When a lender makes a loan to a borrower secured by a mortgage on the borrower’s real property, the lender usually requires the issuance of a lender’s title insurance policy insuring the mortgage. Lender’s title insurance protects lenders from losses associated with defects in the record ownership of the mortgaged property, insures the priority of the lender’s mortgage, and provides information about recorded restrictions on the use of the property or responsibilities of the property owner that may affect the value of the property.
When modifying existing loans secured by mortgages, lenders often ask us whether they need a mortgage modification endorsement or a date-down endorsement to their existing title policies. The decision ultimately lies in the balance between the risk and the cost. In this installment of our Why Do We Care series, we discuss when title endorsements are necessary for a loan modification, the types of endorsements available, and the risks associated with forgoing an endorsement.
When Endorsements Are Necessary
Certain loan modifications require a title endorsement in order to preserve the validity of the original title insurance coverage, to preserve the mortgage’s lien priority position, or to provide increased coverage for greater loan exposure. These include:
- The assignment of the insured mortgage to a different lender;
- Any change to the name of the insured party;
- An increase in the amount of the loan; or
- Any recorded amendments affecting the original mortgage.
For other modifications, however, the lender must evaluate the risk of forgoing a title endorsement against the cost of issuing the endorsement. Title insurance companies charge fees for the issuance of endorsements and additional premiums if they are increasing the insured amount under the lender’s policy. As lender’s counsel, we typically consult with the underwriter for the title company or the title agent that issued the original policy to evaluate the proposed loan modification and advise as to the best course of action and the anticipated costs.
While not as relevant to the lender, certain situations may also require endorsements to the borrower’s existing owner’s title policy. Interestingly, an endorsement to the owner’s policy may not require a similar endorsement to the lender’s title policy. For example, if the borrower assigns the debt to a third party, the borrower must get an endorsement to its owner’s title policy changing the insured owner, but the lender does not need a similar endorsement to the lender’s policy since the lien of the mortgage is not affected by the transfer of title to a new owner. It is a best practice, however, for the lender to require that a new owner assume the obligations under the existing mortgage (and related financing) and we would typically record an assumption agreement and obtain an endorsement to the lender’s title policy to reflect the assumption by the new owner.
Types Of Endorsements Available
A mortgage modification endorsement (ALTA Endorsement 11) insures that a recorded mortgage amendment does not affect the priority of the mortgage, except for matters stated in the original policy and any new matters listed in the endorsement. This endorsement does not insure against creditors’ rights issues arising out of the modification. This endorsement also discloses matters that are subordinate to the insured mortgage but recorded between the original policy date and the date of the endorsement. The coverage under this endorsement is less than provided by a date-down endorsement, because it does not extend all coverages (e.g., property taxes being current as of the time of original issuance of the policy) under the policy to a current date.
A date-down endorsement (ALTA Endorsement 10), on the other hand, extends the coverage for an existing title insurance policy to a current date. Like the mortgage modification endorsement, it insures that a recorded mortgage amendment does not affect the priority of the mortgage, except for additional matters stated in the endorsement. It also provides coverage over matters occurring after the original date of the loan policy, up to the date of recording of the new mortgage amendment.
Disbursements or future advances under an existing loan (such as a construction loan) are not considered loan modifications (since such advances are contemplated under the original loan documents) but a lender should require title run-downs and date-down endorsements to the lender’s title policy at the time of each advance. In Massachusetts and many other states, title policies generally do not insure the full amount of a loan until the loan has been fully advanced. The lender’s title policy for a construction loan will typically include a so-called “pending disbursements clause” which requires that the title company will only increase the insured amount of the mortgage after running down the title and confirming that there are no intervening liens or additional matters of record affecting the mortgaged property. If a lender makes an additional advance without obtaining a date-down endorsement, the title company could possibly deny coverage for such advance under the terms of the lender’s title policy.
If another creditor (such as an unpaid contractor or subcontractor) records a lien prior to an additional advance, the amount due to the contractor may prime (i.e., have priority over) any advances made by the lender after the recording of such lien. In Massachusetts, this process is governed by the so-called Mechanic’s Lien Statute. Thus, the best practice for a lender is to always require a date-down endorsement prior to making any additional advance. The loan documents generally require that the cost of the title search and issuance of the title endorsement shall be paid by the borrower and is typically deducted from the advance.
In summary, title endorsements issued after the original closing in connection with amendments to mortgages or additional advances under a construction loan are a necessary part of the process for loan renewals, loan modifications, loan increases, and construction advances. A “clean” title endorsement (i.e., one showing no new matters of record) provides insurance coverage that nothing has occurred in the time between issuance of the original title policy (or the prior date-down endorsement) and the date of the additional disbursement that could affect the priority of the lender’s lien on the mortgaged property. The relatively minimal cost of a title endorsement is well worth the comfort it provides to mortgage lenders.
This communication is for informational purposes only and is not legal advice on any specific facts or circumstances. In addition, the firm undertakes no obligation to update the information discussed in the foregoing article.