Pub. 8 2017 Issue 3

www.wvbankers.org 22 West Virginia Banker A mortgage modification is a pro- cess by which the original terms of a mortgage/deed of trust are altered. The modification is agreed to by both parties to the transaction and can vary depending on the contents of the modification. Modification to the lien can be anything from lowering the interest rate to altering the payment schedule. A modification can also pro- vide additional funds to the mortgagor. When loan terms are altered, the priority of the original lien could be jeopardized. There are two terms to be familiar with when evaluating modifications: contin- uation and novation. When loan terms are modified and the original debt is continued, the original lien priority is continued. This scenario is often referred to as a “continuation.” If the original debt is discharged and replaced with new debt, the original lien priority is lost for the entire indebtedness. This scenario is typically referred to as a “no- vation.” Does this mean that a contin- uation of the loan will always ensure the lien priority? Is it safer than a novation? Not always. The risky part of a novation is that the policy could no longer be considered to be in force. If the loan is released, the coverage ceases. Similarly, if the con- tinuation is deemed to materially affect a junior lienholder, the modification and its priority could be called into question. Examples of adverse effects to a junior lienholder range from a shortening of the maturity date, or an increase in interest rates. These adverse effects to a junior lienholder mean that the portion of the debt under the modified terms is limited in priority as to the date and recording of the modification. There are situations where the modification is to the benefit of the junior lienholder. Examples include the lengthening of the maturity date, a reduction in the interest rate, or reducing the principle amount of the loan. Regardless of whether the modification is a continuation or a novation, changes to loan terms are best reviewed on a case-by-case basis. Keeping in mind that title insurance provides coverage for past events and not future matters, modifications made post-policy to the insured loan might not enjoy the same coverage as the original loan. With this knowledge, lenders are beginning to request endorsements to their existing policy for the modification. What is the proper way to handle this type of request? When a request to insure a loan modifi- cation to an existing policy is received, the issuance of the ALTA 11-06 Series Modification Endorsements should be utilized in lieu of a “general” endorse- ment to the existing policy. There are three endorsements in the ALTA 11-06 Series, each with slight varia- tions of coverage: • ALTA 11-06 -Mortgage Modifica- tion • ALTA 11.1-06 - Mortgage Modifi- cation – with Subordination • ALTA 11.2-06 - Mortgage Modifi- cation with Additional Amount of Insurance Because the modification affects the original policy, a commitment will not be issued when a request for coverage of a modification is received. In light of this fact, requirements must be communi- cated to the Lender before the issuance of the endorsement. This can be done through phone calls or email correspon- dence. In the event that the lender requests a copy of the proposed final endorsement, a “proforma” or specimen endorsement may be issued. Prior to issuing an endorsement to the existing policy, it is necessary to: 1. Examine the records before recording a modification. 2. Receive the recording information for the modification. 3. Validate that the current owner and lender are parties to the modification. 4. Confirm there are no full or partial reconveyances of the mortgage. 5. If a search reveals any intervening matters, they must appear on the endorsement. It is possible that the lien is subordinated to the lien under the policy. 6. Obtain proof that the taxes for the current tax year have been paid. 7. Verify the current parties in posses- sion. 8. Obtain an executed Affidavit Regard- ing Liens/Seller Borrower/Estoppel Certificate. On the surface, modifications seem sim- ple enough, but they are complex instru- ments that could alter the lien insured in the original title insurance policy and potentially jeopardize the coverage provided under that policy. By properly understanding the pitfalls of modifica- tions, the underwriter can provide the lender with the desired coverage for the modification without exposing the company to undue risk.  Modification Endorsements By David S. Florio, and Frank L. Tortora III, Investors Title Insurance Company David S. Florio, Training Director, Investors Title InsuranceCompany Frank L. Tortora III, Underwriting and Escrow Counsel, Investors Title Insurance Company