2012 gave rise to a slue of mortgage modifications accounting for nominal changes to insured mortgages. These changes commonly included decreases in interest rates and extensions of maturity dates. These “loan workouts” are expected to continue well through 2013. As a result, these non-novation, non-substitution rate premium triggering, modifications have created the need to provide lenders with a simplified and streamlined process for obtaining title insurance coverage without having to take on the potential high cost of endorsing their loan policy.
The Mortgage Priority Guarantee Policy (“MPG Policy”) was recently approved for issuance in the State of Florida and may be the solution lenders (and borrowers) have been looking for.
What coverage does this new form of policy provide?
As contained within the terms of the policy, the Mortgage Priority Guarantee Policy does not assure the validity, enforceability or priority of the Mortgage but only assures that the validity, enforceability, or priority of the Mortgage, if any, has not been diminished or lost by reason of the modification shown.
The MPG Policy does NOT:
- Endorse (nor have any effect on) the Loan Policy insuring the mortgage.
- Extend the effective date of the Loan Policy.
- Insure the mortgage.
The MPG Policy does:
- Provide insurance, in the form of a new policy, against loss arising from the mortgage modification affecting the priority of the mortgage it’s modifying.
From a practical standpoint, this new policy allows a lender to obtain coverage against adverse affects created by their mortgage modification without having to go back to the underwriter who issued the original loan policy. For example, in the past if ABC Title Co. was the underwriter of the lender’s loan policy, the lender would have to get an endorsement to that loan policy (from ABC Title Co.) if they wanted coverage for their mortgage modification. Since the Mortgage Priority Guarantee Policy is a standalone policy (not affecting the original loan policy), any underwriter may be used.
As stated on the face of the policy, the cost to issue the Mortgage Priority Guarantee is a flat $125 (no more, no less). The policy premium is typically split 70%/30% (agent share/underwriter remittance).
What are the requirements to issue this policy?
It is critical that the mortgage modification be reviewed to confirm that it does not create a novation of the underlying policy. Said another way, the modification must not place any additional burden on the borrower which was not contemplated in the original loan terms or may be construed to affect the priority of the original mortgage. Some examples of a potential novation include:
- Decrease in the maturity date.
- Future Advance not allowed for in the original mortgage.
- Increase in interest rate.
- Increase in payment amount.
To simplify even further, the Mortgage Priority Guarantee Policy may only be issued if the proposed mortgage modification does not trigger substitution rate. No other determination nor title search is required to issue the policy.
Frequently Asked Questions
Is a title search/commitment necessary to issue the Mortgage Priority Guarantee Policy?
No. This policy does not have an affective date nor does it increase/affect the loan policy’s effective date – therefore a search is not required.
How do I prepare the Mortgage Priority Guarantee Policy?
First, contact your underwriter to obtain copies of policy. Second, since a title search is not necessary, simply fill in the recording information of the mortgage and the mortgage modification. Lastly, send a copy of the completed policy (along with 30% remittance) to your underwriter.
Is the Mortgage Priority Guarantee Policy an endorsement to the loan policy insuring the original mortgage?
No. This policy is a standalone policy insuring against the affects of the mortgage modification.
Does the Mortgage Priority Guarantee Policy insure the terms and conditions of the mortgage modification?
No. This policy insures against loss arising from the mortgage modification affecting the priority of the mortgage it’s modifying.
May the Mortgage Priority Guarantee Policy be issued for both residential and commercial property?
What if the proposed mortgage modification triggers substitution rate?
This policy may not be issued. The original loan policy would need to be endorsed or a new loan policy insuring the mortgage as affected by the modification would need to be issued (the cost would be the same; substitution rate premium on the outstanding principal balance).
What is the difference between the Mortgage Priority Guarantee Policy and the ALTA 11-06 Mortgage Modification Endorsement?
The two products are very similar in the coverage they provide, however, several key differences include:
- The MPG Policy is a standalone policy that may be issued on any underwriter. The ALTA 11-06 is an endorsement which must be issued to the original loan policy.
- The MPG Policy does not require a title search. The ALTA 11-06 may* require a title search to identify additional matters affecting the underlying mortgage.
- The MPG Policy is set at a flat $125 fee. The ALTA 11-06 does not have a set fee.
* Review our Florida Title Insurance Endorsements eBook to learn about the specific requirements of issuing, coverage provided and costs of the ALTA 11-06 Endorsement.