26 October 2020 / Larry R. Rothenberg

Equitable Mortgages and Lenders' Due Diligence

Topics: Real Estate

After a default, can the lender nevertheless enforce a mortgage through foreclosure if due to an oversight, the mortgage was never recorded and no copy is available?  An Ohio Court of Appeals shed light on this issue in a recently-decided appeal in Wilmington Savs. Fund Soc. v. Woods.
Some Background
Ohio Revised Code §5301.01(A) provides that a mortgage is to be signed by the mortgagor and acknowledged before a notary or other authorized person.  Ohio Revised Code §5301.25(A) requires that a mortgage is to be recorded with the county recorder in order to be effective against subsequent bona fide purchasers without knowledge of the instrument.
The purpose of recording a mortgage is to give third-parties notice of the existence of the mortgage.  A title search would reveal to a prospective buyer or lender, that the title to the property is subject to the recorded mortgage.  The prospective buyer or lender could use that information in deciding whether to proceed with its purchase or loan.
If a lienholder fails to record an encumbrance on real property, the mortgage holder will not be entitled to claim constructive notice of the mortgage against a third party.  However, Ohio case law establishes that an unrecorded or defectively executed mortgage will lose its priority to other properly recorded liens, it is nevertheless an equitable mortgage that is enforceable against the mortgagor himself1.
Are the Borrowers’ Heirs “Third Parties?”
In the Woods case, the lender filed a foreclosure alleging that the borrower, who had become deceased, signed a note and mortgage.  The lender attached a copy of the promissory note as an exhibit to the complaint.  However the mortgage was never recorded, allegedly as a result of an error made at closing.  The lender admitted that it did not even have a copy of the unrecorded mortgage. Hence the lender had two potential difficulties: 
  1. The mortgage was not recorded, and 
  2. The lender did not even have a copy of the unrecorded mortgage.
The Case Continues
The Court of Appeals decided the Woods case on the narrow legal question of whether an equitable mortgage may be enforced against the heirs of a deceased mortgagor.  However, the trial court had made no findings of fact as to whether a mortgage had actually been agreed to, or its terms.  Therefore, the Court of Appeals returned the case to the trial court to make a determination in that regard.  The lender has obviously incurred, and will continue to incur, substantial litigation costs and delays, in attempting to recover the defaulted loan through foreclosure.
The Takeaway for Lenders
Due diligence is the watchword.  Lenders should (among other things):
  1. Ensure the loan documents, including the mortgage, are error-free before they are executed.
  2. Ensure that the loan documents are properly executed by the correct parties, that the signers of the mortgage acknowledge their signatures before a notary public, and that the mortgage is properly notarized.   
  3. After the closing, follow up promptly to obtain a copy of the recorded mortgage.
  4. Retain the recorded mortgage and any mortgage assignments, and the original of the promissory note with any executed allonges attached to it, in the lender’s records.  
For a copy of the Woods case, click here.
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

1 Daniely v. Accredited Home Lenders, 2013-Ohio-4373; Citizens Nat. Bank in Zanesville v. Denison, 165 Ohio St 89, 95, (1956): HSBC Bank USA, N.A. v. Ward, 2017-Ohio-7315 (8th Dist.).

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Larry R. Rothenberg


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