Abstract

If a refinance lender (or its title insurer) fails to conduct an accurate title search, or fails to act upon information it learns in a title search, the lender may find out later that its mortgage does not have the priority position it expected because another lien—one that the refinance lender did not discover or consider—has higher priority under the state’s “first in time, first in right” recording law. When this occurs, the refinance lender may request that a court assign its mortgage the priority position of the mortgage it paid off in the refinance under the doctrine of equitable subrogation.

The Restatement (Third) of Property’s approach to equitable subrogation grants a refinance lender equitable subrogation nearly automatically, granting the refinance mortgage over an earlier-recorded lien regardless of whether the lender (or its title insurer) has been negligent in failing to discover or address an intervening lien. Proponents of the Restatement approach claim that it reduces or eliminates the need for title insurance on refinance transactions. However, these promises may have been overstated, and any benefits to consumers of avoiding title insurance may erode as technology is applied to the title search and examination process, making it less costly and more efficient. Furthermore, the Restatement approach often reaches an inequitable result because any benefits are merely extracted from diligent intervening lienholders. And meanwhile, the benefits of equitable subrogation mostly accrue to careless title insurers. This Article proposes an alternative approach, under which a refinance mortgage would be subrogated only when truly required to avoid an injustice.

How to Cite:

Slade Smith, Inequitable Subrogation: The Flawed Restatement Approach to Equitable Subrogation of Refinance Mortgages, 1 Ariz. L. J. Emerging Tech., no. 1, 2017, https://doi.org/10.2458/azlawjet.5493