Throughout most of the United States, property titles are recorded and maintained by the local county government. The records office primarily records four title elements with every property:
1. Transfers. Whenever the property is sold or the ownership identification is altered, the records office will update the title ownership.
2. Liens. Claims against the property, such as mortgage, tax and contractor liens, are recorded against the property—with proper documentation that the lien can be recorded.
3. Restrictions. The ownership and use of the property can be restricted with legally recorded encroachments, easements, lease agreements and covenants.
4. Releases. Liens and restrictions against a property can be legally removed with a formal release, properly authorized by the lien holder or legal authority behind the restriction. For each instance of recording any of the above items, the records office will normally charge a recording fee. This fee will vary from county to county. For more information, see the “Recording” article in the “Real Estate In- Depth” section.
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Local Records Office
Claims
Lenders and property buyers have the same concern with regard to the title. They want to make sure that it is clean and defect-free, or at least reasonably clear. Mortgage lenders and property buyers will seek to avoid all encumbrances that may affect their interest in the title. The first mortgage lender wants to be sure that it has the first lien position (after the real estate taxes) on the title; the second mortgage lender wants to ensure that it has the second lien position. Liens, easements, deed restrictions and other encumbrances against a property restrict how property can be handled, owned and transferred. Thus, if the property owner owes taxes or has defaulted on a loan, a lien for that debt can be recorded against the property. The “Marketable Title” article discusses this issue in depth. If the current owner does not or will not eliminate these liens, he or she may still be able to sell it. But it would be difficult. The new buyer would have to agree to accept the existing liens and encumbrances. If the new buyer will be using a mortgage loan to buy the property, the first mortgage lender will normally require that all liens be paid off before or at the closing. Claims against the property, such as liens, follow certain rules:
Legal recording of liens
Legitimate liens are legal regardless of whether they are recorded or not. However, liens will not carry any weight against the property unless recorded with the local governing authority, which is usually the county records office. Moreover, there are often time limits as to how long a unrecorded lien is valid and recordable. Anyone may record a lien against another person’s property, as long as the current property owner has legally agreed to the lien. For example, most home improvement contracts contain a clause allowing the contractor to record “mechanics & materialmen” lien if the home owner fails to pay the bills.
Order of liens
Property liens are normally recorded and satisfied in chronological order: “first come, first serve.” A first mortgage loan, for example, holds the first lien position against a property. A second mortgage loan is recorded in the second lien position. When a property is sold, all the funds will pay off the first lien debt; any funds remaining will then be used for the next lien, etc. The exception, of course, is the government. Taxes owed to the government normally take primary lien in effect, the government always cuts to the front of the line. First mortgages always want to be first in line—i.e., they want to have first lien. If other liens already exist when a homeowner applies for a first mortgage loan, the borrower must satisfy or subordinate the other liens.
Thus, if a homeowner has both a first and junior mortgage but refinances only the primary mortgage, the junior mortgage must be subordinated to the new first mortgage. The lien subordination agreement (issued by the junior mortgage to be subordinated) will then be recorded into the county records so that the new order of liens becomes official.
Ownership
The county records office maintains extensive records of all the property parcels in the county. These records can go all the way back to the first person to legally record a claim to the property. In most cases, however, the lender will only be concerned with the identity of the current owners, who must acknowledge and accept the mortgage transaction.
The title will identify the current owners, as well as the types of ownership the current owners may have on the property. There are many elements and dimensions to ownership. For example, a condominium owner may only own the air rights within his or her unit, but own no walls, floors, buildings or land. For more information, see the “Title and Estates in Land” and “Introduction to Real Estate” articles.
The title must also clearly identify the property. The description of the property is typically not according to the common street name recognized by locals. Precision is required. Most counties use a PIN, or parcel identification number, particularly for subdivided lands. They also record the full legal description, which provides even more clarity.
Lenders and recorders want descriptions so exact that it can only apply to one property in the world. Remember that there are many “Main Streets” or “Washington Boulevards” in this country; this makes street address an insufficient method for recording property with the precision the industry requires. An example of typical legal description may be as follows:
“Units 2334 and 166 in the Madison Square Condominiums as delineated on a survey of the following described real estate: Lots 1, 2A, 2B, 3, 4, 5 and 6 in William J. Harold’s Resubdivision of Land, Property and Space of part of the Southeast 1/4 of Section 2, Township 27 North, Range 19 East of the Third Principal Meridian, which survey is attached as Exhibit “C” to the Declaration of condominium recorded as Document 45, 176, 749, together with its undivided percentage interest in the common elements in St. Clair County, Oklahoma.”
Analyzing the Title Report
The title records the legal ownership of a property and the claims against it.
Ownership. The title identities the current owners of a parcel of property.
Claims. As important as the ownership, the title also identifies any claims against the property. During the mortgage process, two institutions are normally involved in coordinating the ownership and claims against a property:
1. Local records office. The records office, usually a department of the county, is responsible for recording a property’s title ownership and claims against the property.
2. Title insurance company. The title is normally inspected through the title insurance commitment, usually provided by the title insurance company or the seller’s attorney.
Mortgage lenders always want to ensure that before they finalize and close the loan, they will have a clear and unimpeded lien on the property. Buyers will also want to ensure that the title is clear of unnecessary or damaging restrictions. A sample copy of a title insurance commitment is available to support this article.
This article only provides an introduction to some of the title issues that underwriters must analyze, with regards to the title. More detailed information can be found in the “Marketable Title” and “Title & Title Insurance” articles.