For this month’s article, I am borrowing extensively, with permission, from an Underwriting Bulletin sent to us by North American Title (NATIC). The Bulletin concerns certain liens that may appear on title that may be somewhat curious. If you quiz the seller or borrower about the lien, they may be clueless about it. Regrettably, I think there is a good reason for that, which the article hints at and I will discuss further below. Here’s the bulletin, virtually unchanged by me, followed by a personal anecdote:
“Many U.S. homeowners sought and obtained mortgage debt relief during the “Great Recession” from a variety of federal programs, including Home Affordable Modification Program (HAMP) or Home Affordable Refinance Program (HARP), in order to prevent home loss due to foreclosure. The relief provided through HAMP and HARP often required the affected homeowner to execute a subordinate mortgage (Relief Mortgage) in favor of the debt relief providers, for example, HUD, to secure repayment of the relief provided at a future date. Many of these homeowners may not be fully aware of the impact of the relief provided (emphasis supplied by me) and the legal affect of the Relief Mortgage they executed earlier. Now, many of these homeowners are positioned to either refinance or sell their homes. As part of the sale or refinance of these homes, settlement agents must obtain payoff information for both the original mortgage as well as the Relief Mortgage and follow through after the closing to ensure that both are satisfied and discharged of record.
Several national underwriters, including NATIC, are experiencing claims due to the failure of settlement agents to satisfy and discharge both mortgage liens on the properties being refinanced or sold. In these scenarios, the title agent may have mistakenly concluded that the payoff provided by the first mortgage holder or its servicer included amounts due on the Relief Mortgage. It appears that many of the selling homeowners actually believed they were not obligated to make payments under the Relief Mortgage (emphasis supplied by me) and advised the title agent not to confirm payoff status with that second position lender or its servicer. Some title agents may have misconstrued the mortgage instruments and reached a mistaken conclusion that the mortgage to be satisfied was a reverse mortgage (a/k/a HECM or Home Equity Conversion Mortgage) and that no separate pay off information was necessary in order to secure release of the second mortgage.
Settlement agents who identify a Relief Mortgage in a title search or commitment must obtain a separate pay-off letter for the Relief Mortgage either from the lender or its servicer prior to the closing, and include a separate disbursement in full satisfaction of the Relief Mortgage on the closing statement. Very often, the Relief Mortgage will show HUD as the lender, and will involve NOVAD Management Consulting (NOVAD) as the servicer. However, it is possible for a Relief Mortgage to be administered by the senior lender, or its servicer. If that is the case, the title agent must still obtain 2 distinct payoffs – one for the senior mortgage and one for the Relief Mortgage. You may need to send the senior lender or its servicer a description of both mortgages in order to secure a valid payoff and release. This is the only way to be certain you are securing both loan payoffs in advance of the closing.”
Several months ago, a very close friend of mine was refinancing the 1st mortgage on his house and ran into a stumbling block prior to closing. Apparently, there was something appearing on record that was holding up the deal. He asked me to intercede. I asked him to e-mail me the offending document. It was clearly a deed of trust. The title notes made it clear that it was in a second position. I explained to my friend that it was a second mortgage on his house, but he was adamant that he didn’t have a second mortgage. I reminded him that he had sought some relief from Bank of America or Wells Fargo a few years back. I asked him about the details. He explained that the mortgage company had reworked his mortgage knocking off some of the principle so as to lower his monthly payment. I asked him if anyone ever told him that they were carving out some of the principle and re-working it as a new, and junior, indebtedness. He said no. We examined the signatures on the Deed of Trust together and they were clearly those of he and his wife. I also asked him if an attorney was present when he agreed to the relief package with Wells Fargo or Bank of America. You can guess his response.
As indicated in the NATIC Bulletin, not only are the Sellers or Borrowers clueless about these liens, they may supply you with information that throws you off the scent. It is clear to me that the Banks were not forthcoming about the intricacies of these transactions. Whether or not that was purposeful, I will leave for each of you to decide. (I have my own suspicions). Despite what you may be told, these liens are valid second liens. While they may be excused over time, if the property is sold or the first mortgage refinanced, these second liens may become due and payable immediately. Don’t fall into this trap. You cannot take what the sellers or borrowers are telling you at face value. Not because they are lying to you, but because someone was not honest with them initially. Be sure to get a payoff or a cancellation in hand before closing.