Brokers must understand how to prepare and file sound mortgage documents

Vernon D. Singer, partner, Millsap & Singer LLC

As published in Scotsman Guide's Residential Edition, April 2010.

When errors in the preparation or processing of mortgage instruments occur, they can have significant consequences.

Mistakes in preparing mortgages can render them unenforceable. In other words, if a loan defaults, the lender couldn't foreclose against what it thought was its collateral for the loan. Failing to bind the proper parties to the terms of a mortgage or neglecting to file a closed loan also could cause problems.

Mortgage brokers must understand how to define a property legally, who should sign a mortgage and what should occur after closing. When they don't and errors occur, trouble often follows.

Depending on the error, liens placed after mortgage origination might take priority over the first lender's mortgage. For mortgage brokers, this can lead to a demand for repurchase of the loan, a claim for damages or costs associated with fixing the error.

Description details

One example of this issue occurs when brokers fail to insert or attach a legal description of the property in the mortgage before it's recorded. A common practice for those preparing mortgage documents is to attach the legal description as an exhibit with the intent to record the legal description.

Failure to include the legal description in the mortgage calls into question what real estate serves as collateral for the loan. It is common to include the tax identification number or to list the property's address. This information, however, only is evidence of what the parties intended to mortgage.

The legal description, on the other hand, defines the actual property subject to the mortgage and the real estate boundaries. In some cases, it will reference a plat or survey filed with a local government office.

Failure to include the legal description in a mortgage can result in an inadequate record of the property subject to the mortgage. Consequently, no notice of the mortgage in a third-party transaction could mean that party is not bound by the mortgage. If, for example, there is a bona fide third-party purchaser of the property without notice of the pre-existing mortgage, then that purchaser may take title to the property without being subjected to the pre-existing mortgage. In addition, if there is a subsequent lien placed on the property, then that lien may take priority over the mortgage lacking a legal description.

In many instances, the failure to include a legal description will result in the lender having to file a lawsuit or include a count in a foreclosure lawsuit to quiet title or reform the mortgage. There may be significant delays and costs associated with these actions.

In a quiet-title action, the lender asks the court to enter an order identifying the legal description of the property serving as mortgage collateral. It can ask the court to establish lien priority to address competing-lien issues.

To reform the mortgage, the lender asks the court to enter an order to reform it by inserting the missing legal description.

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