FEATURE ARTICLE, OCTOBER 2006

MODIFICATION ENDORSEMENTS: WHEN IS A NEW DEAL NOT A NEW DEAL?
John Rothermel III

The use of modification endorsements is an area that confuses lenders, borrowers and sometimes even a title company closer.  The reason for this confusion is that only certain terms and conditions of the loan can be changed without affecting coverage under the existing mortgagee policy of title insurance. When borrowers ask their lenders to change or modify a loan, a well-trained lender will then ask the title company if changing the terms of the loan will void their mortgagee title policy. For the title company, the answer always is: “It depends.” Listed below are a few common questions title companies receive about modification endorsements.

Q: What does the mortgagee policy insure?

A mortgagee policy insures the priority and validity of a lien. The lien secures the payment of a note. This is sometimes called the deal.

Q: Can a lender change the terms of the loan?

A lender and borrower are free to modify the terms of the loan as long as they don’t create a new deal.

Q: What is the legal term for a new deal?

At law, a deal that has been modified significantly is called a novation.

Q: What do you mean by significant modification?

Procedural Rule P-9b3 gives the title insuring rule for Texas. It says that the following matters are not sufficient to cause a novation:

a) Release of property as collateral

b) Release of one of the borrowers from liability for repaying the loan

c) Release additional collateral that was covered by the deed of trust

d) Reinstate the lien

e) Enter into a modification agreement that doesn’t create a new lien or  power of sale, create a new note, secure additional indebtedness other than accrued interest, or cover new property.

Q: Okay, so if the deed of trust covers 6 acres and the modification agreement releases 2 acres, can I issue the T-38 modification endorsement?

Yes [see (a) above].

Q: A man and his daughter bought the house together. She has been making the payments for 3 years and just got married. The lender has agreed to release the father from the note. Can I issue the T-38 modification endorsement?

Yes [see (b) above].

Q: On a commercial deal, the property description included three tracts. The borrower has sold one of them to his partnership. The lender has agreed to release that tract. Can I issue the T-38 modification endorsement? 

Yes [see (c) above].

Q: The borrower on my $78,250 deed of trust failed to make payments and the lender posted the property for foreclosure. The lender and the borrower have worked out a deal to keep the borrower in the property. The lender has filed a reinstatement agreement. Can I issue the T-38 modification endorsement?

Yes [see (d) above].

Q: My lender client has sold the loan to a new lending institution. The new lender wants by borrower to sign a new note on the new lenders form. No terms will be different. Can I issue the T-38 modification endorsement?

No [see (e) above].

Q: A West Coast lender just bought out my local bank. They insist that they know more than we locals do, so they have required my borrower customer to sign a new deed of trust. Can I issue the T-38 modification endorsement?

No [see (e) above].

Q: My lender’s attorney has been studying P-9b3. He believes that he has found a way to get around having to get a new policy. He has drafted a modification agreement that “restates” the note and changes the terms. He has also “restated” certain terms of the deed of trust as they related to the foreclosure. Can I issue the T-38 modification endorsement?

No. If by restating the terms he has created a new note or new power of sale, he has created a novation and a new policy is required.

Q: My lender wants to advance an additional $1000 to cover new pictures in my doctor client’s office. Can I issue the T-38 modification endorsement?

No [see (e) above].

Q: Rosepetal National Bank is willing to give my good customer the money to buy a lake lot but they want to use his existing hunting land as collateral and just put the two properties into the same loan. Can I issue the T-38 modification endorsement?

No [see (e) above]

Q:  You’ve said no to all of these creative and innovative financing ideas. Does this mean that the existing coverage is gone?

No, it simply means that the changes create a new deal that to be covered require a new policy. To the extent that the existing policy hasn’t been changed, it is still in effect.

Q: Okay, so a new policy is required and no new money has been advanced. What rate rule do I use to provide the new policy and the new coverage?

It depends. You will need to look at R-8 and R-6B to see which applies to your situation and which is the cheapest for the borrower. R-6B may be required if the loan is more than 7 years old.

Q: What if new money has been advanced?

Again, you have to look at both R-8 and R-6. Most likely, R-8 is the appropriate rule but R-6 could apply. Let’s compute the premium and see.

MTP is dated January 1st, 2003, in an amount of $50,000. The unpaid balance of the loan is $45,000. The lender wants to advance an additional $1000. Under R-8, you would compute the premium for $46,000 MTP ($491) and the on $45,000 ($484) and then give a 30 percent credit on the $484 or a credit of $145. The premium is then $491 less $145, or $346.

Since the MTP is dated more than 3 years, R-6 and R-8 would produce the same result (both giving 30 percent credits). If the MTP is dated 6 years ago, R-6 may be a better credit since R-8 would only produce a 2 percent credit. Just be certain that the modification doesn’t state that it is in renewal and extension of the original lien.

John Rothermel III is senior vice president, Texas agency services manager and Texas senior underwriter with Stewart Title Guaranty Company.

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