What You Don't Know Will Hurt You - The Sequel!
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Summer 2003, Volume 2, Number 3
What You Don't Know Will Hurt You — The Sequel!
by Richard Urban, Vice President and Massachusetts State Counsel
Our recent teleconference on Homesteads was very well received. By coincidence, a front page article on the effect of a Homestead in a mortgage refinance appeared in Lawyers Weekly during the week of the conference. The difference of opinion among our agents as to what to do in a refinance situation when property is subject to a Homestead quickly became the underwriting question du jour. Was additional language needed for the mortgage in order to preserve a Homestead or protect the lender? Or were separate releases, subordinations or declarations required?
This column provides an analysis and options on what to do, or not do, if a Homestead exists at the time a mortgage refinance occurs so that the lender's security is not impaired and a homeowner's rights are preserved.
For the sake of the following discussions, assume that title to the property is held by a husband and wife, that one of them has declared a Homestead, and that both spouses will execute the refinance mortgage.
1. Do Nothing. A mortgagor's execution of a mortgage which contained mortgage covenants "conveyed his entire interest in the property to the mortgagee, subject to defeasance, and effectively subordinated his entire interest he possessed to the mortgage lien." [Emphasis added.] Atlantic Savings Bank v. Metropolitan Bank and Trust Company & others, 9 Mass.App.Ct. 286, 288, 400 N.E.2d 1290, 1291 (1980).
Although a slew of Bankruptcy court decisions are providing guidance in the realm of Homestead interpretation, the Atlantic Savings Bank case remains the seminal state court decision in this area. In that case, a husband and wife owned the property and executed a second mortgage to Metropolitan Bank and Trust Company which was subject to, respectively, a first mortgage (held by the Atlantic Savings Bank) and a declaration of Homestead. Atlantic Savings Bank foreclosed its mortgage and named the borrowers and the second mortgagee in an interpleader action relative to the surplus proceeds left over after its auction. A legal battle of claims of superior rights to the surplus ensued between the homeowners pursuant to their Homestead and the second mortgagee pursuant to its mortgage. The Appeals Court ultimately upheld the lower court decision and ruled in favor of the second mortgagee.
The critical issue before the court was whether the execution of the second mortgage by the homeowners released any Homestead rights.
The homeowners argued that under G.L.c. 188, §6, specific words of release were required to subordinate a Homestead to a mortgage. This statute provided in pertinent part that:
Property which is subject to a mortgage executed before an estate of Homestead was acquired therein, or executed afterward and containing a release thereof, shall be subject to an estate of Homestead, except as against the mortgagee and those claiming under him, in the same manner as if there were no such mortgage…. [Emphasis added.]
The mortgage before the court in this case was completely silent on Homestead rights and did not contain any language similar to that found in today's Fannie Mae/Freddie Mac instruments, e.g.:
Waivers. Borrower waives all rights of Homestead exemption in the Property and relinquishes all rights of courtesy and dower in the Property.
However, in reaching its conclusions, the court acknowledged that the mortgage was written in the statutory short form with mortgage covenants. Since Massachusetts recognizes mortgages under a "title theory" of analysis, the court defined the mortgage in very narrow terms: that "it constituted a deed of conveyance which transferred a fee interest in the bank, defeasible upon the performance of the conditions stated therein." Atlantic Savings Bank, supra, at 9 Mass.App.Ct. 288, 400 N.E.2d 1291.
The court then construed the husband's execution of the mortgage as a conveyance of his entire interest in the property to the bank subject to defeasance. This, the court said, in unequivocal terms, "effectively subordinated any homestead interest he possessed to the mortgage lien." [Emphasis added.] Id.
As far as the wife's execution of the mortgage, the court applied the title theory of mortgages as well since G.L.c. 188, §7 stated in language pertinent at that time that:
No conveyance of property in which an estate of homestead exists, and no release or waiver of such estate, shall convey the part so held and exempted, or defeat the right of the owner or of his wife and children to a homestead therein, unless such conveyance is by a deed signed by the wife … but a deed duly executed without such signature or release shall be valid to pass, according to its terms, any title or interest in the property beyond the estate of homestead.
Since Massachusetts recognizes a mortgage as a form of deed, and since §7 expressly provided that the spouse's signature on a deed releases a Homestead, the Atlantic Savings Bank court held that the spouse's execution of the mortgage released her interest in the Homestead without any specific words of release. Id. at 9 Mass.App.Ct. 288-289, 400 N.E.2d 1291-1292.
Keep in mind that the court made this finding driven by a short form mortgage completely devoid of "waiver" language that is customarily found in today's Fannie Mae/Freddie Mac instruments. Although not necessary pursuant to the Atlantic Savings Bank decision, it would seem that such language would provide a "belt and suspenders" effect to the subordination of a Homestead when a refinance mortgage is executed. Consequently, under this analysis, the conveyancer needs to do nothing to subordinate a prior Homestead to a refinance mortgage.
