s title company and the mortgage exception can be omitted (no longer an issue). The title companies have “cross-indemnification” agreements which allows them to rely on these title policies.
The problem arises when (a) you didn’t buy title insurance or (b) you can’t find your title policy. The solution is a little more time-consuming at that point. We need to get as much documentation from when you bought the house to show that the mortgage in question was paid off.
Every title company assigns a file number to a transaction. Most of the time, we can track down the prior title company (if it still exists) and then track down the title policy. If we can’t find the title policy, there are still ways of clearing the issue. The title company may ask for a copy of the HUD (bank closing statement) or checks showing the payment to the lender. Sometimes the mortgage may be so old that it is considered an “ancient mortgage” (basically the mortgage has expired by its own terms and the statute of limitations has passed for the lender to collect on it), and with the proper affidavits signed at closing, the title company can omit it.
Another issue may arise if you have refinanced since you bought your home. Now, you go to sell it, and up pops the old mortgage that you paid off when you refinanced. Once again, the satisfaction (or the “sat”) wasn’t properly recorded confirming that it was paid off. This happened a lot in the 90’s and the mid 2000’s when there was a big refinance boom. Lenders and title companies were so busy that the sats just didn’t get recorded. This is a little more tricky.
Since the title policy only insures your interest in the property as of the date you bought it, we cannot rely on it to clear this exception. What we are going to need to do is contact the prior lender and obtain a duplicate sat and get it recorded. Easy, right? As long as the lender hasn’t gone out of business or been bought out by another lender, it just takes some time. But, tracking down a lender that has gone out of business or getting the duplicate sat from a lender where that note and mortgage was assigned 3-4 times is time consuming and frustrating and can add to extra legal bills.
What happens if you cannot track down the title policy, and you cannot get the mortgage omitted prior to closing? Are you going to have to pay off that mortgage again? No.
But, worst case scenario, the title company could agree to hold a certain amount of money in escrow until you track down and get the sat filed OR you will have to file a lawsuit known as a “quiet title action.” Basically, you ask the court to issue an order based on your proof that the mortgage is no longer valid and that the County Clerk needs to expunge it from the record. You have to serve the lender in question and provide whatever proof you can to show that it was paid off, etc. It’s not difficult, if you have the evidence, but it can be costly and time consuming.
So, the moral of the story is it is so important you keep your documents until you sell your home. We all know keeping paperwork is never fun, but this is paperwork you NEED to keep. If you have it, most issues can be resolved quickly.
But if you don’t have the right paperwork, it is important to hire an attorney who knows what to do and can help you resolve these issues.
(Little known law, by the way, New York State Real Property Actions and Proceedings Law (“RPAPL”) § 1921 and New York Real Property Law (“RPL”) § 275. RPAPL § 1921 and RPL § 275 both require a mortgagee to execute a satisfaction of mortgage and arrange to have the satisfaction recorded within 30 days. Failure of the mortgagee to do so entitles the borrower to a penalty based on when the satisfaction was recorded. The amounts are $500 for satisfaction not recorded within 30 days, $1,000 for satisfaction not recorded within 60 days, and $1,500 for satisfaction not recorded within 90 days. RPAPL § 1921 also provides that if the loan is secured by a one-to-six family, owner-occupied residential structure or condominium and the mortgagee fails to deliver the satisfaction of mortgage within 90 days, the mortgagee is liable to the mortgagor for the greater of $500 or the economic loss to the mortgagor.)
If you want to talk about this in more detail, have any questions or want to ensure you are ready to sell, if and when you are ready, please reach out.