Mortgage Subrogation

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 What Is a Mortgage?

A mortgage is a security interest that is attached to a piece property, and is paid with borrowed money. This security interest acts as a sort of collateral for the repayment of a loan borrowed from a bank or other financial institution, in order to pay for the property.

An example of this would be when a person wants to purchase a home, but they do not have enough money to purchase it outright on their own. A bank or other lender provides the money to purchase the home or property, and a mortgage is placed on the property. This is done so that if the borrower defaults on their loan, the lender is given the right to take possession of that property.

Mortgage transactions are composed of two important documents: the promissory note, and the mortgage, or “deed of trust.” A promissory note is a type of legal contract containing terms stating that one party promises to repay a specific amount of money to the lending party. This is to be repaid within a specified amount of time. The promissory note is what holds the borrower accountable for repaying the loan, even if the borrower goes on to sell the property at a later date.

A mortgage or deed of trust document is what specifically acts as a lien on the property. What this means is that if the borrower does not repay their loan, the lender can legally force them to repay by selling the property. The mortgage document itself is what guarantees that the lender will get their money back, even if the actual borrower is not the party making the repayments.

What Is Subrogation In Mortgages?

The term subrogation refers to a broad concept associated with equitable remedies. The right of subrogation allows another party to be substituted in place of a creditor, in order to obtain recovery for damages or losses from the debtor. This substituted party is then given the rights of the creditor against the debtor. As such, they can recover directly from the debtor. Essentially, the third party obtains these rights from the creditor when they pay the entire amount owed to the creditor.

The intention of subrogation is to allow the substituted party, known as the “subrogree,” to legally obtain reimbursement for payments they have made associated with the legal claim or debt. The original creditor is referred to as the “subrogor.” The subrogor forfeits their right to recovery to the subrogree, who is said to “step into the shoes” of the subrogor.

Instances involving insurance companies and subrogation are most common. Subrogation is also common in cases associated with:

  • Mortgages;
  • Surety and guaranty;
  • Tax debts;
  • Banking accounts; and
  • Any other time a debt is paid by a party other than the original debtor.

Subrogation is very similar to the legal concept of contract assignment. However, the difference is that subrogation is sometimes allowed without the consent of the original parties involved, such as when the subrogation is ordered by a court.

To summarize, subrogation is the process of substituting one creditor with a different one. The substitute creditor receives all of the same rights of recovery against the debtor that the original party had. As such, the debtor must render payments to the subrogree instead of the original creditor. A person who pays the mortgage when the original debtor fails to do so can obtain all of the same rights under the doctrine of subrogation.

How Does a Subrogation Occur? What Are the Different Types Of Subrogation?

Subrogation can occur through operation of law, by contract, or through the authorization of a statute. These are further discussed below. Many states require that the subrogation agreement be put in writing; otherwise, it will not be enforceable. This is especially true for cases involving real property and/or taxes.

As previously mentioned, subrogation arrangements are commonly used for:

  • Mortgages;
  • Loans;
  • Tax issues; and
  • Various other creditor-debtor relationships.

Some of the common, different types of subrogation are:

  • Legal – Operation of Law: Authorized by operation of law, this type of subrogation can take effect without a formal agreement between the parties involved. When one party pays off the debt of another without any assignment or agreement of subrogation, that party would be considered as a volunteer. This type of subrogation may also be modified by a contract;
  • Conventional – By Contract: The terms of subrogation are specifically stated in a written contract which dictates all of the various conditions under which subrogation is to occur. This is one of the most common types of subrogation; and
  • Statutory – Authorization Of a Statute: This type of subrogation is based on a statute that has been enacted by legislature. Such statutes will obviously vary from state to state, the terms of which may not apply in other states.

How Does Subrogation Apply to Mortgages? How Does Subrogation Apply to Taxes?

When a party other than the original debtor pays the mortgage when the original debtor defaults, the mortgage is then considered to be subrogated to the new party. As previously discussed, the new party obtains all of the rights of the original creditor under the principles of subrogation.

However, it is important to note that mortgage subrogation is subject to several requirements. Some examples of such requirements include, but may not be limited to:

  • The person being substituted must have an interest in the property applied to the mortgage;
  • The subrogree must pay off the entire mortgage in full;
  • Generally speaking, the subrogree cannot recover for losses under the rule of subrogation unless a subrogation agreement has been recorded in writing, and signed by all parties involved;
  • The mortgage subrogation is much more likely to be honored by the court if the new party has previously lent some money for payment of the property; and
  • The subrogee was not primarily liable for the debt paid off.

With regards to property taxes, the process and requirements are similar. A party cannot obtain subrogation rights unless they are interested in the property; additionally, they should record the subrogation agreement in writing in order to ensure that it will be valid and enforceable. If a third party has paid taxes on another person’s property, they will be unable to obtain remedies if they have no interest in the property.

It is important to note that if a person pays taxes for another person’s property by mistake, the court will treat them as if they were a volunteer. What this means is that they will not be able to obtain recovery through subrogation without an agreement.

Do I Need an Attorney For Issues With Mortgage Subrogation?

As you can see, mortgage subrogation can be a complex topic which varies from state to state. If you are involved in a mortgage subrogation, you should consult with an experienced local mortgage lawyer. Because much of mortgage subrogation is subject to differing state laws, an area attorney will be best suited to helping you understand your state’s specific laws and how those laws will affect your legal options moving forward.

A skilled and knowledgeable mortgage attorney can help you navigate any mortgage and property disputes that commonly arise when one party renders payments for another. Additionally, an attorney can also help you draft a legally sound subrogation agreement in order to avoid such disputes. Finally, an attorney will also be able to represent you in court, as needed.

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