Thursday, August 31, 2017

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. 

No comments: