The term “mortgage” is often used interchangeably as “debt” (i.e. “I need to pay my mortgage”). However, a mortgage is actually the security interest in real property that is held by a lender as a security for a debt.
By securing a loan with a mortgage on real property, purchasers are able to purchase properties that they may not otherwise be able to pay for upfront. Instead, they give a mortgage to secure the loan and can finance the repayment of that loan. Once the terms of the mortgage are satisfied (i.e. the loan is repaid), the interest in the property returns to the purchaser. If, however, the purchaser fails to abide by the terms of the mortgage, the mortgage lender may exercise its right to the property.
Two types of mortgages are legal mortgages and equitable mortgages. Legal mortgages normally require that title to the property be conveyed into the name of the secured party such that the secured party becomes legal titleholder of the property. This requires that the mortgage documents be properly filled out and all the legal requirements of a mortgage be satisfied.
However, sometimes, despite the intent to create a legal mortgage on the property, a mistake is made. While the legal mortgage would not be valid because of the failure to fulfill all of the legal requirements, an equitable mortgage may be created instead to avoid the injustice that would otherwise be done to the lender. Equitable mortgages arise when a transaction does not fulfill all the legal requirements of a mortgage, but still looks and operates like a mortgage.
Recently, however, the Michigan Court of Appeals refused to extend the grant of equitable relief to situations where the mistake that necessitated the request for equitable relief could have been avoided with reasonable diligence.
In Green Tree Servicing, et al. v. James and Donna Rau, a mortgage lender loaned money to Donna Rau to finance the purchase of real property. Donna Rau intended to purchase the property on her own. Therefore, the loan was applied for by Donna Rau alone, and she intended that the title be put in her name alone. However, a mistake was made and her husband, James Rau, was added to the title also.
This mistake proved fatal to the mortgage lender’s mortgage securing the loan when Donna Rau defaulted on the payment of the loan. Because Donna and James Rau were both on the title, they owned the property as tenants in the entirety, and neither of them could mortgage the property without the consent of the other. Therefore, since Donna Rau did not have authority to mortgage the property, the mortgage held by the mortgage lender was invalid.
The successor of the mortgage lender argued to the court that an equitable mortgage should be created in this case since a mistake had been made and it would be unjust not to enforce the terms of the mortgage. The Michigan Court of Appeals agreed with the lower court’s determination that an equitable mortgage should not be given. The Court noted several actions that the mortgage lender could have taken to rectify the mistake and protect its interest. Since the mortgage lender could have avoided the mistakes that necessitated the request for equitable relief with reasonable diligence, the court determined that its successor was not entitled to an equitable mortgage.
If you have any questions, please contact the attorneys at Demorest Law Firm.
