The Hidden Construction Risk in a Refinance

What looked like a routine refinance became a serious lien priority issue when construction had already begun before the lender’s deed of trust was recorded.

A lender closed a refinance on a small multifamily property expecting its deed of trust to be secured in first position. The loan involved substantial cash out, and the transaction initially appeared to be a standard refinance. After the loan later went into default, the lender began pursuing foreclosure.

What was not identified at closing was that construction activity had already begun at the property before the lender’s deed of trust was recorded.

As the project progressed, disputes arose between the borrower and the general contractor. Allegations related to construction defects, disputed work and project changes led to the contractor recording a mechanic’s lien of over $600,000.

Because work had begun before the insured deed of trust was recorded, the mechanic’s lien claim created a lien priority issue. The lender’s mortgage was now at risk of falling behind the contractor’s lien, undermining the lender’s expected security position and creating potential exposure for the lender.

The dispute quickly became complicated. Project records were incomplete, discovery was disorganized, and key issues including undocumented change-order work were heavily contested.

How First American Helped Address the Claim

The lender submitted a claim under its First American Lender’s Title Policy, and First American stepped in to defend the lender in the underlying litigation, subject to the terms and conditions of the policy.

To evaluate the claim and support the lender’s position, First American coordinated a detailed review of the available records and retained experts to assess the work performed at the property. That investigation helped clarify the scope of the lien claim and supported efforts to reach a practical resolution.

Ultimately, First American participated at a mediation and negotiated a settlement paying approximately $400,000 to resolve the mechanic’s lien litigation. The lender was then able to continue its foreclosure process after the mechanic’s lien issue was resolved.

This case illustrates how construction-related risks can create unexpected title exposure even in a refinance transaction. When covered title issues arise, a First American Lender’s Title Policy can help address covered claims and protect the insured lender’s interest, subject to the terms, conditions, exclusions, and exceptions of the policy.

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.