08/30/2013 04:40 pm ET Updated Oct 30, 2013

Acreage Mistake May Allow Mortgage Rescission

If both the borrower and mortgage lender are mistaken (mutual mistake) concerning the acreage being purchased and financed, there may be a basis for rescinding (unmaking) the mortgage according to a recent decision of the U.S. Court of Appeals for the Eighth Circuit (Roers v. Countrywide Home Loans, Inc..). It is rare that an acreage mistake would occur since typically there is a surveyor's report based upon the legal description of the land in question. However, in this situation the Eighth Circuit allowed litigation to proceed to determine if mortgages on three unrelated properties used to finance the land purchase may be rescinded in exchange for the amount owed on the mortgages.

In this case the buyers believed that they were purchasing a front 20 acres and a separate rear 25 acres where a house was located. In fact only the rear parcel was being sold. Litigation against the sellers and seller's realtor has been settled. The Countrywide lending representative indicated to the purchasers that the front 20 acres could be subdivided and sold to pay off the mortgages on the three unrelated properties. Countrywide appraisals and the resulting mortgages were based upon the value of the entire 45 acres. Payments on the mortgages are in arrears.

Countrywide unsuccessfully argued that mortgages are financial instruments distinct from the collateral. However, the value of the appraised 45 acres was a basic material (significant) assumption underlying the mortgages. An adversely affected party due to a mutual mistake may seek rescission of a contract and in a given situation both parties may be adversely affected. In particular, these borrowers stand to lose four tracts of land due to the mistake. The trial court was instructed to proceed to determine if in fact a mutual mistake existed.

When purchasing land, it is risky to simply rely upon a street address, in this case "20 County Road 20." Additionally, it is important that the appraiser have a detailed legal description in order to conduct an accurate appraisal. Finally, this decision illustrates that it is sometimes possible to rescind a mortgage when the lender has not engaged in fraud.