2. Subordination. Although under Atlantic Savings Bank no additional language is required to subordinate a Homestead to a refinance mortgage, some practitioners may still require a subordination. If that is the case, then a conventional subordination of the Homestead to the refinance mortgage can be drawn. However, in these days of increased registry fees, instead of drafting and filing a separate document, consider inserting a subordination provision directly into the body of the refinance mortgage itself, e.g.: "by execution of this mortgage, the Borrowers hereby release and subordinate all rights of Homestead for purposes of this mortgage and for no other purpose."
3. New Homestead. Given the paucity of state court decisions that have rendered a modern-day Homestead analysis within the application of Atlantic Savings Bank, the recognition of mortgages under a title theory, the various connotations of Fannie Mae/Freddie Mac "waiver" language, and G.L.c. 188, some conveyancers are sufficiently concerned that they advocate the filing of a new Homestead after a mortgage refinance. Great care and caution should be contemplated if such a tactic is employed since, pursuant to G.L.c. 188, §2, "[T]he acquisition of a new estate or claim of homestead shall defeat and discharge any such previous estate."
A recent First Circuit Court of Appeals decision examined the application of section 2 in a Bankruptcy Court ruling that was affirmed by the District Court and appealed. David G. Garran v. SMS Financial V, LLC, Assignee of Citizens Bank of Massachusetts (In re Garran), Case No. 02-2033, 7/28/03, (Lawyers Weekly No.01-204-03). A debtor had filed a section 1A Homestead as a disabled individual. Later, the non-debtor spouse filed a section 1 Homestead as well. The debtor then claimed an exemption by "stacking" both Homesteads for $600,000 (i.e. $300,000 under the section 1A Homestead and $300,000 under the section 1 Homestead). The Bankruptcy Court ruled that the second Homestead discharged the first Homestead pursuant to the application of section 2.
In making its ruling, the Court of Appeals recognized and applied two redundant themes that are repeatedly found in the many bankruptcy court decisions that have wrestled with the interpretation of Massachusetts Homestead laws:
- First, that "homestead laws are designed to benefit the homestead declarant and his or her family by protecting the family residence from the claims of creditors." Garran, supra, __ ,citing Shamban v. Masidlover, 429 Mass. 50, 53, 705 N.E.2d 1136, 1138 (1999).
- Second, that the "Massachusetts courts have construed the State homestead exemptions liberally in favor of debtors." Id.
Notwithstanding the favorable disposition to Homestead declarants and debtors, the court also acknowledged that "liberal construction does not mean that the courts could extend the protection of the homestead exemption when doing so would contradict the plain and unambiguous language of the statute." Id., referring to Shamban, supra, 429 Mass. at 53-54, 705 N.E.2d at 1139.
Turning to the Homestead statutes, the court examined sections 1 and 1A and, with emphasis, focused on the plain language of section 2: "The acquisition of a new estate or claim of homestead shall defeat and discharge any such previous estate". Consequently, the section 1A declaration and corresponding Homestead exemption was defeated and discharged by the subsequent section 1 declaration and the debtor's Homestead exemption was reduced to $300,000.
With this court's interpretation in mind, the declaration of a new Homestead will most likely discharge an existing Homestead by operation of section 2. In addition to debts and liens existing prior to the original Homestead and debts contracted for the purchase of the home, a homeowner might be exposed to any matters or claims arising between the filing date of the original Homestead and the filing date of the new Homestead. See c. 188, §§1(2) and 1(3). However, this is more of a concern in a state court action than it would be in a bankruptcy. See e.g., Patriot Porfolio, LLC v Weinstein (In re Weinstein), 164 F.3d 677 (1st Cir., 1999), cert. den. 527 U.S. 1036, 119 S.Ct. 2394, 144 L.Ed.2d 794 (1999) (exceptions for prior contracted debts and preexisting liens from Homestead protection under G.L.c. 188, §1 are not impediments to avoidance because state exceptions are preempted by Bankruptcy Code §522(c)) and In Re Ballirano, 233 B.R. 11 (D. Mass., 1999) (reasoning of Weinstein applies equally to c. 188, §1(3), debts contracted for purchase of home, and, in this case, debt incurred in constructing the home).
Caution should be exercised if this option is chosen.
Final thoughts. The above discussions were driven by a fact pattern in which both spouses own the Homestead property and one spouse declares a Homestead. Occasionally, an individual may own property in his or her name, alone, and declare a Homestead. If that same individual is refinancing (or selling for that matter) his or her property, then inquiry must be made of that individual's marital status. If married, that individual's spouse's Homestead rights must be specifically addressed.
In the context of a mortgage refinance, the non-record spouse should waive or subordinate the Homestead rights by either executing the mortgage (and add specific subordination language for clarity's sake) or by separate instrument.
In a sale, the non-record spouse should release the Homestead rights by executing the deed or by separate instrument.