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There are many reasons why a real estate document may be defective. Some are obvious: lack of signatures, lack of or defective acknowledgement, failure to include a description sufficient to identify the property, wrong or misspelled names of the parties, etc. Some are not so obvious. There is, of course, what seems to be the never ending question of who must sign a mortgage. The simple answer is that whoever is in title (named on the deed, owns the property) must sign the mortgage. But, as we all know, things are rarely simple.
I have a friend, Ray, who is retired and isn’t doing anything much these days, so let’s put him to work for us on these problems. Ray has a lovely wife whose name is Betty. Suppose Ray and Betty buy a house and they want to finance part of the purchase price. First, they will need to make sure that they get a deed correctly naming them as the purchasers. They will then own the property as tenants by the entirety (because they are married). If one of them should die, the other one automatically becomes the owner of the real property without the need to record another deed. Now, as they are financing the purchase of their new home, they will need to sign a note promising to repay the money that they borrowed from the bank. They will also be asked to secure their promise to repay the loan by signing a mortgage to the bank, which will then be recorded and becomes a lien on their property until it is cancelled or discharged of record.
Suppose the deed names both Ray and Betty as the new owners, but only Ray signs the mortgage. The mortgage is defective because it does not protect the bank if there is a default and it wants to foreclose. The bank would not be able to foreclose on Betty’s interest because she didn’t sign and therefore did not give her consent. Maybe Betty signed the note. In that case, the bank could sue Betty on her promise to repay, but it couldn’t foreclose her interest in the real estate.
What happens if Ray bought the house in his name alone and a few years later decides he wants to get a loan to put on a new addition for his model railroad? Betty will need to sign a mortgage for this transaction because she is living in the house as the marital home. Ray may find it difficult to continue living in the house if he is intent on spending all of that money on his trains.
But, let us add some complications to these simple situations. Suppose that Betty signs the mortgage, in either case, but her name does not appear on the first page where the borrowers are named. The mortgage is defective. Suppose that both Ray and Betty sign the mortgage and their names appear in all the right places, a notary signs and seals everything nice and clear and the mortgage gets recorded, except, Betty didn’t actually appear before the notary. The mortgage is defective.
Some of these things may seem like inconveniences that can be fixed and they can be fixed. However, there is something called Bankruptcy lurking in the forest. The Bankruptcy Act is a federal law designed to help debtors get out of monetary distress and to reestablish their financial lives. A Trustee in Bankruptcy is someone appointed to take control of the debtor’s assets and to fairly use those assets to pay off the debts. The Bankruptcy Code gives great powers (called the “strong arm” provisions) to a trustee to “avoid” certain debts, including defective mortgages. The trustee is deemed to lack notice of a properly recorded, but defective mortgage. This can become a very big problem if the borrower files for bankruptcy protection, or if a creditor forces the borrower into bankruptcy. As far as the bankrupt estate is concerned, the mortgage does not exist and the lender will have to stand in line with the rest of the unsecured creditors. He will be very unhappy and, while standing there in line, will surely be reviewing his title insurance policy.
Another area in which a trustee may attack the interest transferred by a document is in the timeliness of its recording. Generally, a document must be recorded or filed within ten days of the creation of the interest that it secures or conveys.
This is only a very brief synopsis of the many, many reasons that a document can be attacked, or, that it does not convey the interest intended. Title insurance underwriters, of course, can get stung paying claims or litigating matters involving defective documents. Language in title policies has been revised time and again to tweak protection or to accede to lender’s objections that coverage should be more liberal. Title insurance producers can help to protect underwriters and clients, as well, by taking the time necessary to carefully review documents and to follow correct procedures for signing and recording. The writer would like to thank Ray and Betty for their valuable contribution to this article.
