Re: technical title insurance question - Posted by Bob H
Posted by Bob H on October 30, 2000 at 03:09:08:
Unfortunately, neither scenario accurately describes the process: Scenario 1 fails the “good funds” requirement; title companies will not disburse the proceeds of an unfunded loan. Scenario 2 is closer, but more accurately describes the process for an escrow state (Colorado is not one)
It is important to understand the function of the title company in non-escrow states. Since it would be impossible to facilitate the simultaneous recording of both release and new loan documents for every transaction, title companies assume the risks of disbursing the proceeds from transactions prior to the recordation of the actual documents. During this “gap period”, after they have collected and disbursed the funds from the transaction, but before the respective documents have been recorded, they insure the condition of title. In the case of a refinance, they would insure the new lender a 1st lien position.
Your post asks about what takes place from a “legal” standpoint. I’m assuming your question relates to chain of title. In a typical refinance, the following occur in order:
Day of closing: borrower executes loan documents; new lender funds loan to title company; title company sends pay off to old lender. At this point, the old lender still has a 1st lien position, and the new lender, an unsecured loan that is insured by the title company to become a 1st lien.
Subsequent day(s): title company records new lender’s Deed of Trust (technically now a 2nd);
Several days (or weeks) later, title company receives an executed Release of Deed of Trust from old lender and records it: new lender is now legally in 1st position.
How this process relates to the priority of a judgment lien is not apparent w/o more information. In general, if a judgment lien was of record prior to a refinance, or came of record, in the gap period, before recordation of the new Deed of Trust, it would be senior to the new loan. The only scenario where I could envision this happening would be in the case of a title company error, or collusion between the judgment creditor and the borrower.
Hope this additional information helps answer your question.