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May 25, 2011

Firm News for May 2011: Title Insurance: Endorsements for Specific Situations – Mortgage Modifications and Swaps

By: Amy R. Brownstein, Esq.

I have previously discussed the “standard” loan policy title endorsements and the variations of the ALTA access endorsements. This month I would like to focus the ALTA Endorsement 11 (Mortgage Modification) and the ALTA Endorsement 29 (Interest Rate Swap).

When a lender contemplates recording a modification of a mortgage with respect to which a title policy has been obtained, the lender should consider whether the nature of the modification is such that a mortgage modification endorsement should also be obtained. A modification endorsement should be contemplated when the terms that are being modified create the potential for the modification to result in a loss of priority, i.e., if the modification might prejudice a junior lienholder and, therefore, result in a loss of priority to the junior lienholder. Potentially prejudicial modifications generally include those that materially increase the obligations of the mortgagor, such as an increase in the amount secured by the mortgage or in the applicable interest rate.

The ALTA Endorsement 11 insures the lender that the original mortgage is not rendered invalid or unenforceable by the modification and that the modified mortgage has priority over liens and recorded matters except as reflected in the endorsement. Before issuing the endorsement, the title company will conduct a new title search and will identify liens and encumbrances that have been recorded since the mortgage was recorded; those items will be added as exceptions to the coverage. Before finalizing the modification, the insured lender should review the items identified by the title company to ascertain whether any junior lienholders might claim priority over the modification and resolve any such potential issues, by subordination agreement or otherwise.

When a loan includes an interest rate swap secured by a mortgage, the lender may wish to obtain an ALTA Endorsement 29 to address the risk that the mortgage securing the swap may be determined to be invalid or unenforceable or may fail to obtain the required priority. This endorsement insures against loss or damage resulting from the invalidity, unenforceability or lack of priority of the insured mortgage as security for the repayment of a swap obligation that exists under an interest rate exchange agreement in effect as of the time of closing.

There are two versions of the ALTA Endorsement 29 — one insures the mortgage in connection with repayment of a direct swap obligation, and the other insures the mortgage in connection with the repayment of additional interest. Lenders should keep in mind that, as is the case with title endorsements generally, the coverage provided by this endorsement is not absolute, and excludes matters such as rights or obligations set after the endorsement date and the effect of certain determinations made by courts (for example, stay, rejection or avoidance in bankruptcy proceedings or the calculation of the amount of the swap obligation or additional interest).

For more information on endorsements and other title insurance related matters, contact Amy at abrownstein@starfieldsmith.com, or 215-542-7070.