SAN ANTONIO – Jay Beitel of Polunsky Beitel Green, LLP, discusses the merits of filing a renewal and extension rider on a refinance transaction for investment property and illustrates with a refinance scenario.
Let us look at a refinance loan scenario on residential property which is not the borrower’s homestead.
Facts:
In 1996 Mr. Buyer purchased a residential property from Mr. Seller at a sales price of $100,000.00. To consummate the transaction, Mr. Buyer obtained a first purchase money loan from First Lender, for 80% of the purchase price or $80,000.00, paid $10,000.00 cash to Mr. Seller and also gave to Mr. Seller a $10,000.00 second lien note and deed of trust for the remaining balance of the purchase price. The $80,000.00 first deed of trust lien in favor of First Lender is recorded of public record and then the $10,000.00 second deed of trust lien in favor of Mr. Seller (the “Seller Deed of Trust”) was recorded.
In 2001, Mr. Buyer obtained a new loan from Best Bank in the amount of $75,000.00 secured by a deed of trust lien (the “Best Bank Deed of Trust”) and at the closing, the balance of the original $80,000.00 first lien was fully paid and a full release of lien was filed of record. The Best Bank Deed of Trust did not contain any notice that it was given in renewal and extension of the First Lender’s first lien, because the property was not the homestead of Mr. Buyer.
In 2003, Mr. Seller transferred the $10,000.00 note and Seller Deed of Trust to Webenotes, Inc. (“Webenotes”), a third party investor who purchases real estate lien notes. At that time Webenotes searched the public records and found that the original $80,000.00 first lien was fully released and also found that in 2001 Mr. Buyer obtained a loan from Best Bank in the amount of $75,000.00 secured by the Best Bank Deed of Trust filed in 2001, five years after the Seller Deed of Trust was recorded.
In 2005, Mr. Buyer defaulted in the payment of the note secured by the Seller Deed of Trust, causing Webenotes, the current owner and holder, to foreclose upon the Seller Deed of Trust. Webenotes then claimed ownership of the property free and clear, because the Seller Deed of Trust was filed in 1996 prior to, and therefore superior to, the Best Bank Deed of Trust filed in 2001.
The issue:
Who has the superior lien; the Best Bank Deed of Trust filed in 2001 (securing a loan whose proceeds were used to pay off the original First Lender’s $80,000.00 first lien) or Webenotes’ Seller Deed of Trust filed in 1996 (which Webenotes purchased in 2003)? Best Bank claims its Best Bank Deed of Trust was subrogated to the priority of the First Lender’s $80,000.00 first lien, which it paid off.
The Winner:
Under similar facts, a 2008 Texas Court of Civil Appeals decision evidences that the Webenotes’ Seller Deed of Trust filed in 1996 was the superior lien and its foreclosure cut off the Best Bank Deed of Trust, filed in 2001. (See: AMC Mortg. Services, Inc. v. Watts, 260 S.W.3d 582, Tex. App.-Dallas, 2008.)
Why?
The real estate records showed the superior 1996 First Lender $80,000.00 deed of trust was fully released in 2001. That appeared to make the Seller Deed of Trust (purchased by Webenotes in 2003) the superior existing lien. The 2005 foreclosure of the Seller Deed of Trust, extinguished the apparently inferior, later in time, Best Bank Deed of Trust filed in 2001. The lack of notice of subrogation rights in the Best Bank Deed of Trust, defeats Best Bank’s subrogation claim of a superior lien on the property. Webenotes was entitled to rely upon the record for the priority of the Seller Deed of Trust.
The moral of the story:
Even though the subject property is non-homestead property, your refinance deed of trust should contain express renewal and extension verbiage thereby giving notice to the world that your deed of trust lien is equitably subrogated to the priority of the first and superior lien you are refinancing. Such subrogation overrides the normal rule of first in time first in right. A Renewal and Extension Rider will accomplish that notice for all property types.
Also because of subrogation, such notice will elevate your refinance lien over any other encumbrance upon the property filed after the date of the recording of the first and superior lien you are refinancing, even though they were filed before your deed of trust.
If you have any questions regarding this article, please contact any of our firm attorneys or representatives at www.MortgageLaw.com/People