Recorded Life Estate given priority over later-recorded mortgage

Here’s a situation that came up after parents transferred their home to their daughter and reserved a life estate. The value of the life estate vis-à-vis the whole property is a pro rata percentage based on the age of the life estate holder at the time of the transaction in question. The case is called Ocwen Loan Services, LLC vs. Quinn.

The transfer took place in 2004. A year later, the Quinns and their daughter mortgaged the property and received $260,000. The market was hot and two years later, the daughter alone refinanced that mortgage loan and obtained $380,000, paying off the 2005 mortgage in the process. For some reason, when this new lender (IndyMac)  did its title search, it failed to discover the recorded life estates that were held by the parents, so it didn’t ask the Quinns to co-sign its mortgage documents. The daughter defaulted on the IndyMac mortgage, and IndyMac started foreclosure proceedings against the parents as well as the daughter.

The parents argued that since they had no knowledge of the daughter’s refinance of the mortgage which they had originally co-signed, their life estate should not be subject to the new mortgage. However, the court applied a legal doctrine that is called “equitable subrogation,” and found that it would be inequitable and would unjustly enrich the parents if they were totally relieved of any responsibility for the mortgage, yet at the same time, it would be inequitable for the lender to be able to hold the life tenant liable for the full amount due. The Judge stated: “[Defendants] signed a mortgage in the amount of $260,000 as possessors of a life estate. While [defendants] may have signed the mortgage as an act of kindness and love to their daughter, the fact remains [defendants] were parties to the 2005 mortgage and thus subjected their life estate to this foreclosure action. This [c]ourt sees no procedural or substantive defect which would challenge the validity of the 2005 mortgage.”

Bottom line? The life estates are subject to the IndyMac mortgage up to the $260,000, but the IndyMac mortgage is subordinate to the rights of the life tenants for any excess above that.

Call us for advice about elder care planning including real estate transfer issues …. 732-382-6070