Congratulations! Your mortgage is defective. Blog by John A. Schuh
Defective? In what way?
When you bought your home you left the loan closing with a packet of papers that you probably stuck in a drawer somewhere and you haven’t seen it since. You assumed that everything was handled properly and in the vast majority of cases it was. But in more cases than you’d think, it wasn’t. In this blog we will demonstrate one such defect. When you sign a real estate mortgage you are making a contract with the lender that simply stated says that if you don’t pay the mortgage, the bank can take the real estate away from you through a foreclosure process. You signed it and you cannot deny that or deny that you intended that you would be bound by the agreement. But before that mortgage can be recorded in the public records, it must be “acknowledged” before a notary public. Click the link to take a look at an acknowledgement.
But there is something wrong with this acknowledgement? Can you see it?
The defect in this mortgage is what we call a “blank acknowledgment”. There are many other kinds of defects but as you can see in this blank acknowledgement case, the notary public has stated that the mortgage was “acknowledged before me” by, uh-oh, there’s no name listed there of the person who signed the mortgage.
Mortgage? What mortgage? I can’t see a mortgage.
The law says that if the acknowledgement is defective, the mortgage is not entitled to be filed in the public records. The county recorder accepted it for filing anyway, however, and it is there in the public records for all to see. If the bank files a real estate foreclosure on this mortgage in state court, it will be able to foreclose nothwithstanding this defect because as between you and the bank, you cannot deny that even though there was a defect both you and the bank intended to make the contract. But if you were to file a bankruptcy case, the Trustee of your bankruptcy has a special status called a bona fide purchaser or BFP without knowledge of the contract between you and the bank. It is a fiction really. Even though the document physically appears in the county real estate records, because the law says that the defective mortgage is not entitled to be recorded, the Trustee as a BFP is blind to it. It is as if the mortgage were never recorded at all.
What does this mean? Options!!!
Every case is unique but let’s say that your real estate is worth $150,000 and you owe the bank about the same amount. But let’s also say that you have unpaid taxes, interest and penalties and a bunch of credit cards upon which you can barely make minimum payments. In a bankruptcy case the Trustee can take the defective mortgage, obtain a court order that it is invalid, and then sell the real estate for $150,000. Once the Trustee has the $150,000 he is going to pay your priority taxes before any money goes to the credit cards or to the bank who is now treated as an unsecured creditor. Bingo … you lost a piece of real estate that had no equity in it but instead of the sale proceeds going to the bank, all of those nasty taxes that have been keeping you up all night are now paid and gone!
Every case is unique but wouldn’t it be nice to have a big chunk of your student loans paid off at the bank’s expense? There are lots of options when there is a defective mortgage and John Schuh and the bankruptcy group of Schuh & Goldberg LLP can spot those defects and guide you to some places that you never thought were possible. Call us and find out more!