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Slade Smith's Blog

Punished for trying to fix a flawed mortgage
by Slade Smith | 2014/05/27 |

A bank lost another mortgage because they made an error in recording their mortgage-- as is all too common, they attached the wrong legal description.  However, in this unusual case, the bank caught the error before anybody else and applied to the court to get the incorrect legal description fixed, but a judge still voided it. 

In reading the facts of the case, I thought the court got it wrong, resulting in a very unfair decision.  See what you think.

Slade Smith's Blog ::

In this bankruptcy case, In re Simmons, the mortgage lender, Full Spectrum Lending, made its mortgage loan to a Mississippi homeowner.  In the mortgage document itself, the correct address parcel ID number are included.  However, they attached an incorrect legal description to the mortgage document, and recorded it. 

Full Spectrum later assigned the mortgage to Bank of New York Mellon, which later discovered the error.  They filed a case with the court to have the deed reformed to show the correct legal description.  On the same day, they filed a lis pendens, which included the correct legal description.

One month later, the homeowner filed for bankruptcy.

When a bankruptcy is filed, the bankruptcy trustee takes ownership of the debtor's property as if they bought it from the debtor.  If an ordinary buyer of the debtor's property would be able to have a lien invalidated because of some flaw in the lien, the trustee can also have that lien wiped out, so that there's more money to pay off the creditors with valid liens. 

Here, the trustee became aware of the incorrect legal description on the mortgage, and applied to the bankruptcy court to have the mortgage voided.

Naturally, BNY Mellon objected.  After all, they had applied to the court to get the problem fixed a full month before the bankruptcy was filed, and they had filed a lis pendens to give notice to the world that they were seeking to have this mortgage fixed so that it would show the correct legal description.

But despite the bank's protest that they had applied to fix the defect in time, the bankruptcy judge wiped out the mortgage, based on its interpretation of Mississippi's lis pendens statute.

Mississippi's lis pendens statute states:

When any person shall begin a suit in any court, whether by declaration or bill, or by cross-complaint, to enforce a lien upon, right to, or interest in, any real estate, unless the claim be founded upon an instrument which is recorded, or upon a judgment duly enrolled, in the county in which the real estate is situated, such person shall file with the clerk of the chancery court of each county where the real estate, or any part thereof, is situated, a notice containing the names of all the parties to the suit, a description of the real estate, and a brief statement of the nature of the lien, right, or interest sought to be enforced.

The court interpreted the phrase "unless the claim be founded upon an instrument which is recorded" to be an exception which prohibited the filing of a lis pendens in a situation where a claim is based on an instrument which is recorded.  Finding that BNY Mellon's attempt to reform the legal description was based on a recorded instrument, the court found that the lis pendens was prohibited by the statute and therefore invalid and not effective at preserving the mortgage at least until the court in the reform action had a chance to issue its decision in that case.

I think the judge's interpretation must be wrong.

I think what the statute is saying is that if your claim in your suit is expressed in something already recorded so that the world has proper notice of the claim, including the property it concerns, you do not have to file a lis pendens. 

Here, the incorrect recording does not have the correct legal description, and therefore the bank was properly concerned that anyone interested in the property would not have notice of their potential interest.  How else was BNY Mellon supposed to provide notice of their potential interest in the property?  The bankruptcy judge does not say.

* * *

The court noted that even if it had not struck down the bank's attempt to fix the mortgage based on the lis pendens statute, it would have struck it down because the bank's attempt to fix the mortgage shortly before the bankruptcy amounted to a  "preferential transfer" that the bankruptcy trustee can reverse. 

Normally, the term "preferential transfer" refers to payments the debtor makes to creditors shortly before it files bankruptcy.  Say that a debtor, Sam, knows he is going to file for bankruptcy.  He owes his best friend John $10,000, so he pays him off completely the day before he files.  Under the law, this is considered unfair Sam's other creditors, so the bankruptcy trustee can make John pay the $10,000 he received back into the bankruptcy estate so that it can be distributed among all the creditors.

