How does a Quitclaim deed affect the note?

[Tim S.]

If the owner of record Quitclaims the deed to another party, does the note need to be modified as well to reflect the new deed holder?  I would think the answer is yes.  

I'm looking at buying a note where this is the case, seems like a problem. 

[Dion DePaoli]

Tim, the grantor is the one giving title to the grantee.  The deed is a part of the chain of title.  It if was unclear it wouldn't be a valid deed.  

As Pari rightfully pointed out a transfer into a family trust does not alienate the mortgagee and thus is not grounds for triggering due on sale. As you stated Tim, the grantee is not a trust but rather a natural person who does not bear the same family name as the original borrower so this sounds like a violation of the DOS. The address situation is not a definitive indicator of family relationship and it is not fully clear to us without seeing what you are looking at - I am inclined to think the address is in fact the subject property.

The due on sale clause resides within the security instrument (mortgage or deed of trust) and note.  The security instrument and note is signed by the borrower at origination and that clause remains in effect until the instrument is released from the property.  There is no additional execution of the clause by grantee or grantor that is relevant to the world.  Sometimes a grantor may sell the property subject to the existing mortgage and in doing so draw up paperwork which obligates the grantee to be responsible for the loan.  That paperwork, if created and executed, does not bind the mortgagee in any fashion, it would merely be an agreement between the grantor and grantee.  The mortgagee can agree to allow for the assumption of the loan by the grantee but that would require a written amendment to the note whereby releasing the original borrower (grantor) and obligating the new borrower (grantee).  The mortgagee is not obligated to agree to any assumption.  

The seller of the loan claiming it is not an issue may be answering that idea based on the service of the debt.  It's not an issue because some payments are being made is how I would read the response.  There certainly is truth to that idea in some sense.  The loan is being serviced and that is a good thing.  However, you as the mortgagee do not have a contractual obligation with the grantee.  This means the grantee should not have access to the borrower's account and should not be treated as a borrower since they are, in fact, not the actual borrower.  Unless of course you formally process an assumption for the grantee as mentioned above.  That is where the situation starts to get sticky, everything is "all good" while everything is being paid and taken care of.  In the event of delinquency or default the original borrower is the only party you can contact and is responsible for the loan.  

Further, the grantee is not under the obligations of the security instrument and note so property insurance technically is an issue in the event a claim ever needs to be processed.  The grantee is not obligated by the security instrument to name you, the mortgagee, as the loss payee.  Additionally, dispersing a claim to a party that is not the borrower who is contracted with the mortgagee opens you up for legal issues.  Not ideal in any manner.  

So as you can start to see, while things may be "all good" because the loan is being paid we shouldn't assume that everything is really "all good".  The underlying issue with a non-assuming grantee is they have less of an incentive than that of a contracted borrower.  Delinquent payments do not adversely affect their credit.  Default and foreclosure do not adversely affect their credit.  They are not bound by any of the features in the note or security instrument at all.  We have not even dove into issues arising in the event of a non-assuming grantee filing for bankruptcy.  (complicated x100)  While it may be nice they are making payments, it is problematic to brush off the non-assuming grantee as if there are not other ideas to consider.  There are numerous.

This is one of those examples of getting involved with things that a lack of experience can really back you into an uncomfortable corner.  The good news is you can certainly deal with the situation as the mortgagee.  Since the grantor is in violation of the DOS you can issue a notice to the property and last known contact information for the actual borrower/grantor.  Hopefully that prompts them to come to the table whereby you can address the transfer and consider processing an assumption for the grantee.  You are entitled to underwrite the grantee and you do not have to approve the assumption.  You will have some restrictions in regards to changing loan terms such as interest rate and maturity.  If the parties are uncooperative you can accelerate the loan and if they do not pay begin to foreclose.  While it is not always the case, many times grantee's have less than stellar credit and thereby didn't qualify for a loan in the market to actually buy the property outright.  However, there is a chance they might, in the event you have to accelerate and foreclose, they (grantor and grantee) can figure out among themselves how to pay you off.  Do not step out of your shoes as a mortgagee in your role.  Again, there agreement is by and between them and your agreement is by and between you and the borrower.  

Good luck.