In Hindsight: Finding What the Parties Intended
In a foreclosure action, the complex part of a title issue is generally the attorney’s attempt to determine the true intention of the parties at origination. The most troublesome loans are home equity loans. Home equity loans (HELOC) almost always lack title insurance and supporting documentation. When requested, the origination file provided by the servicer generally includes only a copy of the mortgage. A closing transaction involving a HELOC has historically been a less intensive process than a purchase money mortgage or a refinance. A HELOC in the mortgage world is akin to a credit card. The borrower withdraws funds as needed and pays the balance per the terms of the agreement. It is also the borrower’s responsibility to close the HELOC account once it is paid in full and no longer necessary. When a HELOC is in default, a foreclosure is pursued.
Equity considerations are heightened when a HELOC is in foreclosure because the balance of the HELOC can be much less than the value of the property. In addition, although HELOCs are usually second liens on the property, many HELOCs are in first lien position. Thus, foreclosure of a low balance HELOC in first lien position for a property with a much higher market value will result in a windfall for the mortgagee. This is especially the case when the legal description attached to the HELOC only appears to encumber a portion of the property.
The borrower held two adjacent parcels of land which shared the same parcel ID and property address. However, parcel one was a part of a subdivision and parcel two was described by metes and bounds. The metes and bounds parcel was also identified by the county property appraiser as a Lot B of an unrecorded plat. The legal description attached to the HELOC was a mixture of the two legal descriptions. It included Lot B, but had parcel one’s subdivision. It also used the section numbers for the plat book and page instead of the correct plat book and page for the subdivision. A discussion with the county property appraiser further complicated the matter because each parcel had a home, but the home on parcel one was demolished a year after the HELOC was issued.
Did the parties intend to encumber Lot B of the unrecorded plat and, thus, intentionally attached the legal description to the HELOC? On the other hand, the legal description may have been an unintentional error and the parties intended to encumber both parcels because mortgagees are generally unwilling to mortgage portions of properties. After all, the parcel ID and the property address encompass both parcels.
Analyzing the legal description issue at the onset to determine the parties’ intentions at origination allows the servicer to make an informed decision regarding how it would like to proceed. The servicer will be aware of the potential challenges it may face during the foreclosure litigation due to the uncertainty of the parties’ intentions. The litigation counsel will also have an opportunity to gather as much circumstantial evidence as possible to help support the allegations in the foreclosure complaint.
Foreclosing on a HELOC where a windfall may result from a legal description issue can be a complex and highly contested matter especially due to the limited documents available in the origination file. However, timely analysis and preparedness will allow litigation counsel to remain one step ahead during the foreclosure action.