Prior to 2008, when the Great Recession and its aftereffects brought about a sea of changes in the mortgage lending arena, it was not an uncommon scenario, post-closing on a sale or refinance of real estate, to see a mortgage signed by only one of multiple owners of the real estate. In most of these instances, it was one spouse signing the mortgage and the real estate titled in both spouses’ names, but the spousal scenario was not the only one. Unmarried co-owners and other family members might be on title, but missing from the mortgage encumbering such title.

At first glance, a solution would seem to be title insurance coverage (if obtained), but submission of a claim to the title insurer would only be the beginning. Once such a claim is made, the title insurer most likely would “tap” outside counsel to, on behalf of the aggrieved lender, file a mortgage reformation action on the “dime” of the title insurer.

A mortgage reformation action, simply, seeks to make right what went wrong with a mortgage that is defective for some reason. The most common defect is a missing signatory/mortgagor, but other scenarios, such as a missing or incorrect metes and bounds legal description of the mortgaged real estate, can also form the basis for a mortgage reformation action. In a typical straightforward reformation action, the aggrieved lender names as defendants the party/parties who signed the mortgage as well as the party/parties who should have signed, as well as any junior lienholders on the real estate whose lien position could be affected by the mortgage being reformed. The action seeks a court order judicially reforming the mortgage to include the missing mortgagors, legal description, etc., a copy of which order is then recorded with the county recorder of deeds as evidence of the reformation.

Pennsylvania recognizes only limited grounds for mortgage reformation. Essentially, a mortgage may not be reformed unless either mistake (most likely mutual mistake between the parties to the mortgage) or fraud is shown. Practically, though, mortgage reformation actions are very rarely defended, because common sense usually dictates that the mortgage be reformed.

Although banks and institutional mortgage lenders are the most likely filers of mortgage reformation actions, they are by no means the only ones. Private lenders and mortgage holders may do so as well.

A word of warning, though…if the holder of a defective mortgage (institutional or private) does not have title insurance, the cost of a reformation action will be on the mortgage holder.

Stark & Stark has filed successful mortgage reformation actions in many counties of the Commonwealth. Institutional and private lenders who do not have title insurance coverage, but who would benefit by reformation, may contact us for assistance.