We’ve been working on an interesting file the last few weeks that involved a buyer, our seller, three past beneficiaries, the title company, their legal department, the seller’s lawyer, two brokers, many support people and a few couriers. As you might imagine, with that many people involved, things haven’t been very smooth.
I’ve never seen an issue like this – and surprisingly, neither has our title company.
Allow me to start this story with a couple of legal definitions so we can all be on the same page. California is one of about 30 states considered Deed of Trust States. Deed of Trust States differ from Mortgage States in how the title to a property is held, by whom and the laws governing possible foreclosures.
A mortgage and a deed of trust are not the same even though people usually use the term “mortgage” interchangeably for both. Mortgages involve two parties: borrowers and lenders. Deeds of trust have third parties, called trustees, who hold temporary title to the properties until borrowers pay off their loans.
When you finance a home, the lender will execute a note, a document which describes the amount of the loan, the interest rate and the terms of repayment. They also execute a deed of trust in which you – as the borrower – “convey” interest in the home to the trustee. Once you have paid off the loan, either through payments, sale of the home or refinancing, the trustee reconveys the interest in the property back to you. The trustee uses a document called the “Substitution of Trustee and Full Reconveyance.” This document is signed, notarized and electronically filed at the County Recorder’s Office. The original signed, notarized and filed copy should be sent to you.
This is where things got interesting in our file.
Our seller purchased this home in 1991. At that time, he was $30,000 short, so the seller arranged for him to borrow the $30,000 from a third party as a second loan. The deal was completed, and our seller agreed to make equal monthly payments on this second loan for seven years. Three years later, the person who lent him the money died. He was contacted by one of the heirs, and instructed to make the remaining payments to her. According to the contract, the loan should have been paid in full by early 1998.
In 2000, our client re-financed the home and the documents were handled by a large title company. That company obtained signed reconveyances from all three heirs indicating that the second loan had been paid. For some inexplicable reason, the title company did not notarize nor record the reconveyances. However, since they had the signed reconveyances, the company issued a title policy to the lender.
In 2001, our client refinanced the home again, and this second title company relied upon the same un-notarized and unrecorded reconveyances in order to provide title Insurance to that lender.
This brings us to today. We placed this home on the market, opened escrow and began receiving offers. We selected the best offer, entered into an escrow and everything was moving as scheduled. When we received the preliminary title report, the former second loan appeared and we began to seek answers. When we found the heirs and trustees of the former lender’s estate, they claimed that the loan was never paid.
Our seller contends that he made every payment in the contract, but the beneficiaries claim the loan is unpaid. The heirs are demanding that our client pay them $24,000.
Our title officer located the documents from the 2000 re-fi, in which she discovers the three signed – but not notarized or recorded – reconveyances. The heirs claim the reconveyances aren’t valid since they aren’t notarized and now we have a stalemate.
Without the notarized and recorded reconveyances, our title company cannot issue title insurance for our new buyers, and the heirs won’t resign the documents without payment.
In the end we negotiated a more reasonable settlement amount which our client paid. The heirs signed the required documents, and we were able to close the deal.
What can we learn from this?
For anyone borrowing money on a deed of trust: make sure that once you pay off the loan, you receive the signed, notarized and filed copy of the document. Keep it in a safe place for at least as long as you own the property. Keep accurate records of all payments, when they were made and to whom they were paid. Your cancelled checks are the best proof.
For those who lend money: make sure that you have copies of the deed of trust and the note. Keep records of every payment made. Be certain to send registered letters when communicating with the borrower, especially if the letter is regarding late or missed payments. Be sure to follow all legal timelines if collections or foreclosure action needs to be initiated.
As for me, I will never really know if the loan was paid or not. I believe my client and the discovery of the signed reconveyances certainly support his position. I have a new appreciation for reconveyances and the effect they can have on all parties.
