A recent state Supreme Court ruling could potentially spell disaster for real estate lending in Alabama. In late September, the Court ruled that a future-advance mortgage does not create a mortgage lien until some indebtedness is incurred under the mortgage, rather than when the mortgage is executed. Upending traditional notions of lien priority, the Court determined that a construction company’s materialman’s lien had priority over a future-advance mortgage because while the mortgage was executed prior to the commencement of the construction work, the first advance on the mortgage occurred after the construction work had been completed. In a friend-of-the-Court brief filed on Oct. 19, the Alabama Bankers Association asked the Court to rehear the case, arguing not only that mortgages are created when they are executed even if no funds are advanced at the time of execution but also that Alabama statutes grant lien priority to mortgages created before the commencement of work by mechanics or materialmen. In addition, the association’s brief outlines the negative impact the Court’s ruling would have on (1) financing options where no funds are advanced at closing, such as future-advance, open-end, and revolving loans; (2) Letters of Credit; (3) the ability of lenders and title insurers to use probate records to verify prior liens on property; and (4) the “safety and soundness” concerns overseen by state and federal financial services regulators. The association was joined on the brief by the League of Southeastern Credit Unions, the Mortgage Bankers Association of Alabama, the Alabama Credit Union Coalition, and the Alabama Land Title Association. It is unknown whether the Court will choose to rehear the case and, assuming it does, whether it will choose to alter its decision from September. But rest assured that the Association is monitoring and researching all judicial and legislative avenues that can be used to solve this potentially troublesome situation.
Questions? Contact ABA’s Vice President of Legal and Governmental Affairs Jason Isbell at jisbell@alabamabankers.com.
