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Legal Matters: Private Mortgages

kathleen_webBy Kathleen G. Moriarty, 

Peters & Moriarty, 

Attorneys and Counselors of Law

Legal Matters is a regular column intended to address general legal concerns. Since every client walks in the door with a different set of circumstances, you should not rely on this column to provide specific legal advice. If you are in need of specific legal advice, please consult with an attorney; he or she will provide advice that is unique and tailored to your legal needs.

A tight lending market hurts buyers and sellers because if buyers can’t get financing, then sellers can’t sell. One solution is a private mortgage, also known as seller financing. In this scenario, the seller holds the buyer’s mortgage instead of a bank, and the buyer makes monthly payments, including interest, directly to the seller. Some sellers actually prefer the steady stream of income to a lump sum if they’re not planning to reinvest the sale proceeds.

Although private mortgages have become less common, they have seen a resurgence as banks have restricted lending policies. They also tend to be more common in rural areas than urban.

In the long run, however, private mortgages often pose title issues for future buyers. Any mortgage should be recorded; recording establishes priority over other creditors if buyer defaults. The problem with recording — and not that it shouldn’t be done — is that the mortgage needs be discharged when the mortgage is paid off. And it usually isn’t.

Often, especially when it comes to farmland or large family tracts, the land isn’t sold until long after the mortgagor and mortgagee are dead. Children and other family members often have no knowledge of the mortgage, and, thus, obtaining a discharge is next to impossible. Although banks are more diligent about discharging mortgages, this problem has increased in the wake of the recent mortgage crisis and subsequent collapse of many banks.

Thus, when buyer’s attorney reviews the title search (the written history of the property, including mortgages, judgments, liens, rights of way, etc.), undischarged mortgages are considered title “defects.” Most County Bar Associations adopt standards for curing title defects, including those applicable to undischarged mortgages of record.

Ancient mortgages — mortgages recorded more than 50 years ago — may be discharged with an affidavit of the current owner stating that no principal or interest has been paid in at least six years. The six-year rule relates to the statute of limitations for breach of contract since a mortgage is a contract.

Similarly, a mortgage that would have matured more than 12 years ago may be discharged with an affidavit stating that no payment or demand for payment has been made during the past 12 years.

Where the maturity is unknown, the mortgage may be discharged if it was recorded at least 40 years ago and an affidavit is obtained stating that no payments or demands for payments have been made in the past 12 years.

The effort required to cure title defects can be time consuming and costly for the seller and her attorney; whenever possible, it is best to avoid title defects or at least clear them up as soon as possible. Ideally, the best practice for private mortgages is for buyer to ensure that the mortgage lists the maturity date. At the time the mortgage matures, if buyer and seller, or their successors in interest, are alive and able to execute a discharge, they should do so as soon as possible. In the event that buyer and seller do not execute a discharge, at least the recorded mortgage lists the maturity date for future buyers and buyers’ attorneys to rely on.

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