Just as the refinance boom hits and the pipelines swell beyond capacity, a wrench gets thrown into the process, which is the unexpected closure of courthouses across the nation due to the Covid19 aka Coronavirus.
When this happens, title companies cannot check for unknown/undisclosed liens or record mortgages. Even recording through e-filings can be risky. It is a double whammy to lenders who need to ensure that their lien is recorded properly in order to satisfy their contractual obligations to their investors.
Brian S. Levy of Katten & Temple, LLP and author of Levy’s Mortgage Musings, notes the complexities of courthouse closings and what lenders should consider.
“Although, as a national industry, we try to standardize our products and processes as much as possible, real estate law remains a matter of state law which can differ in dramatic ways beyond merely the foreclosure process. This situation with county clerk offices closing in places exposes an example of those state law differences.
The impact of the inability to record mortgages (or releases) for an extended period of time are questions under state law that can have different legal effects in each state (that is why title insurance companies get the big bucks).
Most states operate under one of 3 basic rules for enforceability and priority of a mortgage:
1) “Race to the courthouse” (recording),
2) Race & Notice, or
3) Notice (i.e., a person seeking to enforce a superior mortgage will be defeated if they knew or should have known about the prior mortgage regardless of recording).
On the issue of Notice, consider that since credit reports obtained by institutional lenders should show most debts, Notice may be satisfied in those states even if the mortgage is not recorded. In some states, such as Illinois, an “equitable mortgage” can even be possible, but it might be really hard to convince a title insurer or investor to buy that argument.
Your local title companies should know the law of your state, and you should ask if they are willing to provide gap coverage without exception for recorder office/virus related closing contingencies (you must read the actual terms of gap coverage to confirm the insurance). Whether your investors will buy these loans with that coverage and a delay in getting the recorded mortgage is another question entirely.”
It’s tough for lenders to set policy when they are faced with an issue that none of us have seen in our lifetime or could possibly prepare for to this scale. Prudent lenders need to consider State laws [individually, unfortunately], Investor, and GSE’s issues that may result in buybacks if loans are not closed properly. Lenders are in a catch-22 due to borrower commitments, secondary marketing commitments and the ability to earn income and stay afloat. We are expecting some guidance from the GSE’s later this week and can only hope that they have some guidance to protect lenders from the risk of closing loans in areas where courthouses are closed for business. We will keep you posted as we learn more!
