What is a Deed of Reconveyance
Learn about the document that shows your loan is paid off
A reconveyance deed is an official document from a mortgage holder releasing the debtor from the mortgage. It is evidence that the mortgage has been paid in full. The mortgage note is marked paid, the original mortgage is returned and a deed of reconveyance is issued to the homeowner showing the mortgage has been paid off.
Recording a Reconveyance Deed
A deed of reconveyance must be recorded in the public records of the county where the property is located. If the deed of reconveyance is lost or destroyed, it creates a title nightmare and puts a cloud on the title because there is nothing to show that the loan has been paid.
During my real estate career, I have encountered many situations in which the reconveyance was not recorded, so it's more common than you might initially assume. It happens when somebody drops the ball during the transfer of funds and preparation of the beneficiary demand. One person might have thought the reconveyance was delivered but it wasn't, or another would have been responsible for drawing up the reconveyance but overlooked that task. There are numerous reasons why it might have been missed.
On top of that, sometimes the title company that handles the insurance for the particular transaction might have insured the title. If that happened, then that particular title company is generally the title company the parties will need to entrust to insure the next transaction. You might wonder how a title company can insure a transaction when all the documents are not recorded as required, but they can do it. A title company that did not insure the property initially will most likely refuse to issue a title insurance policy for it.
Mortgage Subordination Mistakes
Other situations have involved a homeowner who refinanced a loan in first position, with the second loan allowing a recording to be placed in front of it. This is called loan subordination. Sometimes the loan subordination does happen due to a mistake, and the loan is recorded in second position instead of primary position. I see this happen more in short sales when the first lender who is not in first position gets shorted by a junior lien payoff that is far less than it would ever agree to accept.
This can send a short sale situation into hiatus and stop the process of short sale approval. That's because the second lender is now in first position and may refuse to budge.
Probably the most common problems that occur with reconveyance deeds are minor mistakes made in the document itself, such as misspelling of the borrowers' names, misspelling the lender's name or incorrect entry of the property's legal description. This can be resolved by recording a correction deed.
Lack of Historical Records
During the 1970s, homeowners burned their reconveyance deeds as a form of celebration. They would sometimes hold big bonfires and invite family and friends to the occasion. The problem is that they sometimes burned the reconveyance deed before recording it. If a reconveyance is not recorded in the public records, even though the money was received by the lender and deposited, the loan could remain listed as unpaid, and again, this puts a cloud on the title.
Refinancing Options Result in a Reconveyance
Today, most reconveyances occur because the homeowner has elected to refinance the existing loan, and in doing so, the owner pays off the existing loan. Many homeowners are attracted to loan programs that either lower the interest rate or extend the amoritzation period (or a combination of both), which also results in a lower monthly payment.
It is becoming less common for homeowners to pay off a mortgage and own their homes free and clear. Many continue to extend and extend by refinancing over and over. That kind of financial thinking can result in paying a steeper price over the course of home ownership. Before jumping on a teaser rate to refinance, it might make more sense to consider the additional years that are being added to your mortgage or opt for shorter amortization period.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California