Refinancing Homestead Property; Half Measures and Half Liens
Author: Bill McEachern
“Half a league, half a league,
Half a league onward,
All in the valley of Death
Rode the six hundred.”
So wrote Alfred, Lord Tennyson, years ago, in “The Charge of the Light Brigade”. But this is not about half a league (a bit more than a mile and a half), but rather about half a lien. And that may be all a lender gets if it takes only half measures when it refinances homestead property without confirming the marital status of the titleholder.
This story begins with homestead property. If it’s titled in the name of two spouses, then it’s simple – both sign the refinancing mortgage. But what if the home is titled in only one name and that titleholder states in the loan application that he or she is single? Then just the one person signs the refinancing mortgage – correct? Well, yes, if the titleholder truly is single. But if the titleholder is married, then the spouse must sign the refinancing mortgage in order for it to be valid and enforceable. This is homestead; both spouses must sign, even if just one holds title.
What happens if the spouse does not sign? Again, this is homestead titled in the name of only one spouse, and that spouse falsely states that he or she is not married. In that case, the refinancing mortgage is not valid or enforceable. The refinancing lender may be able to rely on the doctrine of equitable subrogation, the lender subrogates or “steps into the shoes” of the prior lender which it paid off through the refinancing. The new lender has the right to impose an equitable lien on the homestead. But this equitable lien is only for the amount the new lender advanced to pay off the prior loan. If additional funds were advanced to the borrower through the refinancing, the new lender’s equitable lien will not secure any of these additional funds unless the funds were used to benefit the homestead (possibly home improvements or repairs or payment of taxes or assessments). If the additional funds were used for other purposes, these amounts are not secured by the new lender’s equitable lien on the homestead.
Now, as to half measures, we move away from legal analysis and more into closing procedures. The lender should require the borrower to sign a statement – under oath – that the borrower is single. Good. But what if the borrower does not tell the truth, even under oath? Is there more that can be done to verify the borrower’s marital status (which again, as to homestead, is critical)? Yes, there is more you can do to verify. In the credit report obtained by the refinancing lender, there is a section, which addresses tax filings by the borrower. This section should contain information as to the borrower’s marital status as reflected in tax filings. If the credit report includes this information, review it carefully, for the validity of your mortgage will depend on getting this correct. If the borrower claims to be single, trust (well, to an extent), but verify. No half measures, no half liens, no unpleasant endings.
These situations arise more often than you might think. A recent case emphasizes the consequences. In Crawford v. Federal National Mortgage Association, Case No. 5D17-3027 (5th DCA March 22, 2019), the owner refinanced his mortgage on his home, but he had remarried before the refinancing; he falsely stated in the loan documents that he was a single man. His wife never signed the mortgage. He died and the loan went into default. His widow argued that the refinancing mortgage was invalid; she was correct. The new lender argued that it could impose an equitable lien; it was correct, but of the roughly $98,000.00 refinance amount, only about $50,000.00 was used to pay off the prior loan. The lender could not prove that the additional loan funds were used to benefit the homestead property. So, the lender’s equitable lien secured $50,000.00, but not the balance of the loan. In the end, it was “half a lien”.
Bill’s experience includes but is not limited to commercial law transactions and litigation; asset-based lending, asset sales, and leasing; business sales; corporate, partnership, and LLC matters; and bank and lender representation.
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