Satisfaction of Mortgage

Transcription

1 Note 2, page 468 Husband and wife own farmland as joint tenants; Bank holds mortgage which contains due on transfer clause Husband dies. Can Bank accelerate mortgage loan over objection of widow? If purpose of loan was to finance farming operation, Bank may expect to be able to accelerate But if they live on the farm, court may treat farm as residential real property (excepted under Garn Act) How might Bank structure the loan differently to address this ambiguity? Bank could have originally made two separate mortgage loans: (1) Loan A, secured only by house and curtilage; (2) Loan B, secured by rest of the farmland (and financing farm operations) In the event of transfer on death, Bank could accelerate Loan B (commercial mortgage financing farm operations), but not Loan A (residential) Satisfaction of Mortgage When mortgagor pays off the mortgage debt, the lien of the mortgage is extinguished But if it still appears on record, it s a cloud on title Thus, mortgagee must execute release or satisfaction of mortgage In some states, mortgagee must also record it If paid on schedule, debt is fully paid off at its originally scheduled maturity date Today, however, most mortgage notes are prepaid (before the originally scheduled maturity), either on (a) sale of the mortgaged land or (b) refinancing by the mortgagor How does mortgagor confirm the amount needed to make full payment of mortgage debt? 1

2 Payoff Statements Common law: lender had no legal duty to provide payoff statement (confirmation of balance of debt) Compare UCC (which requires secured party to confirm balance of debt upon request) Restatement of Mortgages 1.6 recognizes a legal duty, and such a duty is also imposed by statute in some (but not all) jurisdictions In practice, lenders routinely provide payoff letters (often for a fee, unless prohibited by statute) Mitchell contracts to buy mortgaged land from Uphoff Bank provides Uphoff with payoff amount of $125,000 Uphoff pays what he believes to be the correct balance of $124,000 Bank accepts the payment, but refuses to prepare/record a mortgage release What happens: If Uphoff was correct? If Bank was correct? Problem 2 If Bank Gave Correct Payoff Uphoff s payment of $124,000 does not satisfy the mortgage debt No accord and satisfaction (b/c the mortgage loan is a liquidated debt, not subject to bona fide dispute) Uphoff still owes $1,000, and the mortgage remains valid to secure payment of that amount If Mitchell completed the purchase, he took the land subject to the lien of Bank s mortgage If Payoff Amount Was Too High Uphoff s payment of $124K fully paid the mortgage debt and extinguished the lien Bank is liable if it fails to execute and record satisfaction w/in statutory time period Many states authorize harsh statutory penalty (MO = $300/day, up to 10% of mortgage debt; NE = $5,000), payable to owner of mortgaged property Borrower could also recover any actual damages, if they exceeded statutory penalty 2

3 Same problem, but now assume Bank provided payoff amount of $124,000 Uphoff tendered that amount, then conveyed land to Mitchell 1 week later, Bank says Sorry, the payoff letter was wrong. The payoff amount was $125,000 Can Bank collect $1,000 from Uphoff? Can it enforce the mortgage against Mitchell? Problem 2 Bank can still collect remaining $1,000 from Uphoff (Uphoff is personally liable for debt, which has not been satisfied) Bank probably can t enforce mortgage lien vs. Mitchell (estoppel) Mitchell relied upon accuracy of payoff amount to complete the purchase What if correction occurs b/c the check for Uphoff s last monthly installment payment bounced? Buyer s Dilemma Mitchell is paying cash at closing, Uphoff is going to use this cash to pay off its mortgage to Bank How does Mitchell protect himself against the risk that Bank corrects its payoff amount and thus won t release its mortgage? Closing Protection Letter Provided by title insurer, and protects Buyer against two specific risks: (1) Bank later refuses to release its mortgage (claiming the mortgage debt hasn t been fully paid off due to change in payoff amount), and (2) Closing agent misapplies closing funds and doesn t pay off Bank s mortgage at all (fraud) Due to losses, many insurers are now imposing CPL fees (e.g., MS; $35/per transaction) 3

4 Lambert owns Free Market Shopping Center; Equitable holds $10MM, 8% mortgage Mortgage is payable in full at end of 10 year term, in a balloon payment Lambert wants to pay off mortgage early (mortgage is silent), tenders $10MM Can Equitable refuse this prepayment? Prepayment Perfect Tender in Time Rule Traditional rule: if mortgage is silent, mortgagee can refuse prepayment. Rationale: Lender should be get the benefit of the investment it made when it made the loan E.g., if current interest rates are now below contractedfor rate, lender will suffer a reinvestment loss due to prepayment In remedies terms, does it make sense to give mortgagee the right to specific performance of the promise to timely repay? Perfect Tender in Time Rule It is true that prepayment by the borrower will impose a reinvestment loss on the lender, if interest rates have declined in the interim But, money damages would inevitably make the lender whole (damage due to reinvestment loss can be calculated with relative precision) So why not let the borrower prepay (i.e., breach the contract), as long as the borrower pays lender for the damages the lender s suffers as a result of the breach? Restatement 6.1 rejects perfect tender in time rule; if mortgage is silent, mortgagor can prepay w/out a fee (i.e., prepayment = not a breach) Fannie/Freddie single family form allows prepayment w/out fee (has cultivated expectation among lay people that mortgage loans can be freely prepaid) Lender should bear burden of insisting upon express restrictions or fees on prepayment Note: only two states (PA, MO) accept this view; the rest still apply perfect tender in time rule 4

5 Lambert owns Free Market Shopping Center; Equitable holds $10MM, 8% mortgage Mortgage provides for prepayment fee = 6% of the amount prepaid Lambert wants to prepay (balance = $10MM) Interest rates are now 10% Can Equitable impose $600K fee when it suffered no loss? Problem 3 5