Posted by Stacy (AZ) on January 10, 2001 at 10:54:53:
Well, I guess this is just one of those “level of risk” problems. There’s probably not one good answer, but it depends on the investor’s comfort with the degree of risk. As for me, I’d pass on this strategy. Banks are under extreme scutiny, from within and without. I would find it hard to believe that a lender would pay-off a several thousand dollar loan, and not find it later when the books don’t balance. At least, I wouldn’t want to “bank” on it (pun intended).
My daughter had something similar happen to her. A bank made a mistake on a car loan, showing that it was paid off. She’s only 21, and not very experienced in the ways of “financial karma”. She was overjoyed at the prospect of getting this free ride at the expense of the bank. I advised her not to spend the money, and to expect that the error would be found. Sure enough, a few months later the bank requested all the back payments she didn’t make. And if she refused, because the bank made a mistake? Repo!
In Jim’s case, we know what’s what. We would be trying to get a free ride. For me, personally, I have learned not to put out that kind of karma. What I put out into the world always seems to catch up with me one way or another.
The convention…If I go, I’ll definately search-out the Texas folks. I think I’ve only met Steph and Alex from Texas; both a couple of terrific people.
Imagine yourself in this position if you will.
You talk to a seller who “just wants out”, and they are willing to sign and give you the deed. (Subject to)
They looked at doing a refi on their loan, because they were not happy with the interest rate on the current loan.(which is really not bad at all, it is only 9%)
They bought the home 6 months ago so there is little equity if any at all.
When the refi broker calls the sellers, they find out that in order to close they must show up with $5k to close the refi.
Not being able to afford the $5k they decline to close, and leave the old loan in place.
Now here is the confusing part.
When I call the lender to varify the loan amount, payments, and the alleged 1 month arrearage, the lender claims the loan is paid off in full.
Remember, the refi never went thru.
This is probably a glitch on the lenders part, since the refi was to be with the same lender.
The county shows the original loan as being released and no new loans recorded against the home.
So, what would happen if the seller gave the deed to an investor and that investor placed a mortgage on the home now, making it a first lien?
Can the lender who “messed up” do anything to get back into first position, or does the new lien stay in first?
I know that he who records first gets first position.
No one can seem to find any loans on this home anywhere, and there have been no payments made to a new loan or new loan docs signed.
As well as the old loan payment not being made since December.
I know this may not be an ethical situation, and this is why I am passing on it, but It did make me think.
Just doing some thinking, it is a slow day today,
In the title industry, there are two types of legal notice affecting property titles. One is called “constructive notice” and the other is called “actual notice.”
“Constructive notice” is what the recording office is for. Whenever a document is recorded in the public records, everyone in the world is now given constructive notice that the document exists. This type of notice can legally protect 3rd parties like a new buyer, a new lender, a creditor filing a lien, etc. This 3rd party would have no knowledge whatsoever that a lender made a mistake and thus would not be bound by the lender’s mistake in recording the release.
Actual notice means that you have knowledge of things outside the public records that affect the property. Some examples of “actual notice”:
If a tenant is living in the property, you are put on actual notice that they might have some rights to the property even though the lease is not recorded.
If the city mails you a notice that they are widening the road in front of your house and will be filing eminent domain proceedings shortly, you are on actual notice even if nothing is recorded yet.
If you know that the owner is still making mortgage payments even though a release was recorded, you are on actual notice.
The common law held by most courts (at least in Florida) is that acutal notice and constructive notice have the same priority. Meaning that if you have actual notice that you aren’t off the hook simply because something isn’t recorded in the public records.
I would be very careful in this situation and assume that the lender will eventually find out about its mistake.
Posted by Stacy (AZ) on January 09, 2001 at 11:23:23:
Interesting question. I’ve seen this before, as well. My feeling is that if you record and end-up in first position, and it ever becomes an issue in the future for the bank who forgot to record their mtg, there would be a method to get them back in first position. I’m guessing it would be a quiet title action brought by the bank…if you didn’t agree to subordinate. How would they ever find out in the first place? Well, since there is a loan on the house, but no payments are being made, the bank will eventually try to foreclose. I have to believe the bank will discover this error at some point. Who knows, they may even discover it during an audit after you’ve bought and sold the house. The seller’s rump will be on the line when they do discover it. Guess who he’ll come after when that happens.
Posted by TRandle on January 09, 2001 at 09:34:00:
Here’s some ideas that may or may not be worth pursuing. Assuming the original loan was still in place, is the deal worth doing? If there’s some decent equity there, could you not get a mortgage for that amount? That way, if you do run into problems down the road, the property won’t be overencumbered too badly if the original re-records. You could have an easy way to go ahead and get your profit out and then hold it and see what happens?
I agree it’s kind of like an ATM showing you have 25k in your checking account when you know you don’t. When I was a foolish teenager, I withdrew a good chunk that I knew wasn’t mine. Payback, karma, whatever you want to call it was heII when it all settled. But I personally don’t see an issue with “withdrawing” funds that are “mine”. Maybe I’m missing something here. I certainly wouldn’t give up on it yet.
There is an old addage in the RE business which goes “First in time, first in line.” If the bank didn’t “record” some mortgage they may have that’s their mixup and a mistake they will pay for by having to take second position. As I read it, even if the property had “clear title” when they approved “the loan,” they still had to record the new note in order to be in first position. That’s my understanding anyway. I recommend you go down to your county recorder’s office and ask them about it. You don’t need to give them the specific details but just give them your “hypothetical” situation and see what they say. I have a feeling that once you record in first position you’ll have a bunch of laws on your side if the Lender decides to make a stink. Just my humble .02 worth.
Posted by TRandle on January 10, 2001 at 08:04:11:
You brought up good, valid points. However, I would think that if the bank has recorded a release, then no one will be looking for any payments at a servicing center. And I doubt an audit would turn anything up, unless they just happen to pick that particular loan in their sample.
I agree that it would be necessary to have some serious CYA docs drawn up by an attorney to protect oneself, but I still think there may be a way to make things work with minimal risk. Your thoughts? Also, have you decided if you will be joining the TEXAS contingent in Atlanta?