Why Lenders’ Mortgage Liens are at Risk
If a lender has a mortgage executed before July 1, 2002, without a maturity date listed for the debt it secures, or if the debt described in the mortgage had a stated maturity date of July 1, 2002, or earlier, that mortgage is considered to have lapsed and is void as of July 1, 2012!
With the passage of Senate Enrolled Act 298 (Act), the Indiana Legislature has acted to put lenders in the precarious position of looking for needles in a haystack to uncover mortgages that may be at risk of lapsing. For an act with such grave consequences, the Legislature should have given lenders ample time to address this situation. This Act is okay for residential first mortgages as it is customary for maturity dates to be in the mortgage and there is no change in the law for mortgages that set forth a maturity date. However, when it comes to Home Equity Lines of Credit, commercial loans, indemnifying mortgages and open-ended mortgages, the Legislature missed the boat. Instead of taking the time to understand the practical problems the Act presents, the Legislature forged ahead with no real appreciation for the ramifications of its actions. Nevertheless, with diligent planning and an understanding of the pitfalls of the law, the consequences of its shortcomings can be minimized, if not avoided.
As bad as the expiration of the mortgage issue is for lenders, there is another part of the Act that, on its surface, appears to be a good thing for lenders. The Act clarifies the rights of lien-holders omitted from a foreclosure action after the decision in Citizens State Bank of New Castle v. Countrywide Home Loans, Inc., 949 N.E.2d 1195 (Ind. 2011) by delineating a process and setting forth considerations for courts to utilize in determining the rights of an omitted party to a foreclosure action. Of course, there are uncertainties and ambiguities about the practicality of what the Act proposes, which is better suited for future examination. What is certain, however, is that the mortgage expiration issue must be dealt with swiftly.
Mortgage Expiration Changes
Indiana Code chapter 32-28-4 describes when a mortgage or vendor’s lien expires by a lapse of time and from what date that time period runs. The law has always been that a mortgage expired ten years after the last payment becomes due under the loan, as referenced in the mortgage recording. In addition, if there was no reference to the maturity date, the mortgage expired twenty years after the mortgage was executed (or date recorded if no execution date was listed). This law was of no real concern because while some Home Equity Line of Credits, commercial loans and indemnifying mortgages may not have had a maturity date listed, it would be extremely rare for the lender to have one of these credits twenty years and if it did, there would have likely been modifications to the mortgage. Despite the fact that a form of this law has been around since the 1800s, there is very little case law involving it.
However, effective July 1, 2012, where no last payment due date is listed on the record, the lien will expire ten years from the date of execution. Also new, if neither a last payment due date nor a date of execution is listed on the record, the lien will expire ten years from the date the lien was recorded.
As was the case under the prior law, if a lender has left the date off of the recorded mortgage, the original mortgagee or current mortgage owner may file an affidavit stating “when the debt becomes due.” This affidavit must be filed prior to the appropriate lien expiration period as described above, and will have the effect of the “due date” having been included on the original recording (i.e. the lien will expire ten years from the affidavit’s listed due date). The mortgagor does not need to sign the affidavit. Keep in mind that if a mortgage were to lapse under this law, the effect would be that the “lien is fully paid and satisfied by lapse of time, and the real estate is released from the lien.”
Understand this is not a rebuttable presumption that can be overcome by the lender simply showing that the debt is still outstanding. Nor is this simply an argument that a third party may have to show the mortgage is no longer valid. It appears that the mortgagor itself receives the direct benefit of this law. The underlying debt should still survive even if the mortgage lapses, but the language in the statute “the lien is fully paid and satisfied” is somewhat unclear. At best for the lender, the lapsing of the mortgage will turn the lender into an unsecured creditor. At worst, the debt will be deemed satisfied.
Thus far, no Indiana court has had the occasion to interpret the law’s “fully paid and satisfied by lapse of time” provision. At least one other state has interpreted a similar statute as barring recovery under the mortgage against even a mortgagor who is knowledgeable of the mortgage’s validity, save for the statutory expiration. See Harvard 45 Associates, LLC v. Allied Properties and Mortgages, Inc., 952 N.E.2d 411 (Mass. App. Ct. 2011).
As mentioned above, the law is effective July 1, 2012 and will render all mortgage liens which do not reference a last payment due date and were executed or recorded prior to July 1, 2002, expired immediately. Lenders will need to review mortgage documents and file affidavits prior to this date for mortgages that do not reference a due date in order to protect their interests. There should also be steps taken to assure that, going forward, all mortgage recordings make reference to a due date in order to avoid a lapse of the mortgage lien ten years from filing.