In this case, the court decided that the bank's attempt to turn its defective mortgage into a valid mortgage was an attempt to make a preferential transfer to itself.  I am not an expert in bankruptcy law and I did not extensively research the application of the preferential transfer rule in this sort of situation, but I tend to doubt that the preferential transfer rule was intended to apply in a situation like this.

* * *

I think there are other grounds whereby the court could have ruled that the mortgage was still valid.  The error in the legal description is somewhat unusual in that the legal description attached to this particular mortgage could not possibly be correct, because the property described is not in the state of Mississippi!  The attached property description begins:

All that certain parcel of land situated in the Township of Dingman, County of Pike, and Commonwealth of Pennsylvania...

So, we have a mortgage for a property with a Mississippi address, recorded in Mississippi, with a legal description which obviously describes property in Pennsylvania. 

To my thought, this situation is distinct from the more frequent occurrence where the legal description attached to a mortgage is for the wrong property, but it's not obvious from looking at the recording itself that anything is wrong.  In that case, you may find out from looking at other documents that the legal description is wrong but you can't tell but just looking at the document itself.  Here, it's very obvious from just looking at this mortgage document that the legal description must be wrong! 

So I wondered if the court would make that distinction, and perhaps treat the situation more like a situation where the legal description was simply missing, because in both situations, the document obviously does not contain the correct legal description.

As I discussed in an article last week, an incorrect legal description may have different legal consequences depending on the county, because some counties index legal descriptions and others don't.  In a county that indexes legal descriptions, a title search may not be expected to even look at documents with incorrect legal descriptions, and so a court may rule that they fall outside the chain of title, even if there are other elements within the document that indicate that it might have been intended to apply to the subject property.  But here, unlike the case I wrote about last week, there was no legal description index in the county.  In other words, a searcher would not be eliminating this document from the scope of their search because of the incorrect legal description without looking at the legal description. 

I've also recently discussed how a legal description that is entirely missing on a recorded document may have an entirely different legal effect than an incorrect legal description-- it will depend on the state.  Some states have statutes that flatly state that certain recorded documents must have legal descriptions, period.  If the state does not explicitly declare documents without legal descriptions to be valid, a court is probably going to look at the rest of the document and make some determination as to whether the property can be identified with enough certainty as to give the document the desired legal effect.  Courts will look for previous court rulings as to whether an address or a tax or parcel ID or other information on a document sufficiently identify a property and give the document effect.

As it turned out, the court didn't even come close to making this distinction.  According to the court, the law in Mississippi is that the absence of the correct legal description makes a mortgage ineffective in providing notice of the mortgage as to a bona fide purchaser, or in this case, a bankruptcy trustee-- even though the court cited no Mississippi statute that requires this, and there are prior Mississippi cases, brought up by the bank, that arguably indicate otherwise.

All in all, I do not think this mortgage should have been voided.  Yes, the lending bank or whoever did its paperwork was sloppy and they recorded an obviously flawed mortgage.  But the bank holding the mortgage (not the same bank that recorded the defective mortgage) ultimately did what it should have done-- it tried to fix the problem.  Perhaps the bankruptcy trustee wouldn't have even become aware of the defect if the bank hadn't tried to fix it.  At any rate, the result seems unduly harsh for the bank.  Nobody in this case disputes that the homeowner intended to mortgage their property, and mortgage debt is generally subject to elimination in bankruptcy under current law.  Now, with the mortgage eliminated, the debt will likely be discharged in the bankruptcy. 

What do you think? 


2287 words | 11520 views | 8 comments | log in or register to post a comment

Sloppy is as sloppy does, or you get what you pay for...

"... the result seems unduly harsh for the bank."

I have no comment on the right or wrong of the Judge's findings.

