ATG Casenotes and Underwriters' Bulletin

 

 
May 2009 Vol. 2, No. 5

Claims Corner

Contracts

Installment Contracts

In the recent past, installment contracts have seldom been used as a means of financing. The use of installment contracts is likely to increase as it becomes more difficult for potential homeowners to obtain mortgages. This article outlines the nature of installment contracts and explains the procedures to follow to avoid claims when handling installment contract transactions.

We encourage you to review Chapter 9B of ATG's Basic Underwriting Manual, Financing and Secured Interests - Installment Contracts, if you are involved in an installment contract transaction.

ATG's Basic Underwriting Manual describes an installment contract as follows:

An alternative to traditional mortgage financing in which the seller lends money to the buyer to allow the buyer to purchase the land. Instead of a deed and mortgage, the buyer and seller enter into a long-term installment contract, also referred to as articles of agreement, contract for deed, conditional sales contract, or an agreement for deed. The contract permits the buyer to obtain equitable title and to take possession of the real estate while the seller retains the legal title. The installment contract requires the buyer to make periodic payments to the seller and when all the payments have been made, the seller conveys the land to the buyer.

The areas most likely to cause claims are installment contracts that are not properly terminated and improper handling of liens, which are recorded against the seller or contract purchaser during the term of the contract.

Depending on the factual situation surrounding a specific installment contract, an installment contract can be terminated by forfeiture or by a foreclosure. The Illinois Mortgage Foreclosure Act provides that certain installment contracts must be terminated with a foreclosure action. 735 ILCS 5/15-1106 (a) (2) provides that:
 

Any real estate installment contract for residential real estate entered into on or after the effective date of this Act (July 1, 1987) and under which (i) the purchase price is to be paid in installments over a period in excess of five years and (ii) the amount unpaid under the terms of the contract at the time of the filing of the foreclosure complaint, including principal and due and unpaid interest, at the rate prior to default, is less than 80% of the original purchase price of the real estate as stated in the contract must be foreclosed.

Section 735 ILCS 5/15/-1107 (c) provides that installment contracts that fall into the above category are deemed a mortgage for purposes of the Mortgage Foreclosure Law. The contract purchaser is deemed the mortgagor. The contract seller is considered the mortgagee.

It is essential that you review each transaction separately to determine whether or not the installment contract must be terminated by a foreclosure. If the installment contract does not have to be foreclosed, review in detail the requirements outlined in the installment contract for forfeiture.

The other potential area for claims is the improper handling of liens against the property. When insuring an owner who is paying off an installment contract, conduct a judgment and lien search on both the buyer and the seller. If you discover judgments against the buyer that are dated after the contract was entered into, you must raise them on the commitment and resolve them in accordance with ATG's underwriting guidelines.

If the installment contract was recorded, any judgments against the seller that were recorded after the contract was recorded can be waived for the final the policy. However, if the installment contract was not recorded, liens against the seller cannot be waived unless the lien is paid off in connection with the closing or a release of the lien is presented.

What do you do if you are presented with a transaction where a contract purchaser's rights have been forfeited, but there were liens recorded against the contract purchaser prior to the forfeiture? You must examine the forfeiture procedure carefully to make sure that all requirements for a valid forfeiture that were outlined in the contract have been met. In addition, to waive any liens that were recorded against the contract purchaser you must be presented with forfeiture notices that were given to the lienholder. If the lienholder was not given the forfeiture notices in the manner that was outlined in the contract, the lien is a valid lien against the property.

If you have any questions when presented with a transaction involving an installment contract, contact the ATG Underwriting Department, legal@atgf.com, 217.403.0020, or 312.752.1990.

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