Mortgages first appeared in the English feudal system and have continually served as a means to obtain land ownership without paying for the total price of the land. The mortgage is essentially a contractual relationship creating an interest in land, but it is not a loan as many people often confuse it. Most mortgage agreements involve a promise to repay a debt, but is not a debt in itself, but rather, is evidence of a debt.

Essentially, the mortgage is a transfer of either a legal or equitable interest in the land on the condition that the interest will be returned when the terms of the contract are performed. If the borrower fulfills all of the obligations of the mortgage contract, the transfer then becomes void and title automatically passes back to the mortgagor.

The principle generally governing what priority a mortgage is usually first in time, first in right, though modifications to this principle can be made in the course of the process. First in time priority generally belongs to the first party to deliver that specific security instrument for recording, though most states will not enforce this general principle if the person attempting to record has actual knowledge of a previously unrecorded claim.

In a minority of states, statutes provide for a true first in time circumstance where the first to record takes priority regardless of knowledge of a previously unrecorded claim. When dealing with the priority of mortgages, it is necessary to check how your particular jurisdiction treats this type of situation.

The priority of a mortgage will often be the difference between payment and non-payment, therefore, a firm understanding of jurisdictional differences is critical in obtaining the strongest legal position.

Due to both the increased use of online mortgage applications and the increased solicitation by online mortgage companies, determining the true priority of all liens on a particular piece of property can be a challenging task. Like mortgages obtained from a mortgagor with a true physical office, online mortgages will generally be held to the first in time first in right principle.

However, like most mortgages, they may also be subject to any leases involving the land. In the event of a forced foreclosure, when lease was executed before a mortgage, the purchaser of the property in the foreclosure auction would still take subject to the lease. Conversely, if a lease is entered into after a mortgage is recorded, the purchaser of the property would take free of the lease.

Specifically, further problems can be encountered when first and second mortgages are applied for close in time to each other, and especially when one of those mortgages was obtained from an online mortgage company.

When faced with potential foreclosure due to financial difficulties, the first step in determining who takes priority when dealing with a combination of leases, first, second and all subsequent mortgages, is to examine where the debt instrument was obtained and, more specifically, when the instrument was effectively recorded.

Because online mortgage companies may lack a physical presence in your particular jurisdiction, it may take a significant amount of time to perfect the recording, if it ever. As long as subsequent mortgagees or lenders record the debt instrument without notice of the online mortgage, they will take priority over the unrecorded online mortgage, especially in ‘race-notice’ statute jurisdictions.

While not all jurisdictions are first in time, first in line (‘race-notice), most states are, and this specific distinction can determine the priority of any online mortgage application. Whether you represent such an online mortgage company or a consumer subjecting his or her property to various liens and mortgages, it is important to accurately understand the method of record perfection and its relation to establishing priority of a claim.

An attorney experienced in real estate and borrowing transactions can be an invaluable tool in determining your rights as a consumer or company attempting to establish the order of lien priorities.

This article was written by Nick Delaunt, who writes select pieces about real estate law for Goldstein and Clegg, LLC.
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