What it is?
Generally, an open-end mortgage is one that remains open
after it has been delivered to the county recorder, and it permits the lender/mortgagee
to make advances on the loan that are secured by the original mortgage, but
only to the extent the total indebtedness does not exceed the maximum principal
amount identified. An open-end mortgage acts as a lien on the property
described in the mortgage.
For example, let’s say borrower takes out a loan for $100,000
that the lender secures with a mortgage, and borrower draws down $10,000 in
principal under the loan at closing. With an open-end mortgage, the lender may loan
the additional $90,000 in principal and continue to secure the full amount of
the loan with the original mortgage.
Ohio’s Open
End-Mortgage Statute
In Ohio, ORC §
5301.232 governs open-end mortgages, and lenders must be certain to comply
with the requirements of the statute in order to reap the benefits of an
open-end mortgage. Specifically, to comply with the Revised Code, in addition to the
parties intending it to be an open-end mortgage, the mortgage must state at the
beginning that it is an “open-end” mortgage and indicate the total amount of principal
(exclusive of interest) that may be outstanding at any time.
Why Lenders Use them
Lenders use open-end mortgages to advance loan funds to
borrowers while maintaining a first priority lien and without having to issue a
new mortgage after each advance. However, this right is not absolute. The right is contingent upon whether the
lender has the option to advance
future loans or the obligation to
advance future loans – the distinction matters.
When the future loan advances are optional, an intervening
third party loan or mechanics lien may take priority over future additional
advances. If the original lender/mortgagee makes additional loan advances after
having received notice of the subordinate mortgage loan or other lien, and it
was not obligated to make the advance, then it loses its first priority lien
with respect to those later advances However, when the lender/mortgagee has an
obligation to make an additional advance on the mortgage, then its lien on the
additional advances will relate back to the time the original mortgage was recorded
and will take priority over any intervening third party loan, including a
mechanic’s lien.
There is flexibility under Ohio law as to the contractual
language needed to make an advance obligatory. A contractual obligation to make an advance arises
even if the advance is conditioned upon the occurrence or existence, or the
failure to occur or exist, of any event or fact. The Ohio Supreme Court has
explained that as long as the language requires the lender/mortgagee to advance a
certain and definite sum in a particular manner then it will be deemed
obligatory even if no advancement is ever actually made. Thus, a properly drafted open-end
mortgage can ensure a lender maintains its first priority lien.
Borrower’s Right to
Limit Indebtedness; Notice requirements
A borrower/mortgagor can limit the amount of the
indebtedness secured by the original mortgage to the amount then
outstanding. To do so, the borrower must
serve a notice to that effect on the lender/mortgagee prior to recording the
notice. The notice must reference the volume/page number or the recorder’s file
number, and the borrower’s signature must be notarized.
***
The above information is meant to provide a brief summary
regarding open-end mortgages and is not intended to cover every issue that
might arise in the context of an open-end mortgage.
__________________
No comments :
Post a Comment