It’s common for things like mortgages and home equity loans to be guaranteed by the underlying property they are written against. If you don’t make the payments, they foreclose and take the property away. But what happens if someone other than the rightful owner obtained the mortgage or loan through fraudulent means? Perhaps the criminal obtains the loan through identity theft, misuse of powers of trust, or some other fraudulent means. I would assume it would make it to the courts and the fraudster would be charged with a crime, but then what happens to the mortgage or loan that was illegally obtained? Is the rightful owner just stuck trying to work out a deal with the loan originator? Or do the courts release any liens and tell the loan originator to sue the fraudster?
If the rightful owner was never involved in the fraudulent transaction in any way, how could he have any responsibility whatsoever to the lender? Aside from the criminal act, it’s the lender’s problem, the lender’s lack of due diligence.
Isn’t this exactly a situation covered by title insurance?
Edited to add: that is, the insurance will cover the losses. The insurer spreads the risk over many title transactions, and any loss is accounted for by its business model.
I know someone who went through this when a sibling went off the rails and fraudulently mortgaged the family home.
They had to lay charges against the sibling for the police to pursue it. They had to hire lawyers, it went before a judge after a long time, and much money spent on forensic accounting type things, and copies of documents, etc.
In the end it was successful though.
( In an odd twist, the parent passed, the house sold, and the will specified the proceeds were split between the two siblings. So, when the dust finally settled, the fraudster was still entitled to that portion. They had fled the law, out of province. So, if they turn up to collect, the police get notified and will be there to arrest. That’s weird, right? I wonder what eventually happens to that half?)
If the lender had somehow managed to obtain lender’s title insurance guaranteeing the fraudulent borrower’s ownership, then yes, the lender could claim against that. But I don’t think the true owner’s title insurance would be relevant if the loan is now known to be fraudulent and his ownership is not in dispute. There might be some hassle involved, but ultimately the lender has no claim on his property.
This is the kind of situation I was wondering about. Do you happen to know how the fraudulent mortgage was detached from the property? I’m sure it took a lot of time to get all the accounting records and evidence, but then was it just that the judge ordered the title cleared? Did the mortgage company just have to take a loss of the remaining balance?
I think, often, it’s a kinda dodgy mortgage company. Or worse. So it takes some time.
But yes, eventually the judge declares this a fraud, and unencumbers the property. The sibling had also rented out rooms to very sketchy types, and they were difficult to get out. Delaying on every imaginable excuse, damaging the property, and fabricating stories like paid for a years rent in advance! They were a real bonus nightmare.
For a while in Ontario - you couldn’t. Ontario switched to a computerized title system, and all titles, mortgages etc. were in a database. The law said the database was the final word.
IANAML …
For a little while, there were several cases where a person would discover a house which had no mortgage on it, impersonate the owner, and obtain a mortgage - and abscond with the cash. The owner would discover the fraud when the bank foreclosed for non-payment or they tried to sell the house. the courts said that unfortunately, the law was clear - the title database was the final word. If the politicians wanted exceptions, they would have said so. Eventually… the law was amended.
But now, to obtain a mortgage or sell a property now you have to provide some pretty solid ID. I would assume as mentioned earlier, you go to a judge, they determine the action was fraudulent, and the mortgage is removed from the database. A mortgage not in the database has no standing in law. (A mortgage effectively means the mortgagor has first dibs on the proceeds of a sale and must be satisfied …) Under this system at least, anyone who has a legitimate mortgage but fails to register it with the titles database cannot object later.