Adopting Restatement Mortgage Subrogation Principles: Saving Billions of Dollars for Refinancing Homeowners

Abstract

In eras of declining interest rates, millions of residential mortgage loans may be refinanced. When this occurs, it is customary for the refinancing lender to require a title examination and a new mortgagee's title insurance policy. This requirement is expensive, usually costing several hundred dollars or more, and the cost is invariably paid by the borrower. This Article proposes that in the vast majority of refinancings this expense can be substantially reduced or even eliminated. This result can be achieved through proper understanding, adoption, and use of the doctrine of equitable mortgage subrogation articulated in the Restatement (Third) of Property: Mortgages. The principle of subrogation comes into play when the proceeds of a new mortgage are used to pay off a preexisting mortgage; it allows the holder of a new mortgage to take the priority of the old mortgage. If subrogation is made available liberally, as the Restatement recommends, it can eliminate the risk that intervening liens, arising between the dates of the original and the refinancing mortgages, will take priority over the refinancing mortgage. Hence, the need for new title insurance protection can be largely or entirely avoided.

Keywords: mortgage, subrogation, refinancing, homeowners