Unreleased Mortgages - How To Deal With Them

We were recently involved in a sale where all the stars aligned against us: our seller client had an old, paid-off, but unreleased mortgage which was preventing the closing because (a) seller could not locate her old HUD showing it as paid off (b) the current title company could not identify which title company had closed the loan (c) seller could not remember what title company had been used to close the sale (d) lender was no longer in business and had been acquired by a new national bank (e) that new bank said it was unable to identify the loan, promised to "look into it" but said it could not tell us when they would get back with us.

The lenders refusal was contrary to regs requiring the lender to record releases within a certain period of time, which time had long passed. But if no one pushes the legal button, the lender’s search of a years-old paid off mortgage is very low on their totem pole of tasks, even though their refusal causes clouds in title.

Back in the day, prior to the housing bubble burst and great recession, title attorneys would regularly clear unrecorded mortgage pay-offs from title by: using a credit report to show that there is a zero balance on that loan; having the debtor sign an Affidavit stating that they had paid the loan off; disregarding the mortgage because there has been no action filed against the debtor declaring that the debtor has failed to pay. 

Today, in the new era of lending, title companies can no longer use these risky methods for clearing title.

As this title issue was pressing and because the attorney was not prepared to act immediately, we decided to try to obtain all docs necessary to prove the mortgage pay-off ourselves. We started at the Indiana Floyd County Clerk’s Office which directed us to the Sheriff’s office which directed us to the Recorder’s Office - God Bless Bureaucracy!.  When we identified ourselves as being from “across the bridge” in Louisville, and unfamiliar with the Floyd County, Indiana title search system, the clerk helped us track down the old mortgage which we estimated had been filed some time between 2001 and 2004 - we knew borrower’s name and the property address against which the mortgage would have been registered.

Although we now had the mortgage records we saw that the original mortgage (mortgage 1) had had an error in the maturity date, so lender had issued a new mortgage (mortgage 2) to correct the maturity date error.  When the loan was paid off, lender released (Release 1) Mortgage 1 but failed to release Mortgage 2.  Fortunately, Mortgage 2 specified that its sole purpose was to correct the maturity date of Mortgage 1.  We took copies of Mortgage 1, Release 1 and Mortgage 2 to the  local branch of the new lender and met with the branch manager explaining that (a) the property was under immediate threat of foreclosure (b) that we had negotiated a short sale (c) were required to close no later than 3 days later and (d) that we needed immediately to obtain a release of Mortgage 2. 

The bank manager went out of her way to help us - she called her mortgage manager who contacted the national release department of that bank.  Within 15 minutes, we were copied on a fax informing the release department that they needed to issue the formal release.  That document, along with a copy of Mortgage 1, Release 1 and Mortgage 2 (showing that only the maturity date of Mortgage 1 was being corrected) was enough to pass through underwriting and this closing went forward. 

Keep all your closing and mortgage documents in a secure file - you never know when you'll need them.