The Role Of The Allonge In Foreclosure

Many people throughout the country obtain a mortgage to finance the purchase price of their home. Unless you have the cash to pay for the home outright — or other means of borrowing money — you will likely go the route of choosing one of the popular mortgage types that lenders make available.

No matter what type of mortgage you obtain, and no matter which company you obtain it from, the mortgage itself is a document you will sign that essentially promises that you’ll pay back the money you are borrowing and secures the obligation against your real property. The mortgage outlines the terms of the repayment plan, including the length, the number of payments, the interest rate and type, and the monthly payment plan.

If you don’t pay according to the terms of your mortgage, the lender holds the right to foreclose on the property, which allows them to take possession of it and cancel the loan without any recourse to you.

It’s possible that the lender you originally obtained the mortgage from will sell the promissory note to another company or investor, who will then be the one responsible for collecting payment. This new entity will also hold rights to foreclosure for non-payment — as long as the paperwork is done properly.

The most common way that this transfer of note is done is through what’s known as an allonge. What the allonge says, whether it was used properly and how it was done all plays a vital role in how a potential foreclosure may proceed.

Below, we explain in greater detail the role of the allonge in foreclosure.

How Home Purchases Work

When a person needs to borrow money to finance the purchase price of a home, they’ll typically turn to financial institutions that have specific loan programs in place for that.

During the home closing process, there are two major documents borrowers will need to sign. The first is the promissory note, which is a document that promises that you will repay your loan on the agreed-upon terms.

The second depending on the state you reside in, is either the Deed of Trust or a mortgage. These are what secures the promissory notes against your real property. 

While these documents go hand-in-hand — and are terms that are often incorrectly interchanged — they serve different legal purposes.

The promissory note gives the owner the ability to collect money on the home loan.  The mortgage, or Deed of Trust, will give the owner the power to take any legal action regarding the property if necessary, which includes foreclosure proceedings.

What Happens When Mortgages Are Sold

There are a variety of reasons why your original lender may sell your mortgage to a new lender. From the borrower’s perspective, the only thing that should change when their mortgage is sold is that they’ll make their payments to a new company. The new owner of the mortgage is not allowed to change the original terms of the mortgage, as that is set in stone at the signing table.

For mortgages to be legally transferred between two owners, an Assignment of Mortgage (“AoM”) must be completed. In addition to transferring the power to collect money from the original lender to the new lender, the AoM will transfer the ability for the new lender to take legal action to foreclose on the property.

When an AoM takes place, generally an allonge will be attached to the promissory note. The allonge is an additional piece of paper that gets attached to the promissory note allowing for the collection of the debt

The Problem with Allonges

Allonges have been around for centuries. They derive from French law and were traditionally attached to bills of exchange when there wasn’t enough room on the original document for the additional signatures.

While they are certainly valid legal documents, there are some concerns today about how they are applied and added to mortgage contracts. Allonges are only intended to be utilized when there isn’t enough space on the original promissory note for a “wet” endorsement to fit. 

However, with AoMs becoming more commonplace over the last 20 years, some banks began to use allonges improperly. Once this was completed, they used the allonges to allege ownership of a note, which they then used to foreclose on a home.

There have been many legal challenges to the use of allonges in foreclosure cases, with varying results for both sides. 

Are Allonges Legal?

The short answer is that allonges are indeed legal. However, like any other legal document, there are rules and regulations parties must follow to ensure they are legal. 

First, allonges are only to be used in the above-stated cases — when there’s simply no more room to attach additional signatures. Second, allonges are supposed to be “wet” endorsements, or signed by hand. Third, the party purchasing the mortgage is supposed to be in possession of the original promissory note when they’re doing so.

What’s more, all AoMs have to be recorded at the county where the property is located, and the valid allonge must be attached at that time of recording.

The entity purchasing the promissory note also has to follow certain state-specific rules and regulations for how they must be filed, where they must be filed and in what timeframe they must be filed. If all of these are not followed then the AoM can be deemed invalid and, in turn, their rights to foreclosure according to the allonge are invalidated as well.

Work with an Experienced Foreclosure Attorney

If your mortgage has been sold and the new owner of your promissory note is trying to foreclose on your property, you may have some legal recourse. What that recourse is will depend on a number of factors, including whether they attached an allonge to the promissory note and if it was done legally.

Cases like these are not easy for individual borrowers to fight on their own. It’s times like these that you need the help of an experienced foreclosure law firm like Babi Legal Group.

