Although the process of buying, selling, or refinancing a home is somewhat standard, as a real estate lawyer, I’ve had more than a few surprises.
One such case was just brought to my attention. Story: Man owns a property in Massachusetts and has refinanced his loan several times. Unable to tolerate another New England winter, he decides to move South and rent out his house. The house burns to the ground, but no one is hurt, thankfully. While dealing with the insurance company, the owner realizes that his prior mortgages weren’t closed before the new ones were opened.
When you refinance, a lawyer is usually involved in the transactions. If the lawyer is representing the lender, he or she is responsible for paying off the old loan with a part of the proceeds from the new one. The money comes into the lawyer’s trust fund account, then he or she issues a check or wires funds to the old mortgage company to satisfy the outstanding balance on the old loan.
Unfortunately, I’ve heard stories over the years of lawyers misusing client funds, taking in the proceeds from a new loan but not paying off the old. In these Ponzi-like schemes, the lawyer will make the monthly payments so the lender will not start foreclosure proceedings. The homeowners never find out; they just assume the loan has been paid.
How do you prevent this? If you are refinancing a loan with a new company, be sure to do the following:
■ Note the phone number on your monthly mortgage statement;
■ Five days prior to refinancing and getting your new loan, call your old mortgage company/servicer to let it know you will be paying off the balance;
■ Wait at least three days after you are issued your new loan (but no longer than a week), and call your old mortgage company to verify that it has received the payoff. (The lawyer handling the payoff should send the money right after the three-day period has passed.)
■ If a week has passed and the loan has not been closed, call the lawyer’s office and ask for an explanation. Tell the lawyer that you want written verification that the loan has been paid.
■ Keep following up with the old mortgage company to verify that it has received payment.
■ If the lawyer doesn’t do as requested, contact the Massachusetts Board of Bar Overseers (www.massbbo.org).
What happens if a loan isn’t paid off? Homeowners can seek protection if they purchased an owner’s policy of title insurance when they bought the home — with the outstanding mortgage company making a claim against the lender’s insurance policy, which is issued with all mortgages.
Hugh J. Fitzpatrick III is the founding partner of New England Title and Fitzpatrick & Associates PC, a Tewksbury-based law firm specializing in real estate conveyancing. Send your questions and comments to [email protected]. Look for our special Fall House Hunt coverage starting Sept. 11.