Monday, April 30, 2012

Title Underwriter: Property Acquired Through 'Mortgage Terminator' Lawsuits Are Uninsurable

From the Florida Condo & HOA Blog:

  • The largest title insurance company in Florida (Attorneys’ Title Fund Services, LLC, also known as “The Fund”) recently published an opinion by its underwriting counsel cautioning attorneys and title insurance companies against closing and insuring any transaction where the association’s title was obtained through a “mortgage terminator” lawsuit.

  • What is a “mortgage terminator” lawsuit? It is a marketing term used to describe a lawsuit filed by a condominium or homeowners’ association, after the association has taken title to a unit (typically through foreclosure of the association’s lien). After acquiring title to the property, the association files suit against the lender (the owner of the mortgage) to “terminate” the mortgage. When the lender fails to appear, a default judgment is entered granting the relief sought which includes cancellation of the mortgage of record.

  • Proponents of the “mortgage terminator” lawsuit have tried to convince associations that these lawsuits are a good idea. Some are actively encouraging associations to move forward with this type of action. We are seeing more and more evidence that these tactics ultimately put associations at risk. Associations may have sold such units to third-parties, claiming that the mortgage on the unit has been “wiped-out” by the mortgage terminator lawsuit.

  • In reality, the lender may still have the right to enforce the mortgage. Therefore, an association could be sued by the person who bought the unit from the association and who thought that he or she had clear title to the unit. And instead of clear title to the unit, the new owners could be forced to move out of the unit when the bank took title or would have to pay rent to the bank on a unit that they thought they owned.

  • So associations should proceed with caution and understand that any potential benefit from these types of lawsuits are outweighed by the risks to the association and the innocent third party that buys such a unit from the association.

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