At the forefront of every mortgage loan transaction (whether involving a consumer loan or a commercial real estate finance transaction) is ensuring that the lender’s mortgage is properly documented to protect the lender’s security interest in the collateral if the borrower defaults on the loan. Mortgage loans are secured by mortgages granted by the owner of the real estate and then recorded with the registry of deeds in the county in which the property is located. Oftentimes, foreclosing on the mortgage may be the lender’s best (or only) source of repayment and it is vital that the loan documents, especially the mortgage, are properly executed to ensure that the lender has a valid and enforceable lien against the property. In this post, we discuss the importance of reviewing mortgage documentation to ensure that such documents are properly executed and effective in creating a security interest in favor of the lender covering the mortgaged property, as well as the repercussions if mortgage documents are not properly executed.
One of the most common pitfalls in the execution of a mortgage involves the acknowledgment block executed by the notary public. In order for a mortgage to be considered an enforceable lien against the mortgaged property, the notary acknowledgment must state the following: (i) the signatory appeared before the notary public; (ii) the signatory produced satisfactory evidence of identification; and (iii) the notary acknowledged the signatory executed the document voluntarily. See Mass. Gen. L. c. 222, §15(b). In addition, the notary must comply with Mass. Gen. L. c. 222, §8, which provides that a notary “shall print or type such justice of the peace, notary public or other person’s name directly below such person’s signature and affix thereto the date of the expiration of such person’s commission in the following language: ‘My commission expires’”. A notary does not need to affix their stamp or seal under their signature, as long as the notary complies with the aforementioned requirements of Mass. Gen. L. c. 222, §8.
The notary public’s failure to comply with the statutory requirements for acknowledging a mortgage signatory (i.e., to properly notarize the mortgage) may have severe consequences including a determination that the mortgage does not encumber the property, thus resulting in the lender being unsecured with respect to its mortgage loan. Blank spaces in a notary block that have not been filled in by the notary when the mortgage has been signed are a problem! Even illegible handwriting or the failure to print the notary’s name under their signature in the notary block have been found to be problematic. In this era of remote execution of documents where the closing attorney is not directly overseeing the signing of documents at a “sit-down” closing, we are seeing frequent examples of improperly executed and notarized documents. It is important upon receipt of signed documents via email that they be thoroughly scrutinized and approved by closing counsel before the lender books the loan or approves recording of the mortgage documentation.
The Bankruptcy Court in Massachusetts has held that in those cases involving notary blocks which either did not identify anyone as the signatory in the notary block, identified someone other than the signatory, or failed to state that the mortgagor signed voluntarily or as his or her free act and deed, the mortgages were fatally flawed and invalid. In such cases, the lender ended up not being the mortgage holder since the mortgage was deemed to be improperly notarized. Consequently, if a notary block is not corrected before the property owner files for bankruptcy, the lender’s mortgage could be subject to challenge by the bankruptcy trustee. (One of the objectives of a bankruptcy trustee is to challenge the validity of any secured liens where possible, in the hopes of achieving a greater recovery in a bankruptcy for the unsecured creditors.)
Fortunately, a flawed notary acknowledgment can be corrected if the mistake is realized after execution but before a borrower has filed for bankruptcy. If the property owner who gave the original mortgage to the lender is cooperative, a confirmatory mortgage can be obtained and recorded, which will fix the discrepancy in the notary acknowledgment. Alternatively, an affidavit from the original notary public (a so-called “§5B Affidavit”) who notarized the original but defective mortgage can be obtained and then recorded to cure the defective notary acknowledgment. Since most, if not all, mortgage lenders require that mortgage loans be insured by lender’s title insurance, it is important to touch base with the title insurance company that issued the title insurance policy to obtain the title insurance company’s guidance on fixing a defective mortgage.
In short, even though the signing of the loan documents is the last step in a loan transaction, banks should be mindful that proper execution of loan documents requires attention to detail to avoid unnecessary delays and additional legal fees. If you do encounter any of these problems, our real estate litigation team may be able to resolve the defective mortgage issue in a timely and cost-effective manner.
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.