by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)
It is a question I have been asked a number of times over the past few years: If a lender refinances an existing mortgage, does the new lender step into the shoes of the old lender in terms of priority? In other words, if you refinance a first mortgage, does it remain a FIRST mortgage or is it a new mortgage that is junior to other mortgages that may have been recorded after the first mortgage? Granted this is not a question as weighty as, say, "what is the meaning of life?" but if you are a lender, it is an important one. I have written about this topic before, but the Appellate Division's recent decision in Ocwen Loan Services, Inc. v. Quinn, added a new wrinkle. In that case, the question was whether a refinanced first mortgage retains its first status over a life estate, as opposed to another mortgage or lien, that was recorded prior to the original mortgage.
In Ocwen, defendants conveyed their residential property to their daughter but retained a life estate in the property. (In other words, the daughter owned the property, but defendants could live there until they died.) One year later, defendants, their daughter, and her husband acquired a loan from plaintiff that was secured by a mortgage on the property. Two years after that, the daughter refinanced the mortgage for a higher amount. The title commitment that plaintiff obtained did not disclose the recorded life estates, so defendants were not required to sign the mortgage. Through the refinancing, the daughter, among other things, paid off the prior mortgage, which defendants had signed.
Two years later, the daughter defaulted on the refinanced mortgage and plaintiff foreclosed. The parties cross-moved for clarification on the status of defendants' life estate. Plaintiff argued that the life estate was subordinate to the refinanced mortgage, meaning defendants could not rely on it to stop the foreclosure. Defendants argued that the foreclosure had to be dismissed because "they did not sign the [refinanced] mortgage nor pledge their life estates in connection with the [ ] loan refinancing."
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