From Winter, 2001 Newsletter

What Do You Do With The Problem of Unreleased Mortgages? 

(Sung to the tune of "What Do You Do With A Problem Like Maria?")

If a Mortgage has been paid, why does it still show up on your Title Commitment? Mortgages are filed and recorded with the County Clerk where the property is located. This is notice to the public that the Lender has a lien against the property that must be paid if the property is sold or refinanced and establishes the priority of the Mortgage. Since it is recorded in the Clerk’s Office, it must also be released at the Clerk’s Office. Remember that a Mortgage, even the Mortgage of a previous owner, remains attached to the property until paid and released. But all too often a Mortgage is paid but a Release is not filed with the County Clerk. To the title searcher, it appears to be a valid lien.

Why are these releases not filed when they are required? Sometimes it is an honest oversight by the previous Lender. Moreover, individuals who loan money may not be aware a Release is required when the Mortgage is paid. On occasion the Release is sent to the borrower, who is unaware that the Release needs to be recorded with the County Clerk. Or the Release could have simply been lost by the Post Office or the County Clerk. And unfortunately, there are some Lenders who do not place significant importance on filing timely Releases.

Some of this problem may have been resolved when the newest version of KRS 382.365 went into effect. It makes clear that the Lender is responsible for filing the release with the County Clerk with a copy (not the original) mailed to the borrower. More important, the fine for failure to release has been increased from $50 to $500 if not released with 45 days. If it is necessary to file suit to obtain a release, then penalty becomes $100 per day after Judgment is entered, plus attorney fees and court costs.

If you see a Mortgage on the Commitment that has been paid but not been released, what can you do? First, ask your client if they have the original Release. Despite the statute, the Lender may have sent the Release directly to the borrower. If they do not have the original release, get the account number of the old loan and the phone number of the previous Lender. This greatly assists you or the closing agent in obtaining a Release. You may also try contacting the previous closing attorney or Title Company. They may have helpful information or even the actual Release they forgot to record. The Statute of Limitations may allow the closing agent to overlook a Mortgage. This time period is fifteen years after date of maturity, although more recent unreleased mortgages may be ignored under certain circumstances. Finally, the Closing Agent may be willing to write over smaller and older Mortgages, depending on the situation.

When paying off a Mortgage, always have your client follow up with their previous Lender in 60 days if they have not received a copy of the Release.

Why are closing agents reluctant to accept a previous Settlement Statement as proof of payment? First, there is always the rare case where a HUD-1 has been forged or is from a legitimate closing where the borrower later rescinded. Second, occasionally a Lender will give an incorrect payoff which they later discover to be insufficient. While it may be too costly to foreclose on the small remaining balance, they will not release their Mortgage and will expect payment on the balance owed to them at your closing.

Finally, there is the special case of a revolving credit loan or equity line loan. Even if paid in full, unless these accounts are closed and released, future loans may be made on that Mortgage. These future loans will “relate back” to the date of the original loan and take priority over your new mortgage. For that reason, even if they are paid in full and show a zero balance, a Release must always be obtained for these types of “open-ended” Mortgages.

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This information is offered for general information and educational purposes only, and not as legal advice. Legal principles differ substantially in individual circumstances and from state to state. If you have any questions, you should consult with your attorney.