Do promissory notes get recorded?

Overnight I received an email asking if a promissory note is recorded where land is used as collateral. Here's how I responded:

Promissory notes are not recorded. A promissory note is a contract between the lender and borrower that establishes the debt and the terms of repayment. If real estate is used as collateral to secure the repayment of the debt the borrower must execute a mortgage. While the term “mortgage” is used very broadly in everyday life, it has a very clear legal meaning. In Massachusetts, a mortgage is a type of deed in which the borrower conveys to the lender an interest in real estate owned by the borrower. The interest conveyed is the right to sell the property at auction and use the proceeds of that sale to pay down the debt established by the promissory note (commonly called a foreclosure). 

After executing a mortgage, the borrower/land owner retains an interest in the property which is called the "equity of redemption." That means that when the debt is paid in accordance with the terms of the promissory note, the lender will release its interest in the property. The document that does that is commonly called a discharge of mortgage. When the mortgage is discharged, the borrower/property owner has "redeemed" the property. The term "foreclosure" means that when the lender exercises the power of sale granted to it in the mortgage, the borrower/land owner's right to redeem the property has been cut off or foreclosed.

To be recorded at the registry of deeds, a mortgage must meet all the criteria of a deed (such as clearly describe the property, have borrower/land owner’s signature notarized, etc. The recording fee for a mortgage is $175.

A common misunderstanding in this area is that the deed to the property is held as security pending the repayment of the mortgage. People often come to the registry of deeds and announce, "I just paid off my mortgage, I want my deed back." Well the deed is returned to the homeowner (or more accurately, to his lawyer) the day he bought the property, it's just that people either lose track of the deed among all the other paperwork from the closing, or may not even get it back from the lawyer. In any case, not having your deed is not a problem. You can always obtain a copy of it from the registry of deeds, and the copy is just as good as the original. 

Homestead exemption amounts thru the years

Since 2011, homeowners in Massachusetts have an automatic homestead that protects up to $125,000 in the equity of the family residence. If the homeowner files a Declaration of Homestead at the registry of deeds, the exemption amount rises to $500,000.

The exemption amount wasn't always that high. Prior to 1939, it was $800. Here is how it has risen through the years:

• 1939 - increased to $4,000
• 1970 - increased to $10,000
• 1973 - increased to $20,000
• 1974 - increased to $24,000
• 1975 - increased to $30,000
• 1979 - increased to $50,000
• 1983 - increased to $60,000
• 1985 - increased to $100,000
• 2000 - increased to $300,000
• 2004 - increased to $500,000

These are the amounts for the "regular" homestead. At some point, a separate homestead for the "elderly or disabled" was created. Through the years, the "elderly" homestead has either had a higher exemption amount or has been applied more favorably to the homeowner.

For information about the Declaration of Homestead, check out Massachusetts General Laws chapter 188. 

Merrimack Valley Housing Report

The Merrimack Valley Housing Report is a monthly electronic newsletter on housing issues and trends in the Merrimack Valley. It is produced jointly by UMass Lowell and the Middlesex North Registry of Deeds. For a free subscription, email David Turcotte at David_Turcotte@uml.edu.

Back issues of the Report from 2008 through the end of 2016 are available in PDF form on the MVHR website.

Each month, I provide statistics on the number of deeds, mortgages, foreclosure deeds, orders of notice and total documents recorded in the Middlesex North District, and also contribute an article on a real estate-related issue. For example, the July 2017 edition, I provided a midyear review on the real estate market. Here is my article from July:

Midyear Real Estate Report

July 5, 2017

With July upon us, it is time to look at the performance of the Greater Lowell real estate market during the first half of 2017. Anecdotally, it is a great time to be selling a house. Every day there is another story of a residence that gets multiple offers for asking price or more the same day it hits the market. But beneath the day-to-day euphoria of the sellers’ market, there are some troubling indicators.

For the entire Middlesex North Registry of Deeds district—Billerica, Carlisle, Chelmsford, Dracut, Dunstable, Lowell, Tewksbury, Tyngsborough, Westford and Wilmington—the number of deeds recorded in the first half of 2017 was down 2 percent from the same six months in 2016; the number of mortgages was down 10 percent; and the number of all documents recorded was down 4 percent. For the city of Lowell itself, deeds were up 2 percent, mortgages down 5 percent, and overall documents recorded were the same.

One bright spot is that foreclosure related activity was also down. For the entire district, the number of foreclosure deeds recorded in the first half of 2017 was down 5 percent from the same time in 2016, and the number of orders of notice was down 37 percent.

