In order to close escrow, any existing liens on the property have to be paid in full. The most common liens are existing mortgages. And usually the payoff process is pretty straight forward: the title company contacts the lender, obtains a loan payoff statement and uses a portion of the seller’s proceeds to pay off the loan the day escrow closes.
But what happens when there’s a lien on the property from a lender that’s no longer in business. In some cases, that can present a monumental challenge. Over the years we’ve had to tackle that situation more than once.
Before I go any further, if you’ve read some of my other posts, you know that I’m a big believer in finding out if there are any title issues before putting a home on the market. That stems from my years in the title & escrow industry, where I saw way too many sales fall apart due to matters which could have been addressed weeks or months earlier.
So as part of our normal pre-sale activities we routinely research the current condition of title and make sure our clients have current statements for every loan that shows up on the title report.
Usually they do, but every once in a while the seller says “Oh, I paid off that loan years ago”. Or, “That was before I refinanced that mortgage into a new loan.” As long as they have paperwork showing that the loan was indeed paid off or a copy of a closing statement from that refinance there’s usually no problem.
But what if the seller has no paperwork to verify that the loan was paid off?
And what if the lender is no longer in business, as is the case with many lenders who went under during the mortgage meltdown of 2008-2012? Even though many of those now-defunct lenders were taken over by other banks, getting a specific loan file from the old bank’s archives can often be an exercise in futility.
I recall at least three separate instances where our clients encountered such a situation.
One client was selling a home that had been in his family for decades and his dad had taken out a $25,000 loan years ago from the Mare Island Credit Union, which went out of business when Mare Island Naval Shipyard closed back in the mid-1990’s.
His dad had passed away years earlier and our client had no records of that loan. Nor was he even aware that the loan ever existed. What’s more, no one knew what happened to the credit union’s records when it closed its doors.
Ultimately, the chief title officer of the title company we were using made a decision to underwrite the file based on the size and age of the loan. Since no foreclosure proceedings had ever taken place, the title officer made the assumption that our client’s dad probably had paid off the loan as agreed before the credit union went out of business. Fortunately, we tackled this before putting the home on the market, which enabled the buyer to avoid what otherwise would have been a very bumpy escrow ride.
Another client had purchased a home years earlier using a combination of FHA financing, grant funds and junior financing from several different non-profit housing organizations. When we got the title report we noticed that there were five (yes…FIVE) different loans on the property. Our client, who was planning to sell, pulled out a huge file folder that she hadn’t looked at since she moved in, but we only came across four loans. There was no mention of a fifth loan.
Our first thought was that one of the lenders might have broken up their loan into two separate liens. But that turned out to be wishful thinking.
So after a lot of phone calls and emails, we ran into a dead end on that fifth loan, which had been originated by a non-profit that no longer existed. And none of its board members were around anymore.
Ultimately, we discovered that the City of Benicia had gotten involved several years earlier and had engaged the services of a local law firm to try to unravel everything. In the end, the city provided our title company with the necessary documentation and the assurance that it was now in control of loan payoffs for that mysterious fifth loan.
This too was all accomplished before putting the home on the market. Had we waited until we were already in contract to unravel all of this, it would have been a lengthy, nerve-wracking process — and one which probably would have caused the buyer to cancel and move onto another less complicated transaction.
The third situation that comes to mind was also on a loan that would have been paid off several decades ago. As you might surmise, this lender was also no longer in business. It had been sold to different bank, which had merged with yet another bank years ago. Our title report still showed that old loan as an active lien. The owners of the home had both passed away and their kids were handling the sale. Though they were certain mom and dad had paid that loan off when they purchased the home, they couldn’t find any records to document it.
The kids searched high and low in hopes of finding a payoff statement, reconveyance certificate or the original Note marked Paid-In-Full. But they came up empty. So this case also went to the title company’s chief title officer, who ultimately, came to the same conclusion as the title officer on the aforementioned credit union loan. This loan in question was also for a small amount, so the title officer concluded that in the absence of any foreclosure activity, the loan must have been paid off back in late 1980s. And the title company removed that lien so that escrow could proceed.
Two morals to this story:
One, don’t discard old closing statements, reconveyance certificates or promissory notes marked paid-in-full UNTIL you have proof that the reconveyance has been recorded (you can check with the county recorder’s office…or Contact Us and we can try to obtain a pdf copy for you).
And, Two, before putting your home on the market, make sure there aren’t any phantom liens clouding your title…and if there are, make sure they’re removed BEFORE going on the market.
Getting into contract is hard enough…the last thing you want is to lose a dream buyer due to a long delay caused by a title flaw that you could have resolved before coming on the market.