Subrogation is the process of substituting one creditor with a different one. The substitute creditor, or “subrogee”, is granted all the rights of recovery against the debtor that the original party had. The debtor must render payments to the subrogee instead of the original creditor. The person who pays the mortgage when the original debtor failsto pay can obtain all the rights under the doctrine of subrogation.
Subrogation may occur through operation of law, by contract, or through the authorization of a statute. Many states make it a requirement that the subrogation agreement be reduced to writing, or else it will not be enforceable. Subrogation arrangements are commonly employed for mortgages, loans, tax issues, and other creditor-debtor relationships. When a person pays off a debt of another without any assignment or agreement of subrogation, they can be considered as a "volunteer".
When a person other than the original debtor pays the mortgage when the original debtor defaults on a payment. The mortgage is then said to be subrogated to the new party. The new party will be able to obtain the rights of the original creditor under the principles of subrogation.
Mortgage subrogation is subject to several requirements:
- The person being substituted must have an interest in the property for which the mortgage applies
- The person must pay off the entire mortgage
- They usually cannot recover for losses under the rule of subrogation unless a subrogation agreement has been recorded in writing and signed by all the parties
- A court is much more likely to honor the mortgage subrogation if the new party has already lent some money for payment of the property
- The subrogee was not primarily liable for the debt paid off
Similar principles hold true with regards to property taxes. A party cannot obtain subrogation rights unless they are interested in the property. They should record the subrogation agreement in writing. If a third party has paid taxes on another person’s property, they cannot obtain remedies if they are not interested in the property.
Also, if a person who pays taxes for another person’s property by mistake, the court treats them as if they were a volunteer. They will not be able to obtain recovery through subrogation without an agreement.
If you are involved in a mortgage subrogation situation, you should contact an attorney for advice. Mortgage and property title disputes frequently arise when one party has rendered payments for another. These can often be avoided through the use of a subrogation agreement. Mortgage subrogation agreements should be drafted and reviewed by a lawyer to ensure that they follow the various legal requirements, which may vary from state to state. An experienced real estate lawyer will also be able to provide you with representation in the event that a lawsuit becomes necessary.