Unreleased mortgages and open mortgages on a property become a cloud on title when they probably should have been cleared.
Over 36% of all fully paid mortgages are unreleased from the title at the time that the statute says they have to be cleared.
Why an Unreleased Mortgage Happens
The Release Document Requirement
If you refinance a mortgage, pay off a mortgage, or even sell a property, the mortgage holder for that loan is supposed to file a release document and bring it down to the land records to clear that mortgage from the title search.
Do You Have An Unreleased Mortgage on Your Home?
Even though the account balance of that mortgage is paid off to zero, until that release document is brought down to the land records, that mortgage still stays on the title. That title is not cleared of the mortgage even if it’s paid down to zero.
Home Equity Loans Left Partially Unpaid
Many home equity loans which were meant to be paid off weren’t paid off for the correct amount, and that also will leave an open lien on the title. Sometimes it’s not paid off because there was an interest payment that wasn’t made, sometimes it’s not paid off because the exact amount wasn’t sent down to the lending company or the mortgage company.
The average open balance on home equity loans or second mortgages that’s still open on the title could be $2,000 or $3,000, and when that happens, it’s more than just getting a release document, it’s actually getting that money to the lending company itself.
How This Creates a Priority Problem
When a release is not recorded, or a home equity loan is not paid off, that remaining lien or cloud on title becomes a priority over anything that happens after it. If the property is sold, if there’s a new mortgage or any other recorded interest, that old mortgage may become a priority over that new buyer’s interest or that new mortgage company’s interest.
What It Costs to Fix
Getting the Lender to Sign Off
The cost to cure this defect can be pretty significant. You have to go back and get a hold of that original lender or home equity loan company, get them to sign off on a release, get it recorded. If the lender is still in business and still around, it may be relatively simple, but it could still cost a few hundred dollars or so for recording fees and county stamp fees.
When the Original Title Company Gets Involved
If the title company or mortgage company that did the new loan or property transfer is still in existence, they may be brought in to help clear up this cloud on title. Were they authorized to do the transaction without clearing up the title? That’s the big question.
A zero account balance is not enough to clear the title, even if you have a statement from the bank showing a zero payment, until that release document is filed, that unreleased mortgage could still be there.
How This Shows Up in a Title Search
The original mortgage that was borrowed on a property will be recorded as a document in the land records, in a particular book and page in that property’s history.
When it’s paid off and cleared, that original recording will stay right where it was in that book, and there will be a separate document filed elsewhere that’ll cancel it out.
A title report or a title abstract will show that those two documents cancel each other and that the original mortgage is paid. You may still find, and will still find, that original mortgage document showing in the land records. If you are a casual searcher and don’t find that other release document, you may think that mortgage is still inuring to that property.
How an Unreleased Deed of Trust Happens With a Lender
The Payoff Gets Accepted but Not Recorded
One common scenario is that the loan payoff is delivered to the title company, the title company delivers it to the lender, a traditional lender, and they receive it but don’t do anything with it. They just accept the money and show the loan is being paid, but they don’t record the deed of release and reconveyance.
Large Servicers and Servicing Transfers
These servicers are large and are servicing hundreds of thousands of loans at any given time, and some have better procedures than others, so money goes and somewhere along the lines, there’s a break in the chain of command or the chain of tasks and a deed release just doesn’t get recorded.
Other times it could be that they’re in the process of a servicing change, since these notes are bought and sold on the open market, and it could be that the payoff was delivered right in the middle of that change, so it’s unclear which servicer, old or new, is responsible for releasing it.
