Unrecorded Mortgage: Where Does That Leave The Lender?


15 November, 2022


Mortgage Lender and Servicer Alerts

To answer the question raised by the title, not necessarily fatally wounded, but certainly in potential peril.  As partly addressed in a recent case, there are a surprising number of issues here – which can readily be clarified.  [Bank of New York Mellon v. Bentley, 190 A.D.3d 450, 140 N.Y.S.3d 202 (1st Dept. 2021])

When a mortgage closing concludes, every lender will recognize the need to record the mortgage.  New York’s recording statute (RPL § 291) generally speaking gives priority to a first recorded document.  So, if the mortgage is recorded, any subsequent encumbrancers are junior and subordinate to that mortgage.  This is obviously critical; if the owner immediately sold the property to someone who had no knowledge of the mortgage which just closed, that new owner would be free of the mortgage – obviously an untenable situation for the lender.  This by the way is one of the reasons why lenders should have title insurance (in the form of mortgage insurance) for their mortgage.

In any event, the goal is to record the mortgage. This is well understood and most often that is precisely what happens.  But mistakes can be made and on occasion, for whatever reason, the mortgage is not recorded, either quickly, or sometimes for years.  (Yes, that really does happen.)  Now we come to the issues raised.

That a mortgage is not recorded does not prohibit the commencement of a mortgage foreclosure action.  The mortgage contract between the borrower and the lender is no more binding when it is recorded and so legal action can be taken.  (At the very least though, the mortgage tax would have to paid before a judgment of foreclosure and sale could issue.)  Mindful that the mortgage tax is paid when a mortgage is recorded, a neglect to record would almost invariably portend that the mortgage tax was not paid.)

As to the issue of danger, that arises if someone buys the property from the borrower or the property is further encumbered when the mortgage has not been recorded.  Recording provides constructive notice to the world of the existence of the document.  So, if a purchaser from the borrower performs a search of the record, he will know about the mortgage and will be subject to it.  Even if he does not search the record, that constructive notice still binds him.

In the recent case mentioned, the property was conveyed to someone who had no knowledge of the mortgage, although he may not have paid any consideration for that conveyance.  His title was good.  He then sold the property anew and there was some dispute as to whether this last owner had actual knowledge of the unrecorded mortgage.  But this, though, turned out not to be relevant because a bona fide purchaser for value who acquires title without notice of an unrecorded and unsatisfied mortgage is then able to confer good title to a third party.

The important ultimate point is that once a party has good title, even if it has infirmities which can be known to other people, the party with good title could never realize value unless he was able to validly convey the property anew.  So once he is bona fide purchaser for value, the property can be conveyed free of the unrecorded mortgage – fatal news for the mortgage holder.

Ultimately, therefore, a mortgage lender has a very compelling reason to assure that its mortgage is recorded as soon as possible.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2022), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.