I take this opportunity to send holiday greetings and this year to offer information about real estate law and practice. The most important asset in a person’s family balance sheet is often their residence. What makes real estate a valuable asset depends on a several factors. Most real estate brokers would probably cite the location of the residence—is it situated in a sought-after town? Another factor is one universal to most assets: whether the home can be bought and sold relatively easily. Anything that interferes with the process should be eliminated wherever possible.
One such issue is the subject of this article: the problem of improperly or un-discharged mortgages which this author estimates are discovered in as many of a quarter of all pending sales. Over the past few years, this problem of paid-off but un-discharged mortgages creating a cloud on the title has grown. It has caused hardship to both buyers and sellers alike, delaying or sometimes derailing closings. The problem has been amplified by the number of lending institutions entering, exiting or merging in the market each year. The sheer numbers of refinance and sale transactions have skyrocketed. In addition, the same loan might be sold or transferred to different lenders three, four or five times before being paid off. The same property that might have been refinanced multiple times is then offered for sale. Sellers are to often greeted with a nasty last minute surprise before their closing—that one or another of their past mortgages were never discharged or were improperly discharged. “Improperly” usually means that the lender, who actually signed the recorded discharge, is not the lender which the chain of title indicates is the owner of the loan. How can this be?
What happens is that, in many cases, the lender who actually receives a mortgage payment check is only the “servicing” lender, not the lender who “owns” the mortgage according to the Registry of Deeds. The servicing lender is also only too happy to receive a payoff check to pay the mortgage in full at some prior purchase or refinance closing, but then fails to have the proper entity sign the discharge document. Other lenders just flat-out fail to file any discharge whatsoever. On occasion, the borrower may receive the discharge document themselves, but fail to understand that THEY are then responsible to record that document in the Registry of Deeds. As of 2006, statutory revisions in Massachusetts tried to address the problem by amending G.L. c.183 § 55. That law now requires a lender to discharge a paid-off mortgage within 45 days. Failure to do so makes the lender “liable in damages …of $2,500 or the actual damages sustained” by the homeowner plus “reasonable attorneys fees and costs”.
That has not solved the problem. Lenders blatantly ignore this law, and Sellers, even though frustrated by the infuriating delays in filing discharges, most often opt not to litigate to seek damages. They mostly just want to sell their house and move on. The law does offer an option to file supporting “documentation” as defined in the statute along with an affidavit signed by an attorney involved in the transaction, but sellers do not often have all the required “documentation” that is required.
When discharge documents are inaccurate, one of two things happen at the Registry of Deeds. The discharge is recorded, but because the information is inaccurate, a title search will never reveal the filing. Computers are not, sadly, trained to look for documents that are “close”, but not quite correct. Second, a Registry of Deeds may simply return the faulty discharge document to the lender for correction. The Middlesex South Registered Land section returns as many as 30% of the discharges they receive. More often than not, the offending lender places the returned discharge in a file and forgets about them.
I recently represented a Seller who faced the task of needing to track down and record nine (9) discharges that were returned by the Registry to lenders as being inaccurate (and no further action had been taken by the lenders). It took over three (3) months to completely clean up this legal mess, and cost the seller in fees they were forced to pay to me that could not be recouped from the various lenders, as it was not cost effective to sue them.
How can a seller protect itself from such a last minute disaster? There are several recommended steps a seller should take regarding mortgage loans that are paid off:
1) Retain for future retrieval, copies of any settlement statement (often referred to as a “HUD”) confirming that a loan was paid off. A HUD is most often requested by a lender to prove to them that their loan was paid-off. Unfortunately, lenders often purge their computer system of records after a year or two, leaving their “research dept.” to chase down evidence of payment of paid-off loans. Such “research” takes time.
2) Request and retain copies of payoff statements, payoff checks and transmittal letters sent by a closing attorney in charge of paying off the old mortgage loan. Next to the HUD, this documentation is the best evidence that the loan was paid, and which lender that received the money.
3) If a loan was paid off in a purchase transaction, be sure to purchase owner’s title insurance. A title insurance company will then take on the cost and the task of retrieving the proper discharge, if that need arises.
4) Retain any letter received from the lender that may simply say something like “congratulations; your loan has been paid in full”. If photocopies of discharge papers are included with the letter, keep that also.
5) Before putting property on the market for sale, a Seller should engage their attorney to conduct a title rundown. This will reveal whether the seller has a discharge problem. Then request counsel to begin the task of tracking down the discharge so that the document will be available for an anticipated closing. As indicates above, it can sometimes take months to nudge a lender to perform their legal obligations. Start this job early, to avoid closing delays.
Taking these simple steps may avoid more expensive and stressful surprises shortly before any home sale closing.
My law practice continues to grow in the areas of estate administration and settlement, estate planning, taxation, and estate litigation. I also represent clients in all types of real estate transactions, mortgage financing and contract matters, as well as criminal, personal injury, and business litigation. My office at
5 Militia Drive in Lexington is a bright, first floor location with plenty of free parking. I invite you to visit my firm’s updated web site at http://www.georgefootepc.com; you can also contact me electronically at firstname.lastname@example.org. If you know someone in need of legal services, I hope you will recommend me to them. This letter is one of the few “advertisements” I use, as I rely primarily upon recommendations from clients. Thank you for the referrals you have provided in 2014 and I wish you and yours good health, good times, and peace in 2015.
—— George E. Foote, J.D., L.L.M. in Taxation