Friday, March 27, 2009

The Problem with Payoffs

Paying off a seller’s existing mortgage (or deed of trust, depending where you are) is of course a very important part of what a title company does during the closing process. This is because it is extremely important to not only extinguish the indebtedness between the seller and lender, but even more importantly to release the property from the lien placed upon it.

So what’s the big deal? All we’re looking for is a piece of paper saying the note is paid or will be paid upon the receipt of X dollars, right?

If only it were that easy.

Only a payoff from an institutional lender involving a current (non-delinquent) loan can be labeled “vanilla” these days, and even those can cause problems. Here is a list of potential payoff issues:

  1. Private Lender: If the mortgage is to Mom, Dad, or Uncle Jake, we are going to insist upon having the original release in our hands the day of settlement. Otherwise, we run the risk of never getting it.
  2. Deed of Trust Released Between Transactions: Most of the time, a first mortgage is paid off at time the property is sold or refinanced. You’ll see on a title search the release following shortly after the deed or new deed of trust (even within 6 months would be considered “shortly after”). But what if the seller bought the home in June of 2008 with mortgage money, and then there was a release of that same mortgage in November 2008 without a evidence of a refinance around that date? It is possible that they found the money to pay it off, but is it likely? We would take extra precautions to ensure the release was not a forgery.
  3. Institutional Loan, but
  • Payoff is marked “In Foreclosure,” “In Default” or something along those lines;
  • There are several months of unpaid interest on the payoff statement;
  • There are attorney’s fees or a retainer on the payoff statement; and/or
  • It’s a short sale.

The reason we are challenged by any of the circumstances in section 3 above may or may not be obvious. In short, we are concerned that even if we abide by the terms of the payoff statement we have, the lender will not provide a release upon payment citing an insufficient payoff check. In many circumstances we have found the situation to “change” between the time the original payoff was issued, and the closing. More interest accrues (which we typically account for anyway), more attorneys' fees are added, or (gasp) the property is foreclosed upon! What we need to do to ensure insurability is call to verify the terms of the payoff statement verbally, or order a new, updated one.

As always, please feel free to call me or any of our attorneys, TSRs or leaders should a closing of yours involve a "payoff problem."