Our attorneys have 20 years of experience in real estate, and are well-versed in all of Michigan’s rules and regulations as they pertain to mortgages and allonges.

Contact us today to learn more about how we can help you. 

What is a Vendor Lien?

When someone purchases real or personal property, they typically will do so either in cash, on a credit card or as part of a larger loan such as a mortgage. If a secured loan is used to finance the purchase price, then the actual property itself is used as collateral.

The most common example of this is a mortgage on real estate or a secured loan on a vehicle. Most people don’t have the financial means to purchase a home outright in cash. So, they turn to financial institutions to get a mortgage. The financial institution that provides the loan to the homeowner lends them the money needed to complete the purchase, takes a security interest against the home, and the borrower must pay back the money on a monthly basis in return.

Sometimes, though, borrowers can’t qualify for a traditional mortgage, so they look for alternative funding sources. In these situations, the seller may put a vendor’s lien on the property to protect the asset. Yet, vendor’s liens can also be used in other circumstances that involve personal property.

Below is a full explanation of what a vendor’s lien is, and how it works in a few different applications.

What’s a Vendor Lien?

Vendor’s liens serve as a claim for the seller on some type of personal property. The lien is a legal document that will give the seller the ability to repossess the property in question if certain conditions are met.

In most cases, the seller would try to repossess the personal property if the buyer doesn’t make payments according to the agreed-upon terms. If the seller does repossess the property, they would have a right to either hold onto it or sell it to someone else.

What Can Be Secured Through a Vendor Lien?

A vendor lien can technically be placed onto any personal property that’s being paid for by a loan. This could apply to real estate, an appliance for your house or a vehicle.

Each state has its own rules and regulations for what types of property may be secure through a vendor lien. Most commonly, though, they are applied to real estate, jewelers, storage facilities, vehicle repair shops, and financial institutions or banks.

In all of these cases, if the borrower or customer fails to make payment on the money they owe, the person or entity that holds the vendor lien will be able to repossess the property.

So, for example, if you fail to pay a repair bill on your car and the auto mechanic has a vendor lien on your vehicle, they’d be able to at least attempt to take possession of your vehicle.

What is the Purpose of a Vendor Lien?

The obvious answer is that a vendor lien is a tool that lenders of any kind can use to take back property if payment for that property isn’t made by the borrower. So, in the above case with the auto mechanic, the shop would be able to use the vehicle itself as leverage to dissuade the owner of the vehicle from not paying the bill.

But, a vendor lien goes much deeper than that. It prevents the borrower from either transferring the title or selling that property until they are able to clear the title. In this case, the seller will be the rightful owner of the property in question up until the borrower pays off the property completely.

How a Vendor Lien Works for Real Estate

Not every homeowner is able to qualify for a mortgage. When this happens, they may not have a lot of options for obtaining the necessary financing to pay for the home.

In some cases, the seller of the home would be willing to be the lender. Instead of the buyer using money they got from a mortgage company to pay for the home, they would make monthly payments directly to the seller to satisfy the sales price.

A contract would be drawn up that lays out the terms of the sale — just like a mortgage. In that contract would typically be a vendor lien, which would protect the seller’s interest.

It could technically prevent the buyer from selling the home again to another person before they fully pay off the loan. There might be language in the vendor lien, though, they would say this would be OK as long as the holding of the vendor lien approved of the sale.

The vendor lien would serve as the official document in this out-of-the-ordinary home sale transaction, and it would allow the seller to begin the foreclosure process if the buyer doesn’t make the scheduled payments or falls behind. 

How a Vendor Lien Gets Discharged

After all payments are made in the contract, the borrower won’t owe any more money, and the vendor lien will be completely satisfied. Some contracts may include language that says the vendor lien will be automatically discharged when this happens.

Even so, it’s in the best interest of the borrower to get a signed, written document that serves as evidence that the borrower has satisfied the vendor lien and it’s paid off. That way, the holder of the vendor lien can’t make a claim to the property in the future.

This is very important to borrowers for another major reason — vendor liens will typically be reported on a borrower’s credit report. As such, the mere presence of a vendor lien could affect a borrower’s credit score for as long as it’s still on their record.

When the borrower is able to prove that they have satisfied the vendor lien and it gets discharged, it should be removed from their credit report as well, which will typically result in their credit score increasing.

Vendor liens can be rather complicated depending on the type of property you’re trying to secure. Since a vendor lien can be attached to a written contract agreed to by two private parties — and not a mortgage company, for instance — it’s important that if you’re entering into a contract that has one, you understand everything it means.