Lenders Beware: Mortgage Errors Can Really Cost You

One consequence of a struggling economy is property owners, both residential and commercial, facing financial difficulties and filing for bankruptcy.  Typically, a secured lender has additional protections in bankruptcy, but a bankruptcy trustee may try to avoid the mortgage, freeing up more potential cash for the other creditors, if he or she believes there exists grounds to do so.  When a mortgage is avoided, the secured lender is not longer ahead of the other creditors, and instead is lumped in with the other unsecured creditors and sharing any assets of the bankruptcy on a pro rata basis. I bring up the bankruptcy context because the options for protecting a secured lender are more limited. Outside of the bankruptcy context, a court would find against a bona fide purchaser of real property if the purchaser had actual knowledge of the mortgage, regardless of whether the mortgage was recorded correctly or not. Bankruptcy situations are different and for this reason, lenders and their legal counsel need to take care to protect their interests.

Last year I posted an article regarding the ability of a bankruptcy trustee to avoid a mortgage if it was not properly executed.  A mortgage may also be avoided if the legal description is insufficient so that a court could find that the mortgage was not properly in the chain of title for the real property. 

Mistakes happen, and typically, if caught soon enough, are fixable. What matters is to fix the mistake correctly.  If a mortgage is recorded and the description of property is missing a parcel or is otherwise incomplete, the safest course of action is to re-record the mortgage with the complete legal description. However, some may chose to address the error by recording a corrective affidavit. The law varies from state to state regarding the use of corrective affidavits. If your state allows this option, make sure it is followed to the letter. A failure to dot the i's and cross the t's can cost a lender dearly.

No comments :