Reflecting the rising home prices brought on by the sellers’ market, the median price on deeds for nine of the ten communities in the district was up from the 2016 median (Dracut’s median stayed the same). Lowell’s median deed price rose 4 percent from $229,700 in 2016 to $239,000 in the first half of 2017. For the same two periods, Billerica’s median rose 4 percent from $370,000 to $383,000; Chelmsford’s rose 5 percent from $330,000 to $345,750; Tewksbury’s rose 1 percent, from $354,950 to $360,000; Tyngsborough’s rose 6 percent from $315,000 to $332,450; Westford’s rose 14 percent from $403,000 to $460,000; and Wilington’s rose 9 percent from $403,500 to $440,000. (Carlisle’s rose 26 percent and Dunstable’s rose 14 percent, but because of the relatively small sample from those two communities, caution should be used in interpreting their numbers although clearly prices are rising in those two towns).

The mixed message being sent by the real estate market is reflected in the different categories of revenue collected by the registry of deeds during fiscal year 2017 (July 1, 2016 to June 30, 2017) when compared to fiscal year 2016 (July 1, 2015 to June 30, 2016). The total amount of revenue collected was about the same—$16,311,832 in FY17, and $16,248,951 in FY16. The amounts collected for document recording fees and for the Community Preservation Act surcharge were both up 5 percent: Recording fees rose from $4,793,135 in FY16 to $5,032,495 in FY17; and CPA surcharges rose from $1,137,860 in FY16 to $1,196,730 in FY17. However, the amounts collected for the deeds excise tax, which is calculated based on the sales price stated on a deed, declined by 8 percent, dropping from $10,487,920 in FY16 to $9,724,776 in FY17. So even though the median price of properties sold has risen, the number of transactions declined which led to the loss in deeds excise tax revenue.

Looking forward to the second half of 2017, there are some positive signs. With prices rising, more and more people who have been underwater on their mortgages since they bought or refinanced at the height of the boom should now have some equity in their homes. This will allow more owners to put their properties on the market in pursuit of the high prices now being obtained. Still, when you sell one house, you have to buy another, so it is unlikely that there will be a sudden glut of homes on the market. Most likely, the next six months will feature a slow, steady rise in prices with an equally slow decline in the number of properties facing foreclosure.

Making Government Data Available to the Public

There's an interesting story in today's Globe about efforts by people in the state's legal community to get the Massachusetts Trial Court to standardize the manner in which data is entered into its statewide computer system, and to make that data widely available in digital form. In "Trial courts decline to standardize data," the Globe's Catie Edmondson reports that the Trial Court has declined to implement this type of standardization now, but it's a positive sign that people are recognizing the benefits of making government-created data available for public use.

Several years ago I was at a conference on government technology and heard a story of how the MBTA had made the GPS data from its buses available in real time. Several entrepreneurs came up with cell phone apps that allowed riders to determine the exact location of the bus they were waiting for and its estimated time of arrival at their location. Another person took this a step further and designed low cost digital clocks for businesses near bus stops to display in their front windows. The rationale here was that if a bus was scheduled to arrive in 2 minutes, a waiting rider might not run into the store to buy something, but if the rider knew that the bus would not be there for 5 minutes - as reported via the store's clock and real-time locational data from the bus - the store might have a new customer.

Hearing that stories and others like it persuaded me that government data could and should be treated as a digital raw material, made available to the public so that entrepreneurs can add value to it in an almost infinite variety of ways. Unfortunately, implementing systems that share data responsibly and equitably take time, but they are on their way.

Mortgages and assignments

Recently I received an email from a homeowner asking if Massachusetts law requires that a mortgage that “is transferred from one company to another” be recorded in the registry of deeds. After explaining that the registry of deeds is the custodian of the records and cannot provide legal advice to individuals, I tried to provide some general information that might also answer the customer’s question. Assuming he was referring to an assignment of a mortgage, this is what I wrote:

What most people call a mortgage in Massachusetts is really two different documents. First is the promissory note. That's a contract between the borrower and the lender that establishes the debt and sets out the terms of repayment. The promissory note does not get recorded at the registry of deeds. Promissory notes are often "sold" or transferred from lenders to investors (often other banks). When the note is paid off, the holder of the note (the lender or someone who it has been transferred to) stamps it "paid" and returns it to the borrower.

The second document is the mortgage. In Massachusetts, a mortgage is a type of deed. When you sign a document called a mortgage, you convey to the lender an interest in the property. That interest is the right to foreclose on the mortgage if the borrower defaults in the payment of the note. That means the lender can auction off the property and use the proceeds from the auction sale to pay off or pay down the debt owed on the promissory note. (The lender can then sue the borrower for any deficiency that remains, but that’s a story for another day).

