What Recourse Does a Lender Have When A Mortgagor’s Signature is Forged?

Most residential mortgages are executed by a husband and wife.  When you discover that one of their signatures was forged, there are still several means in which your investment may still be recovered:

1. File a title claim:  Submit a claim to the company that insured the mortgage as a valid lien, that the lien is invalid because the signature was forged.

The title company will retain an attorney at its own expense to litigate the forgery issue. They may be able to recover a part of the loss utilizing the doctrine of “equitable subrogation,” which allows recovery from the party whose signature was forged to the extent they received a benefit by having their prior valid obligations paid from the loan proceeds. Upon completion of the litigation, the title company will pay you the amount of your loss up to the face amount of the policy, which is the original amount of the loan. Note that the title company will typically attempt to reduce their payment obligation by the amount they recover and will also demand an Assignment of Mortgage to recover some or all of the funds they paid you.  

It is important to remember, however, that the amount that is due will usually exceed the face amount of the policy as a result of accrued interest, real estate tax and insurance advances, legal fees and costs, etc. that have accumulated since the mortgage was originated. Since you are entitled to recover all of these sums, in addition to the principal balance, you should insist that any recovery by the title company be applied first to the entire payoff balance of your mortgage before any reduction of their obligation to indemnify you for your loss. Additionally, any Assignment of Mortgage given to the title company should provide that the assignment is for a “Junior Participation Interest” only, so you receive full reimbursement of ALL money due to you before the title company collects any money due to them.

2. File a complaint with the District Attorney: In addition to any civil remedies you have, you may file a complaint with the District Attorney as forgery is a criminal act. While the criminal prosecution and conviction will not provide any financial benefit by itself, criminal sentences and plea bargains often include “restitution” where the forger is required to reimburse some or all of your loss.

3.Foreclose the remaining valid interest: Upon receipt of payment from the title company, you will usually be left with a valid mortgage only as to the interest of the party whose signature was genuine. You may complete the foreclosure of this “half-interest” and have it sold at a public auction, but the purchaser at the foreclosure sale will only receive this “half-interest” and will then own the mortgaged property together with the spouse whose signature had been forged. Chances are the spouse will be willing to purchase the other “half-interest” so as to gain complete ownership of the property, thus providing another source of reimbursement.

4. Hire a Collection Attorney: Notwithstanding the forgery, you will still have a valid claim against the party who signed the Note, although it will be unsecured.  You should consider retaining a collection lawyer (as opposed to a litigation lawyer - see my article explaining the difference!)  Collection attorneys will work on a “contingency” basis to obtain a monetary judgment and enforce it against any of the assets of the party who signed the Note, so you will not risk “throwing good money after bad.”

If you have any questions or comments, please contact me at peter.roach@roachlawfirm.com.