Holding The Bag

When this title agent was asked to handle a purchase of this home, there was one mortgage to be paid off through closing.

The mortgage secured a bank line of credit, which the seller used to finance his businesses. The credit limit was $450,000.

Before closing, the seller went to the bank and told them he was selling his home, but wanted to keep his line of credit open and would provide substitute collateral. The bank agreed, and the seller instructed the closing officer to dispurse net sale proceeds of $414,987 to the bank. The closing officer called the bank, getting verbal confirmation the bank would be releasing its mortgage.

The transaction closed, the payment was made to the bank, and title policies were issued to the new owners and lender including coverage against the "old" mortgage.

Two years later, when the new owners applied for a loan, they were told the old mortgage remained "open" – still affecting their home. So they contacted the title agent.

The agent contacted the bank, and was told that the credit line now had a balance due of more than $300,000 – and the seller was delinquent.

An investigation showed that the seller had offered the bank substitute collateral, but it was turned down. At the same time, the bank continued to allow the seller to draw funds from the credit line. Now, a new bank officer in charge didn't know anything about a promise to release the mortgage – and they wanted to be paid.

Ultimately, the title policies paid $50,000 to the bank for a release of the credit line mortgage.

MORAL

In most parts of the country, Tennessee included, it's customary to close real estate transactions with releases "to come" for paid-off mortgages and liens. The risk that a secured credit line will not be closed – but merely paid "down" and later re-accessed by the borrower – is substantial.

Title insurance is your best protection against this risk.