When a lender sells or transfers a note to an investor, the lender normally records at the registry of deeds a document called an assignment of mortgage to show everyone who is the current holder of the mortgage. I don't believe there is a law that requires a lender to record an assignment of mortgage, or to record it within a set amount of time. However, in order to foreclose a mortgage, a lender must record an assignment of mortgage prior to the start of the foreclosure, otherwise the foreclosure would be invalid.

There is an exception to this. Many mortgages are held by a company called MERS (for Mortgage Electronic Registration System). MERS holds the mortgage in trust for whoever holds the note. So in Massachusetts, when MERS holds the mortgage, there is no need to record an assignment of mortgage when the note is transferred from the lender to the investor. That's because MERS holds the mortgage for whoever holds the note.

Finally, it is important to remember that real estate law varies considerably from state to state. Court decisions, statutes or articles interpreting real estate law of other states have little applicability to the law in Massachusetts.

Joint Ownership of Real Estate in Massachusetts

There are three types of joint ownership of real estate in Massachusetts: tenants in common, joint tenants and tenants by the entirety.

Tenants in common is undivided ownership in real property by two or more persons with no right of survivorship between the co-owners.  Thus, when one tenant in common dies, his interest in the property becomes part of his probate estate.  Tenants in common are said to have an “undivided” interest in property since each can possess the whole subject to the co-tenant’s right to possess the same property. A conveyance to two or more persons “as tenants in common” creates tenants in common. Also, a conveyance to two or more persons that does not specify the type of tenancy creates tenants in common.

Joint tenants is undivided ownership in real property by two or more persons with a right of survivorship between the co-owners. When one joint tenant dies, the surviving joint tenants automatically becomes the sole owner of the property. The survivor does not inherit the portion owned by the decedent, rather the decedent’s passing terminates his interest in the property, leaving the survivor as the sole owner. Joint tenants are said to have an “undivided” interest in property since each can possess the whole subject to the co-tenant’s right to possess the same property. A conveyance to two or more persons “as joint tenants” creates a joint tenancy.

Tenants by the entirety is a type of joint ownership limited to married couples whereby each owns the entire property.  Upon the death of one, the decedent’s interest in the property is removed and the survivor automatically owns the entire estate.  Upon a divorce or annulment, the property is held by the former spouses as tenants in common.  This type of ownership also provides protection from creditors: “The interest of a debtor spouse in property held as tenants by the entirety shall not be subject to seizure or execution by a creditor of such debtor spouse so long as such property is the principal residence of the nondebtor spouse.” M.G.L. c.209, s.1.  A conveyance to two or more persons “as tenants by the entirety” creates a tenancy by the entirety. However, if the two people are not married at the time of the conveyance, a tenancy in common is created despite the “tenants by the entirety” language.

A Page of History is Worth a Volume of Logic

The famous Massachusetts and United States Supreme Court justice Oliver Wendell Holmes Jr once wrote in a decision, “. . .on this point, a page of history is worth a volume of logic.” He was then discussing the estate tax, but his observation equally applies to real estate law. Without understanding the historic background of real property law, it doesn’t make much sense.

The basics of Massachusetts real estate law developed in medieval England. Back then, the king owned all the land, but he would grant portions of the land to favored subjects to use and manage in return for them providing him with soldiers and food. When the person died, the land would revert back to the king. Gradually, the king allowed the nobles to keep the land, sometimes for as long as they had a male heir, sometimes longer.

That is how estates in land came to be measure in terms of time. When the English first came to America, there were many different types of estates. Fee simple absolute was ownership for potentially infinite duration. Fee simple determinable was ownership that terminated or “determined” upon the occurrence of a certain event (“I grant you this property for as long as it is used as a church.”). Along with a fee simple determinable came something called a future interest which directs who is to own the property when the contingency occurs. If the deed creating the determinable fee is silent on that, ownership would revert back to the grantor or his estate.

Over time, almost all of these types of ownership that are less than fee simple were eliminated legislatively because public policy preferred the free transferability of land rather than these convoluted genealogical formulas or contingencies. So today, almost every conveyance is in fee simple.

There are at least two estates less than fee simple that remain popular today. One is a lease for a term of years. If I lease you my house for one year, your ownership estate is one year in duration. At the end of that year, the property reverts back to me. The other example is a life estate which is ownership measured in terms of someone’s life. If I grant my house to my heirs but reserve for myself a life estate, I own the property for as long as I am alive, but immediately upon my death, my heirs own it. At the time of the conveyance, the heirs receive an ownership interest, but it only becomes a possessory interest at some time in the future, hence the term future interest.

Other than lease and life estate, it is rare for these deed variations to make an appearance these days, but understanding what they were and how they operated makes understanding current real estate law much simpler.