A year after you close title to your new home, a process server delivers a foreclosure complaint to your door. You notice that your name is listed as a defendant as well as the name of your seller. You see that the plaintiff holds a mortgage on your home that is in default but you do not recognize that lender as anyone that you have done business with. You know that you are up to date with your mortgage payments.
After an anxious phone call to the plaintiff’s attorney, you learn that the settlement agent for your home purchase is alleged to have failed to pay off your seller’s mortgage. Your next phone call should be to your title insurance agent. S/he will advise you to submit a claim by way of letter to your title insurer reporting your receipt of these papers and to enclose a copy of the summons and complaint.
If you purchased your home with mortgage financing, your lender would require you to have a lenders title insurance policy as a condition of the loan. Typically, you would also purchase an owners policy as well for a small additional premium.
If you did purchase an owners title insurance policy, then the title insurer is obligated to handle the claim. That will usually involve assigning counsel to represent you in the foreclosure, and to resolve the claim, in some cases by paying money to satisfy your seller’s open mortgage.
There are many reasons why your seller’s mortgage may not have been satisfied at time of closing. For example, it is possible that the settlement agent (your real estate attorney or the title agent) did not remit the money but rather absconded with it or in rare cases still has it in his escrow account. In such cases, you certainly have the option of filing a police report, but you do in all cases have every right to rely upon your title insurer to resolve this for you.
Alternatively, the open mortgage may have been a home equity line of credit that the seller failed to close out at the time of closing. In such an instance, even though the lender received payment in full on the mortgage, it may have assumed that because the loan was not closed out by the provision of a signed authorization by the seller, the seller intended to retain the line of credit. And it is possible that although the seller sold his home, he continued to take advances from the line of credit, and then defaulted on paying those advances back, leading to the foreclosure. Such cases are very fact sensitive, and depending upon the facts, the court may determine that the mortgage must be discharged. If not, it may be up to your title insurer to pay off the seller’s mortgage, and then to seek reimbursement from the seller, the settlement agent or other responsible party.
It is critical for homebuyers to purchase title insurance and to have an experienced and dedicated attorney to close title, for their protection. Our firm has handled title litigation for many years and provides a free initial consultation for homeowners with title issues. Call us today.