Why mortgagors can't get no satisfaction.

• Author: Freyermuth, R. Wilson
• Position: Symposium: A Festschrift in Honor of Dale A. Whitman

1. INTRODUCTION

   Full payment of a mortgage loan--whether at the loan's originally scheduled maturity or (more commonly) by prepayment upon a sale or refinancing--legally extinguishes the mortgage lien. But while such a mortgage lien is no longer legally effective, its extinguished status does not appear automatically on the public records. Until the mortgage is "cleared" from the record--typically by means of a recorded document called a satisfaction, release, discharge, or cancellation, depending on local practice--a searcher could reasonably conclude that the mortgage may affect title to the land.

   This may create a practical problem for the landowner in a subsequent sale or refinancing. For example, suppose that Alice has contracted to sell her home to the Smiths, who expect to finance the purchase with a mortgage loan from Second Bank. Alice has already paid off her mortgage to First Bank at its scheduled maturity, but no satisfaction of the First Bank mortgage yet appears of record. There are numerous potential reasons--some understandable, some not--why this may be so. These reasons could include:

   * First Bank prepared a document and submitted it to the recorder, but the recorder rejected it for noncompliance with substantive content requirements or technical recording rules.

   * First Bank prepared a satisfaction and submitted it to the recorder, but the recorder has not yet processed the recording. (1)

   * First Bank prepared a satisfaction and submitted it to Alice, but she misplaced it or failed to appreciate the need to record it.

   * First Bank made a clerical error and prepared and recorded a satisfaction of a different mortgage due to a transposition of loan numbers.

   * First Bank did not yet prepare a satisfaction because it has insufficient administrative staff to handle the volume of satisfaction documents (a problem experienced by some lenders during times of high refinancing volume).

   * First Bank did not yet prepare a satisfaction because it mistakenly believes that there remains an outstanding balance on Alice's loan.

   * First Bank no longer exists; e.g., following Alice's payoff of the mortgage, First Bank has ceased doing business, or has been acquired by another bank.

   * First Bank may simply not wish to bother with the expense of preparing a satisfaction now that Alice has paid off her loan and is no longer a customer.

   The existing record presents Alice with a practical problem. To perform the sale contract, Alice most likely must demonstrate marketable record title, (2) which she cannot do without recorded evidence of the satisfaction of the First Bank mortgage. Likewise, Second Bank would require a recorded satisfaction of the First Bank mortgage to be certain that its mortgage will have the expected first priority. Thus, without a recorded satisfaction of the First Bank mortgage, Alice may be unable to close the sale or may incur additional transaction costs to close the sale. These costs might include indemnifying the Smiths against any loss caused by subsequent efforts to enforce the First Bank mortgage, or (more likely) the cost of affirmative title insurance coverage against any loss caused to the Smiths or Second Bank due to subsequent attempts by First Bank to enforce its mortgage.

   To address this problem, each state has one or more statutes that obligate mortgagees to deliver and/or record a satisfaction in a timely fashion after receiving full payment. Unfortunately, most of these statutes--many of which date from the late nineteenth or early twentieth centuries--vary significantly in their particulars and have not evolved to reflect the transformation of the residential mortgage market. Thus, as is the case in other areas of real estate law, state mortgage satisfaction law provides a nineteenth century solution to a twenty-first century problem.

   Reforming mortgage satisfaction law is an appropriate topic for an article in a symposium honoring Dale Whitman, whose career is defined in significant part by his contributions to the modernization of mortgage law. (3) Dale's law reform contributions have come in many different roles. Most notable, of course, was his service with Grant Nelson as a co-Reporter for the American Law Institute's Restatement (Third) of Property: Mortgages, but Dale's contributions go far beyond the influence of the Restatement. Dale also served as Reporter for the Uniform Nonjudicial Foreclosure Act, (4) and as an adviser to the Uniform Real Property Electronic Recording Act. (5) He currently serves as an adviser to the drafting committee preparing a uniform act regarding beneficiary deeds (transfers on death for real estate). (6) He has also served the American College of Real Estate Lawyers (ACREL) as its representative to the Joint Editorial Board for Uniform Real Property Acts (JEBURPA). In this position, Dale played an important role in encouraging the National Conference of Commissioners on Uniform State Law (NCCUSL) to draft a uniform law governing mortgage satisfaction. (7) This article explores the end product of that process--the Uniform Residential Mortgage Satisfaction Act (URMSA)--which addresses certain key aspects of the mortgage satisfaction problem, but which might have achieved more significance as a law reform measure if it had successfully incorporated the more fundamental reform proposals recommended by JEBURPA.

