query: what is an unsatisfied mortgage

When a mortgage lender receives payment in full that mortgage lender must file a document at the county courthouse to let the public know that the mortgage has been satisfied.  In PA mortgage lenders have 60 days to file this document.  It is not uncommon for mortgage lenders to fail to file the satisfaction document and so unsatisfied mortgages are a constant source of title insurance claims.

When a title search reveals an unsatisfied mortgage the first order of business is to determine whether or not the mortgage had in fact been paid in full.  If not, then someone must pay the balance before the mortgage lender will file the satisfaction document.

If the mortgage has been paid in full, there are options for moving the transaction forward.  The best option is to contact the mortgage lender and get them to file the satisfaction.  This may take time and if time is of the essence other options may be more appealing.  The title insurance agent who is in charge of the current transaction will decide whether or not they will accept a letter of indemnification from a previous title policy or perhaps they may accept a letter from the mortgage lender affirming that the loan is paid in full and that they are in the process of satisfying the mortgage.

There are some cases in which the mortgage lender cannot be located and there is no acceptable way to cover the unsatisfied mortgage with indemnification.  In these cases the owner of the property may need to hire an attorney and file an action to quiet title and remove the mortgage lien.

prior owner continued to use an open line of credit

This is the title claim we title agents are trained to avoid.  We take the extra step to freeze the line, if possible.  We have the seller sign a statement requesting that the line be closed and satisfied of record.  This is what we are supposed to do.  Yet, when we recently processed a refinance title insurance application, we were shocked to uncover a situation in which a prior owner [TWO owners back] was using a line of credit attached to our consumer's house.  How could this happen?

We started our investigation by contacting the bank and asking them to satisfy the mortgage.  That's when we found out that the line had a balance and was still in use.  WHAT?  The bank refused to satisfy or assist us beyond a courtesy call to the borrowers asking that they call us.

We then made contact with the title agent who handled the sale that included the supposed payoff of the mortgage.  This title agent is the one who SHREDDED her files and so we had no evidence to show the bank that they should have closed the line and satisfied the mortgage.  [Two ex-employees of the SHREDDER did offer some help by somehow getting into the computer system and reprinting documents so we had a clue about the contents of the HUD-1 and the policy.]

Next we made contact with the title agency who handled the next sale, the one where our consumer was the purchaser.  We asked if they had discovered the unsatisfied mortgage and they said yes, however, they did not pursue satisfaction.  They requested and obtained an indemnification letter from the prior title company.

So, we had the first agency who may not have followed good standards and asked for satisfaction.  Our clue that they may not have followed good standards is that they SHREDDED their files.

We have the next agency in line who also, in my opinion, didn't do such a good job.  If they had contacted the bank they would have discovered that the line of credit was still in use.  They also seemed to have insured over this unsatisfied mortgage without even disclosing its existence to their consumer.

We obtained a copy of our consumer's owner policy and then contacted BOTH title companies and had our consumer open a claim.

We got a great response from the claims department at First American.  The attorney from the other title company was no help except that he wanted us to take an indemnification letter.  We wanted more than that and First American sent demand letters to the prior owner and the bank.  They offered and we accepted indemnification with PERFORMANCE language.  Our consumer and lender were both on board and okay with this performance based indemnity as was my underwriter.  We closed this transaction this week and the good news is that First American was able to get a release from the bank prior to our closing - much sooner than expected. ;)

OK...gotcha...query: what if title company didn't close a line on your property

I'm presuming you mean an open end line of credit, right?

When a title insurer is paying off an open end mortgage which is a line of credit, they should request that the mortgage lender freeze the line. With evidence of a frozen line, the payoff letter is reliable. If the mortgage lender refuses to freeze the line, even with a written request of the borrower, the payoff is kinda risky. We handle it by re-checking the payoff verbally before remitting.

In either case, we always write or type directly on the payoff letter "Please close and satisfy." and have the mortgagor/borrower sign it. Some mortgage lenders will provide a statement of that sort on their payoff letter and place for the mortgagor/borrower signature.

The title insurer has a duty to be careful in their examination of title and look at the mortgage document to see if it is open end and then follow the steps I have just outlined. Why? Well, if the line isn't closed and the underlying mortgage satisfied, the interest of the insured buyer or lender is at risk.

Notice I said buyer or lender and I also said insured. A title insurer is performing this function to protect those they insure.

If you are the mortgagor/borrower under the line of credit that stayed open, well it's unlikely that the title insurer has liability because you have personal knowledge of your line of credit and you have an obligation to make certain it is closed and you also have an obligation to not use it again.

If you are the purchaser of property and you find that a line of credit for a prior owner is still open and unsatisfied, contact your title insurer. If you have an owner policy, they have a duty to protect you and rectify the situation.

Hope that helps.

query via e-mail: unsatisfied HELOC

For instance I have a crazy situation where a borrower had a second and when the settlement happened the second was paid off and a new HELOC opened, but the old one was never closed, and even after calling the bank, Chase they did not close it. So the borrower used it and has been paying on it for over a year. Of course he is now in trouble financially. The problem is the new HELOC went into third position, the existing Chase one stayed in second. Isn't that all the title agents fault, Chase and Countrywide for not caring enough to get it all straight.

My guy is worried if he defaults on all of this they will come after him. He simply used a credit line they did not close after pay off. This client would be happy to pay someone for some good advice. Where is the liability? I need to try and negotiate a solution, but don't want to even call the lenders until I have a good handle if they can hold him responsible for this mess.

If the new HELOC lender has a title insurance policy insuring their position, they could make a claim to the title company if they suffer a loss. If they did not put title insurance in place they have no guarantee of lien position. The title agent has the responsibility of paying off the line of credit and if requested, sending a request for satisfaction and closure. They would only step in and have liability moving forward, in my opinion, if there was an insurance policy, owner or loan, that guaranteed an interest coming behind the satisfaction.

The lender who accepted the payoff has an obligation to satisfy - usually there is a state statute that rules - if the borrower or their agent followed the instructions in the payoff letter.

The borrower has an obligation to watch their own finances and control themselves.

That's pretty much it in my book. ;)

Any other thoughts?