Five years ago I would think this unduly harsh, not today. Years of non-stop STUPID mistakes and errors in recorded mortgage after mortgage finds me thinking, "It serves you right for being so sloppy."  Just look at the difference in work product between in-the-records, in-the-state, experienced professional title searchers and the Get 'R Done cheap and fast "make it up in volume" non-living wage fees being offered. Lenders and title insurance companies deserve exactly what they pay for ... or not.  This is an example of Full Spectrum and its title insurance company Risk v. Reward game. In this case the risk was "getting caught"; had the borrower simply refinanced and paid the loan off the reward would have been great.

How many hands did that mortgage pass through and NO ONE noticed the legal description page was the Wrong State!

I've worked on closings where the lender sent the wrong legal description; it was corrected before signing.  Then again, many of the DIY loan packages don't have the "Schedule A attached," someone attachs it after the fully executed mortgage deed is returned.

Even if the page was correct at the time the borrower(s) signed, there were still many hands and eyes it went through up until it was handed to the County Clerk for recording.  Or maybe it was just a minimum wage file clerk whose job was to  "scan for our file, staple and mail-it-away without title bring down."  The clerk might have noticed, and not being paid enough to think or not wanting to be tagged a "troublemaker - just do your job," laughed and did what s/he was paid to do: don't think, don't question, just ship it out.

Where were all the Quality Review employees when this document passed by?

I used to work in banking, I always reviewed every page of the recorded mortgage deed when it was returned to the bank (at the very minimum, I wanted to verify every page was returned).

I used to work in residential secondary market sales, we ALWAYS reviewed every page of the mortgage deed BEFORE the loan was sold (we did not want to buy any defective loans back).

BNY Mellon didn't have an experienced Quality Control reviewer look carefully at the loans it bought?

Here's a scary thought to keep Full Spectrum awake at night (or BNY Mellon if this one is also in its package of purchased loans):  Is there a Pennsylvania mortgage recorded somewhere with a Mississippi legal description?

by Bobbi Shorthouse, Notary Public | 2014/05/27 | log in or register to post a reply

Here's a scary thought to keep Full Spectrum awake at night (or BNY Mellon if this one is also in its package of purchased loans):  Is there a Pennsylvania mortgage recorded somewhere with a Mississippi legal description?

No doubt! 

BNY Mellon didn't have an experienced Quality Control reviewer look carefully at the loans it bought?

Perhaps this error was caught during such a review-- the court opinion doesn't say.  That's what kind of bothers me about this decision-- it almost discourages review and attempts to correct defects, because when the bank tries to correct the error through the court, it only serves to provide notice to the world that the mortgage is vulnerable to be eliminated. So I think that if the bank files to correct the error before the error affects anyone, the bank should have an opportunity to fix the error.  If decisions like this were handed down often enough, banks might think they were better off not attempting to correct defects like this and just hope that nobody notices them in time to profit from them.

by Slade Smith | 2014/05/27 | log in or register to post a reply

Cost of a pre-recording QC review today or pay the price tomorrow

"If decisions like this were handed down often enough, banks might think they were better off not attempting to correct defects ... " 

Depending on the state, I respectfully disagree.  In CT, I regularly come across "re-recorded to correct" mortage deeds; e.g., missing a signature, adding or correcting a legal description, correcting a notarization block, "scrivener's" errors. Not unusual; however, it is usually recorded done within weeks or say a month or two after the original flawed mortgage deed was recorded.  The ones I see are generally with brick-and-mortar CT banks, who want a "perfect" package before selling to Freddie or Fannie. Comforting to know there is quality control somewhere out there.

In my opinion, sadly the Big No Box, reduce-costs-to-less-than-reasonable lenders and mortgage-packaging companies haven't been hit financially hard enough on poor quality documentation to clean up their act.  Will subprime "documents" be the next to take down the residential real property house of cards?  The Courts and Goverment may continue to decide to protect the individual consumer (homeowner) against the Big Banks as above and maybe next time not bail Big Banks out for their financial mistakes due to poor quality work.

