A common, and a venerable, question when modifying a mortgage loan — should the mortgage lender record the modification of the mortgage in the land records?
Recording a mortgage serves two primary purposes: (i) to create a secured lien against the mortgaged property, giving the mortgage priority over all other subsequently recorded mortgages and non-governmental liens and encumbrances and (ii) to put all subsequent buyers or lenders on notice of the existence of the mortgage and the principal amount of the loan secured by the mortgage, so as to establish a basis for the subordination the liens of all subsequent lenders and other creditors to the original mortgage loan.
In times past, when mortgage documentation was relatively straightforward and all of the terms of a mortgage loan were included in the recorded mortgage, any modification of the mortgage was routinely recorded to ensure the mortgage remained complete in the official land records.
As mortgage loans became more complex (resembling corporate loans), the bulk of the documentation of the terms of mortgage loans shifted from recorded mortgages to unrecorded loan agreements. Only an abbreviated form of mortgage that included the most basic provisions (such as the loan amount, the property encumbered by the loan and the names of the borrower and the lender) necessary to create a lien on the mortgaged property was recorded in the land records. This change in documentation permitted the borrower and the lender to document very complex loan terms without publicly disclosing the loan terms, while still establishing the existence and priority of the mortgage lien securing the loan. In theory, the existence of the mortgage in the land records put other parties that intended to extend credit to the borrower and acquire a lien on the property to secure the credit, such as potential lenders or contractors, on notice of the mortgage loan. The mortgage also notified such parties to request information about the terms of the mortgage loan from the borrower before extending additional credit to the borrower.
But this shift in documentation led to the conundrum alluded to above: when should a modification to a mortgage loan whose documentation is largely off the public record be recorded?
Strictly speaking, a modification to a mortgage does not need to be recorded to be enforceable between the borrower and the lender, as they are bound by the modification as a matter of contract law. The issue is whether other parties that acquire a recorded interest in the mortgage property subsequent to the date of the mortgage modification are subject to the terms of the modification.
If the theory of the recordation of the abbreviated form of mortgage is to put subsequent creditors on notice to inquire as to the terms of the loan secured by the mortgage prior to such creditors extending any credit to the borrower, then arguably any unrecorded modification of the loan made after the initial recordation of the mortgage may not take priority over liens of other creditors filed against the property since such creditors would not have known to inquire about the terms of such modification.
But do all mortgage loan modifications need to be recorded in the land records? An increase in the loan amount or a change in the interest rate would clearly affect the borrower's creditworthiness, and a third-party creditor should have knowledge of, or at least be put on notice of, such an increase or change before extending credit to the borrower. However, what about a change in the insurance requirements? Or a change in the tax escrow provisions? If these provisions are not set forth in the recorded mortgage, arguably modifications of these provisions, which do not directly affect the indebtedness secured by the mortgage, need not be the subject of a recorded mortgage modification. But what about changes to the index for a floating rate loan? Or cases in which a portion of the loan is forgiven or unpaid interest is capitalized? Counsel for lenders and borrowers have long debated the subject matters of the recordation of mortgage modifications.
Helpfully, the National Conference of Commissioners on Uniform State Laws has recently proposed the Uniform Mortgage Modification Act that aims to clarify the types of loan modifications that require recordation in order for the mortgage to retain priority following the modification. The proposed Uniform Mortgage Modification Act reflects the advice of a national group of practicing attorneys with a wide range of experience who are appointed by the governments of every state and Washington, DC.
The proposed Uniform Mortgage Modification Act provides that the following modifications of a mortgage loan do not need to be recorded in order for the mortgage to retain its priority and to secure the loan obligations, and that such modifications do not constitute a novation:
1. an extension of the maturity date of an obligation;
2. a decrease in the interest rate of an obligation;
3. if the change does not result in an increase in the interest rate of an obligation as calculated on the date the modification becomes effective:
a) a change to a different index that is a recognized index if the previous index to which changes in the interest rate were linked is no longer available;
b) a change in the differential between the index and the interest rate;
c) a change from a floating or adjustable rate to a fixed rate; or
d) a change from a fixed rate to a floating or adjustable rate based on a recognized index;
4. a capitalization of unpaid interest or other unpaid monetary obligation;
5. a forgiveness, forbearance, or other reduction of principal, accrued interest, or other monetary obligation;
6. a modification of a requirement for maintaining an escrow or reserve account for payment of an obligation, including taxes and insurance premiums;
7. a modification of a requirement for acquiring or maintaining insurance;
8. a modification of an existing condition to advance funds;
9. a modification of a financial covenant; and
10. a modification of the payment amount or schedule resulting from another modification described above.
A link to the proposed Uniform Mortgage Modification Act is here.
Of course, the statutory and case law, and the industry practice, of the relevant jurisdiction, and the specific circumstances of the mortgage loan, should all be carefully examined when determining whether a modification of a mortgage loan should be recorded.
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