Mortgage Subrogation

A mortgage is a loan used to purchase or maintain a home, land, or other real estate. The borrower agrees to pay the lender (usually a bank) over time, typically in monthly payments divided into principal and interest. The property then serves as collateral to secure the loan.

For example, a person wants to purchase a home but does not have enough money to purchase it in cash. A bank or other lender provides the money to purchase the home, and a mortgage is placed on the property. This is done so that if the borrower defaults on the loan, the lender is given the right to take possession of the property.

Mortgage transactions are composed of two important documents: the promissory note and the mortgage, or “deed of trust”:

• A promissory note is a type of legal contract containing terms stating that one party promises to loan someone a certain amount of money, and the other party agrees to repay a specific amount of money within a specified amount of time. The promissory note holds the borrower accountable for repaying the loan, even if the borrower goes on to sell the property later.
• A mortgage or deed of trust document specifically acts as a lien on the property. This means that if the borrower does not repay the loan, the lender can legally collect the money owed by selling the property. The mortgage document guarantees that the lender will get their money back, even if the actual borrower is not the party making the repayments.

What Is Subrogation In Mortgages?

Subrogation refers to substituting one party for another in a legal setting. For example, the right of subrogation allows another party to be substituted in place of a creditor to obtain recovery for damages or losses from the debtor. This substituted party is then given the creditor’s rights against the debtor. As such, they can recover directly from the debtor. Essentially, subrogation provides a legal right to a third party to collect a debt on behalf of another party.

Subrogation intends to allow the substituted party, known as the “subrogee,” to legally obtain reimbursement for payments they have made associated with the legal claim or debt. The original creditor is referred to as the “subrogor.” The subrogor forfeits their right to recovery to the subrogee, who is said to “step into the shoes” of the subrogor.

The most common time when subrogation occurs is in insurance claims. For example, most automobile insurance policies include a subrogation clause allowing the insurer to pursue the party that caused the accident legally. Your insurance company will have paid you for your losses due to the accident, and subrogation allows the insurer to recover the amount of the claim they paid out to you from the other party.

Subrogation is also common in cases associated with:

• Mortgages
• Surety and guaranty
• Tax debts
• Banking accounts
• Any other time a debt is paid by a party other than the original debtor

To summarize, subrogation is substituting one creditor with a different one. The substitute creditor receives all of the same rights of recovery against the debtor that the original creditor had. As such, the debtor must pay the new creditor instead of the original creditor.

How Does a Subrogation Occur? What Are the Different Types Of Subrogation?

Subrogation can occur through the operation of law, by contract, or through the authorization of a statute. These are further discussed below. If the subrogation is to occur because of a contract, many states require that the subrogation agreement be put in writing. If it is not written down, it will not be enforceable. This is especially true for cases involving real property and taxes.

Examples of the types of subrogation are:

• Legal – Operation of Law: Authorized by operation of law, this type of subrogation can take effect without a formal agreement between the parties involved. For example, when one party pays off the debt of another without any agreement of subrogation, that party would be stepping into the shoes of the original debtor. Note that normally, legal subrogation cannot displace a contract agreed upon by the parties. A legal subrogation can be modified or terminated by a contractual agreement.
• Conventional – By Contract: The terms of subrogation are specifically stated in a written contract, which dictates all of the conditions under which subrogation is to occur. This is one of the most common types of subrogation.
• Statutory – Authorization of a Statute: This subrogation is based on a statute enacted by a legislature. Such statutes will vary from state to state. The statute usually vests a right of subrogation with a party or category of parties. It is governed by the terms of the statute under which it is claimed as a matter of statutory construction.

How Does Subrogation Apply to Mortgages? How Does Subrogation Apply to Taxes?

Imagine that a debtor defaults on a mortgage (cannot or will not pay it off). If someone else pays off the mortgage, the mortgage is then considered to be subrogated to the new party. The new party obtains all of the rights of the original creditor and can go after the original borrower for the money.

However, it is important to note that mortgage subrogation is subject to several requirements. Some examples include:

• The person being substituted must have an interest in the property that the mortgage applies to. They cannot simply be a volunteer
• The mortgage must be paid off in full, not in installments
• The mortgage subrogation is much more likely to be honored by the court if the new party has previously lent some money for payment of the property
• The new party was not already liable for the debt.

The process and requirements for the subrogation of taxes are similar. A party cannot obtain subrogation rights unless they are interested in the property. They should record the subrogation agreement in writing to ensure it will be valid and enforceable.

It is important to note that if someone pays taxes for another person’s property by mistake, the court will treat them as . What this means is that they will not be able to obtain recovery through subrogation without the existence of an agreement.

Do I Need an Attorney For Issues With Mortgage Subrogation?

As you can see, mortgage subrogation can be a complex topic. If you are involved in a mortgage subrogation, consult an experienced local mortgage lawyer. Because much of mortgage subrogation is subject to differing state laws, a local attorney will be best suited to help you understand your state’s specific laws and how those laws will affect your legal options.

A skilled and knowledgeable mortgage attorney can help you navigate any mortgage and property disputes commonly arising when one party makes payments for another. An attorney can also help you draft a legally sound subrogation agreement to avoid such disputes. Finally, an attorney can also represent you in court as needed.