CFPB:  Its primary goal and mission is to Protect The Consumer ... against shoddy banking/lending practices, including error-ridden loan documents.

Perhaps decisions like these will encourage lenders to Get It Right The First Time. Radical old-fashioned thought: An accuracy review by an experienced knowledgeable reviewer (not the person who prepared the package) before the package goes out to the DIY borrower or whomever and a second review when the fully executed package is returned, before the mortgage deed is sent for recording.

by Bobbi Shorthouse, Notary Public | 2014/05/29 | log in or register to post a reply

Re-recording vs. reforming

I'd imagine that with all the lenders that were sold or went out of business during the period of the sloppiest document practices, there's a lot of mortgages that are flawed and can't be fixed by re-recording.  Sure, if all a bank has to do to correct a defect is to re-record the document, then there is little downside for the bank for doing so when an error is caught.  But here, simply re-recording the original mortgage was evidently not an option, for whatever reason.  So the bank had to file suit with the court to correct the document.  What I am saying is that rulings like this will discourage banks from fixing errors when they can't simply re-record.


by Slade Smith | 2014/05/29 | log in or register to post a reply

re: get what you pay for

Well said Bobbi Shorthouse.   It serves them right for being so sloppy.  And a stiff financial penalty is just reward for attempting to save a dollar or two in professional fees.

  I work all over my state, and recording varies Parish to Parish.  But one consistant thing I encounter is a Schedule A is referenced as attached, and it often - can I say usually? - isn't attached.   Once in a while a recording clerk will refuse acceptance of a document referencing schedule a not attached.   I've even had a notary tell me she didn't know what I meant by schedule a she had referenced in a document with her signature.  Very basic stuff.  Read what you put your name to.  Read what you send off to record.

by Judy Maclauchlan | 2014/06/20 | log in or register to post a reply

There is a time limit.
There is a time limit for mortgages to be recorded in order to not be considered a preferential transfer.  It is thirty days from the mortgage signing.  Did the court consider the erroneous recording as a failure to record?  I have a link from an attorney's office I found online which discusses this matter.  I am not sure whether it would apply to this case 
by James Newberry | 2014/07/01 | log in or register to post a reply

I have to go with the majority commentors

It's inescapable that review was only sought shortly before the borrower's bk. The odds are the borrower was in default and the default is what triggered the review. It's also inescapable that the problem likely arose in the first place pursuant to industry-wide corner-cutting, abbreviated.

Having said that, Mr. Slade's interpretation regarding the lis pendens may be the right one.  But even so, it won't save them from the long-arm of the bk trustee with his statutory avoidance powers.  I'd also lay odds BNY Mellon didn't try for voluntary reformation with the borrower, whatever might have come of that.  

by john gault | 2015/02/08 | log in or register to post a reply

for slade re s.s. disability article
Hi, I tried to post a comment but the comment section was closed. I am completely clueless about what is going on with Social Security and I have a question I hope you can help. I have someone in my family who is disabled and is youngish. In 2036 she will be 64. I am wondering if she will be in the street with no money because of what I have read. The disabled have no voice in America and I want to know what will happen to all the people who are in their 20,s thirties and forties when the fund runs dry. Some people are so hateful calling social security an entitlement when they have not been disabled and are well off financially. I want to make sure my family is not homeless. I have a Masters degree yet I cannot for the life of me understand the graphs and projections on the Social Security site. I never paid attention in economics and finance is not an area of expertise unfortunately. I focused my studies on what interested me, for better or for worse. Can you help me to understand? Thank you, Slade. Tatiana  
by Tatiana Lilly | 2015/09/12 | log in or register to post a reply
Slade Smith's Blog

I'm the web developer for Source of Title.  Due to this role, I have become an interested observer of the title insurance industry and the broader issues arising out of real estate and finance.   I have also blogged extensively about politics under the pseudonym "skymutt" at the partisan Democratic blog Daily Kos and the non-partisan community Swords Crossed






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