A Claims Tale: All Mortgages Are Not Created Equal – HELOC Mortgage Payoff
Dealing with mortgages and deeds of trusts in a transaction seems fairly easy to address at a closing, you would think. On occasion, we see a security instrument known as the Home Equity Line of Credit (HELOC) Mortgage or Deed of Trust – a revolving credit line secured by the home’s equity – that is not treated the same way as a traditional mortgage. HELOC instruments may require additional steps to shut down and release the lien from the property.
Let’s consider a scenario:
Mr. and Mrs. Smith are the previous owners of property located at 123 Main Street, Anywhere, USA. The owner has two loans secured by the property: a $150,000 traditional mortgage and a $300,000 HELOC mortgage. Mr. and Mrs. Smith sell the property to the buyer, Tim Jones, for $475,000. As part of the closing process, the title company sends the payments to the lenders by wire transfer.
Two years later, Tim Jones receives a notice of foreclosure from the home equity line of credit lender. The lender asserts that Mr. and Mrs. Smith’s HELOC loan has a balance and was never closed. The HELOC loan once again has a balance of $300,000, and the loan is now in default. Tim Jones submits a claim.
The Lesson:
A HELOC loan typically includes a clause that gives the borrower the ability to “borrow, repay, and reborrow” from time to time, up to a maximum credit available, through a maturity date.
In our scenario, the lender may have applied the payment on the HELOC loan as a “pay down” on the loan and did not close down the account and cancel the loan two years earlier.
For a HELOC loan, the lender may require additional steps be taken to close out the loan and have the lien released from the property. In certain cases, the lender requires that the borrower execute a “Close out / Close Down” letter. Not only does the borrower(s) have to sign the letter authorizing the account to be closed, but the signed letter has to be delivered to the lender instructing the lender to do so. In some cases, a lender may even have a specific form to be used to effectuate the closing of the account.
Practice Points:
If you are planning to mail or wire payoff funds to a HELOC lender, as a best practice, if you see that the loan is a HELOC –
- carefully review the lender’s instructions to close out the account;
- ask questions to ensure all requirements are met;
- deliver the borrower’s signed close down the account letter concurrently with the payment; and
- keep a copy of the letter along with evidence on how and when you sent the “close out / close down” letter to the lender.
Even if there is a zero-dollar ($0) balance on the borrower’s account on the day of closing, you still want to ensure that the account is properly closed, and the lien released.
When you come across a HELOC mortgage, be aware that only requesting a loan payoff statement from a lender may not be enough to obtain a cancellation and release of the HELOC mortgage. By recognizing that there is a difference between a traditional mortgage versus a HELOC mortgage when it is time to pay off the loan, you will be well on your way to having the lien properly cancelled from the property.
Tags: claims avoidance, closing, real estate