The laundry list of unaddressed issues also raises serious concerns for lenders. The law seems to ignore the reality of the complexities existing in today’s financial transactions. The law provides no explanation of how lenders are to accommodate cross collateralized situations, indemnifying mortgages, or open-ended mortgages. While disconcerting, this law is easy to comply with when there is one note and one mortgage. However, when numerous loans have been made; when the mortgage secures not only debt owed by it, but owed by another; or when the lender is simply relying on an “all debts” provision, trying to come up with a “last payment due date” for the debt can be problematic.
In addressing the concerns arising out of mortgages with no set last payment due date, lenders might try to put a due date in the mortgage (or affidavit) that is not actually tied to the final payment due date of the underlying debt. However, any lender doing this should proceed with caution.
This method appears to have support in the nature of the mortgage recording system being intended to provide notice of a possible lien and direct the searcher as to where further information may be found. If the parties agree that, notwithstanding anything to the contrary contained in the mortgage, the mortgage will expire on “x” date (which date would be years in the future and not tied to a maturity date of the loan), that may work. In addition, this method seems to have support because there is no provision in the Act that says that the parties themselves cannot waive the requirements of the Act. If the Legislature wanted to make sure that the provisions of the Act could not be waived, it could have easily done so as it has with numerous other laws.
However, if the purpose of the law is to prevent outdated liens from hindering sales, that purpose is not furthered by allowing “due dates” that are set well out into the future and un-tethered from any actual loan due date. As well, there are no provisions in the Act which seem to allow for an expiration date not tied to the maturity date of a debt. Therefore, without further clarification from the Legislature and without any case law to reference, this course of action should not be taken at this time.
To follow the statute precisely, lenders should record an affidavit or amend the mortgage with each new loan issued and secured by the lien. This method is costly but risk adverse, especially in light of the effect that an expiration of a lien may have under the new law.
A separately recorded assignment of rents should not expire due to this Act. The scope of the law is limited to mortgages and vendor’s liens on real estate. Therefore, there should be no concern about an assignment of rents expiring. However, if a mortgage lapses and the lender is left with a naked assignment of rent, that assignment of rents will have its own issues.
As explained in Bloomfield St. Bank v. United States, 644 F.3d 521, (7th. 2011), the property secured by a lien solely on rent does not come into existence until the rent is received. Because a tax lien takes priority over other liens on property not yet in existence when the liens are created, the IRS may successfully supplant the priority of a prior recorded rent assignment where the lender does not have a mortgage. If the lender were to have a recorded mortgage including a rent assignment, the rent is considered proceeds of the property which is already in existence, thus preventing the IRS from taking a priority interest. As such, a mortgage lapsing under this Act can affect an assignment of rents and the lender’s rights under it, even though the Act does not specifically address assignments of rent.
Suggested Action Steps
I. Prior to Friday June 29, 2012:
a. Review all mortgages executed in 2002 and before (while July 1, 2002, is of immediate concern, sufficient
cushion needs to be established to avoid issues).
b. Determine which of these mortgages do not reference a last payment due date in the recorded document or whose last payment due date is prior to July 1, 2002.
c. Record affidavits to add last payment due dates to the records of those mortgages that would expire in 2012.
d. If there are multiple loans secured by the mortgage, the lender should determine which loan matures last and use that date for the last payment due date.
II. Continued Diligence
a. Each quarter, check to ensure mortgage document review has moved forward on a rolling basis in order
to stay ahead of the automatic ten year expiration.
b. Monitor the Legislature and case law closely for changes to the Act.
III. Going Forward
a. Take steps to insure that all future mortgage recordings include a last payment due date.
b. Amend or file an affidavit each time a loan secured by an existing mortgage to list a last payment due date.
c. Institute a tracking system (could be similar to one for UCC financing statements) to monitor the expiration dates of all mortgages going forward in order to insure that none will inadvertently lapse.
These materials are intended for general informational purposes only. Accordingly, they should not be construed as legal advice or legal opinion on any specific facts or circumstances. Instead, you are urged to consult counsel on any specific legal questions you may have concerning your situation.
RUBIN & LEVIN, P.C. | 342 Massachusetts Avenue | Indianapolis, IN 46204 | www.rubin-levin.com