Among the more common and publicized errors from the mortgage crisis are robosigned loans, missing assignments, and incorrect foreclosures. A less visible but equally dangerous risk for homeowners is that from unreleased mortgages. During the past decade mortgage refinancing was common. During the time period of 2000 – 2004, it was not uncommon for a property owner to refinance yearly or even more frequently than that.
In reality the term “refinance” is incorrect. The existing mortgage was not refinanced or modified, what actually occurs is that a new mortgage is obtained, and the prior loan is paid off. Even when the new lender is the same bank the refinanced mortgage is actually a new loan. The new loan could be for a different amount either higher or lower than the old one which made cash-out refinances possible as property values rose, at least on paper.
So the mechanism for this process was that a new loan is created and the title agency or attorney which performs the closing takes the funds from the new loan and pays off the prior lender who receives the funds to credit the loan balance to zero. That is not enough however to clear the old mortgage off of the property title. The loan balance at the bank may show a zero balance, but unless the title documents in the official county land records show the loan being removed from the title that mortgage will continue to exist as a cloud on title. In many cases a property owner would receive the paid off loan papers from the bank but not be aware that the lien was not removed from the title.
In order to do this the lender would need to create and sign a legal document called a mortgage release, which is then presented to the county recorders office for recording on title. The process of preparing, transporting, and recording the document could cost upwards of $150 including county fees. Over the past decade we have seen that many mortgage releases were never filed especially when the lenders were overworked with new loans. In some cases the borrower had to ask for the release documents specifically. Whether it was a money saving technique or simply oversight many mortgage releases went without being executed.
When doing millions of title searches over the years we have found properties with multiple mortgages because of this phenomenon, as reported in 2007 and 2008. If this is detected early, the property owner can normally request a release from the lender and fix the problem. If an extensive period of time has elapsed it is often difficult to obtain the relase as the lender my have been acquired by another bank, or be out of business. Even when the lender is still around, an old loan might be difficult to track down and get the authorized signatures for. Now it seems that some property owners are discovering this from loans paid off years ago.
MSNBC reports that more and more homeowners say that mortgages they thought were dead and buried are springing back to life, sometimes haunting them all the way into foreclosure. “The problems grew from a lot of sloppy recordkeeping that began during the housing boom, when Wall Street built a quick-and-dirty back-office operation to process mortgages quickly so lenders could sell as many loans as possible. As the loans were later sold to investors, and then resold around the world, the back office system sidestepped crucial legal procedures” the article states. Diane Thompson, an attorney with the National Consumer Law Center, says she has defended hundreds of foreclosure cases, and in nearly all of them, the homeowner was not in default. “The record-keeping on the part of the mortgage servicers is not to be trusted.”
For property owners who have paid off or refinanced a mortgage in the past decade, it may be a good idea to check the property title to ensure that the old loans have been properly cleared and released from the title.