   This article addresses current law governing mortgage satisfaction, the need for effective reform, and the extent to which URMSA provides (or fails to provide) that reform. Part II briefly describes the transformation of the modern mortgage transaction--from its traditional "local" character to the modern development of the "national" mortgage market--and the implications of this transformation for the way in which satisfaction of mortgages occurs. Part III discusses the current patchwork of state law mortgage satisfaction provisions, emphasizing how these provisions have not kept pace with the transformation of the mortgage market, how the lack of uniformity has accentuated problems in obtaining mortgage satisfactions, and how URMSA addresses (or fails to address) these problems. Part IV briefly describes the Mortgage Electronic Recording System (MERS) and explains why the MERS system (as it currently functions) does not provide a satisfactory potential solution for mortgage satisfaction problems. Part V introduces a promising model for law reform--the "one-touch" model--under which a responsible closing agent might deliver a closing-table satisfaction document on the mortgagee's behalf once the agent has disbursed full payment to the mortgagee pursuant to the mortgagee's payoff statement. Part V reviews the mechanics of one-touch, and then discusses the political problems and systemic barriers that have as yet prevented one-touch from achieving widespread influence as a law reform measure. Part VI finishes with some concluding thoughts.

2. THE TRANSFORMATION OF THE RESIDENTIAL MORTGAGE TRANSACTION

   Once upon a time, a mortgagor anticipating a sale or refinancing of the mortgaged land plausibly could have expected to obtain title clearance at (or contemporaneously with) the closing of that sale or refinancing. This expectation arose in significant part from the bureaucratic and geographic proximity of the mortgagor and the mortgagee. Most residential mortgage loans were made by local banking and thrift institutions, which typically held the loans in their portfolios until maturity or prepayment. Frequently, the mortgagee held the loan documents in the office where the loan was originated or in a nearby depository, and the mortgagee serviced the loan (i.e., collected monthly payments) itself rather than outsourcing this function to a remote servicer. The mortgage transaction was a quintessentially "local" transaction; the mortgagor and the mortgagee were a part of the same community (and often known to and familiar with each other).

   This proximity and familiarity helped to facilitate prompt title clearance at or following the sale or refinancing of mortgaged land. Where the closing occurred in close proximity to the county recorder's office, the mortgagee that received full payment at closing could simply proceed to the recorder's office and have the recorder make the necessary marginal notation of satisfaction. (8) More frequently, in anticipation of the closing, the closing agent (9) could go to the mortgagee's local office and, with a few hours or days of notice, obtain the original loan documents and/or a recordable satisfaction document to be available at the closing. In states where an attorney handled closings (attorney states), the attorney could have the mortgagee prepare and deliver a satisfaction document to the attorney in advance, with instructions that the attorney was to deliver or record it only after the mortgagee received full payment of the mortgage debt. These practices fit the local character of the traditional residential mortgage transaction. Local mortgage lenders, who were typically familiar with the identity and reputations of the local real estate attorneys, were comfortable providing such documentation to closing attorneys to facilitate prompt closing and title clearance.

   Today, however, widespread changes in the financial services industry have complicated the payoff, discharge, and release of mortgage instruments. (10) The most significant change is the development of the secondary market and the widespread securitization of residential mortgages. Most originating mortgage lenders no longer retain loans in their portfolios, but promptly assign them on the secondary market (facilitating the eventual securitization of those loans and the issuance of mortgage-backed securities to remote investors). Today, mortgagees also commonly outsource servicing of their loans to remote servicers. As a result, loan servicing often occurs (and the loan documents may physically reside) hundreds or thousands of...