A Mistaken Payoff, a Valid Unpaid Prior Mortgage and a Costly Closing Problem

How First American Helped Solve the Problem

A routine home sale revealed an unpaid prior mortgage after an independent escrow company provided payoff instructions for the wrong loan.
A $1.6 million home sale closed the way everyone expected it to. The buyers received title, the new lender recorded its mortgage, and the seller’s prior mortgage of nearly $700,000 was supposed to be paid off as part of the transaction. The buyer purchased a First American Eagle Policy and the new lender had a First American Lender’s Title Policy to protect their respective interests in the property. On paper, everything looked complete.

After closing, however, it was discovered that the payoff instructions provided by an independent escrow company related to a different loan secured by another property the seller also owned. As a result, payoff funds were applied to that loan instead of the seller’s mortgage on the insured property. That meant the seller’s prior mortgage on the insured property remained unpaid and in first lien position senior to the new lender’s mortgage.

The new homeowner now faced a potential foreclosure risk tied to the seller’s unpaid mortgage.

For the new lender, it created a significant lien priority issue. Rather than holding the first lien position it expected, the lender was suddenly behind or junior to an unpaid prior mortgage. And because that lien was still valid and enforceable, the unpaid prior lienholder could have foreclosed on the home taking the property from the insured homeowner and wiping out the new lender’s mortgage. What seemed like a straightforward closing issue had become a covered title issue with financial consequences for both the homeowner and lender.

Rather than holding the first-lien position it expected, the lender was suddenly behind an unpaid prior mortgage. And because that lien was still valid and enforceable, the prior lienholder could have pursued foreclosure. What seemed like a straightforward closing issue had become a major title problem with real financial consequences for both the lender and the homeowners.

Once the claim was received, First American reviewed the claim, accepted coverage and worked to address the issue. Working through counsel, First American tried to resolve the issue with the prior lender and find a way to correct the collateral problem without letting the matter escalate further.

When those efforts didn’t work, First American took action by paying off the prior mortgage in the amount of over $600,000 to protect the insured homeowner from foreclosure and the insured lender’s lien priority. After that, the company pursued recovery against the seller who had benefited from the mistake.

This case is a good reminder that even a clean-looking transaction can sometimes hide a costly problem. When something goes wrong with an unpaid mortgage and lien priority, homeowners and lenders need more than a policy on paper. They need a title insurance partner ready to step in, respond to covered claims, and help protect their interests.

Disclaimer:

As with any insurance contract, the insuring provisions express the coverage afforded by the title insurance policy and there are exceptions, exclusions and conditions to coverage that limit or narrow the coverage afforded by the policy. Also, some coverage may not be available in a particular area or transaction due to legal, regulatory, or underwriting considerations.

Please contact a First American representative for further information. The services described above are typical basic services. The services provided to you may be different due to the specifics of your transaction or the location of the real property involved.