Lenders will seize if ownership is transferred

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Q: I inherited some money last year. Recently I started looking for a small house or condominium to buy when I found a guy who was willing to sell me his condo. I gave him $22,000 in cash and he gave me a deed. The agreement was that I would take care of the mortgage payments. Last week I had a concern about a tax bill that the bank should have paid. I called and was transferred to several people at the mortgage company until one of them finally told me that I did not own the house and that they were going to start a foreclosure proceedings. I do not understand what is happening.

A: I don’t know if I can help you, but I can tell you exactly what happened.

The type of transaction you describe used to be called a “wrap”. In other words, the buyer would pay the seller the equity in the home and simply continue to make mortgage payments. Until the mid-1980s, the lender did not care who made the payments. As long as the account was kept up to date, everything was fine.

The laws were changed about 40 years ago to allow lenders to include a clause in the mortgage which allowed the lender to call the note due and payable upon a transfer of ownership. Known as the acceleration clause, it required a buyer to formally assume or pay off the existing mortgage.

Then the Great Recession hit about 15 years ago and lenders started not caring again as long as payments were made. Then we came out of the recession about eight years ago and all of a sudden the banks started taking care of us again, as they still do today.

Wraps are still done to a small extent, but the only way they work is if no one publicly records the act.

Most, if not all, commercial lenders perform routine public records computer checks for each of the properties on which they have a mortgage. If the property records indicate that title has changed, the lender will begin the acceleration process. If the note is not paid immediately, the lender can foreclose.

When you called the mortgage company and told them you owned the property, you told them about the transfer.

You didn’t tell me whether the deed was registered or not. If the deed was registered, the mortgage company has no doubt put you on hold while they do a quick records check. When they discovered the change in ownership, they announced their intention to seize the property.

You must do something to protect your equity in the property.

If the bank is allowed to foreclose, chances are you’ll find yourself outside the house with nothing in your pocket.

If you are able, you should refinance quickly to pay off the mortgage holder. Any type of conventional financing will work. Check with your local bank or get a referral to a lender.

If you are unable to refinance, try talking to the existing lender and see if they will officially let you take over the loan.

Failing that, your last course of action should be to try to sell the property. If you can sell the condo, you will be able to save your equity.

Advice to the wise: This is what happens when you try to participate in a complicated real estate transaction without the advice of a professional. A real estate agent could have prevented this problem before it even started.

Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like answered in this column, you can email [email protected].

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