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Title Insurance: Required with a Modification?

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Posted On: 07/02/2008

Q:When someone modifies their loan, are they required to get title insurance?

A: The short answer is generally no, but the real answer goes like this:

When a loan is originated, it’s added to the local property records. This is very important because it tells the world that the lender has a claim against the property. Recordation is also important for another reason: If the property is foreclosed lenders are paid off in the order in which their loans were recorded.

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Imagine that a home is worth $500,000 and that Lender Jones has a $300,000 first mortgage and Lender Smith has a $100,000 second mortgage. Jones has the first loan not because he holds the bigger mortgage but merely because he recorded it first.

Now imagine that the home is foreclosed and sold at auction for $350,000. With the money received from the sale any taxes would first be paid, let’s say $10,000. Next, the first mortgage must be repaid in full. So far, $10,000 plus $300,000 have been repaid, leaving just $40,000 for Smith, the second lien holder.

In our example, you can see that the first lender, Jones, has to be completely repaid before Lender Smith can get a penny. It’s for this reason that recording mortgages is a big deal.

Now let’s look at a loan modification. Suppose that owner Johnson has a loan where the interest rate has risen to a point where the mortgage cannot be repaid. The lender could foreclose, but a typical foreclosure will produce a huge loss. Instead of foreclosing, Johnson’s lender reduces the loan’s interest rate for three years.

Unlike refinancing, the public records stay the same. There is no new lender, new borrower or larger loan amount. A new settlement or closing is not necessary because the amount of the debt is the same. Just as importantly, if the lender had a first mortgage he still has a first mortgage. For this reason there is no need for a new title search, title history or title insurance.

Now imagine if the loan was refinanced. If there is an existing second mortgage on the property that loan would move into first position and the new loan would be the new second. The refinanced mortgage would be a lot more risky because it’s now in second position.

So, no, a mortgage modification such as a shift in interest rates should not require either a new settlement nor a new title insurance policy. Your lender can explain its policies and procedures, for specifics please speak with a local real-estate attorney.

Q: We are facing foreclosure and would like to refinance with a government loan. However, it’s pretty sad when I walk into an FHA lender and they tell me I have more information about what’s going on than they do. We have a 70-percent loan-to-value mortgage on our home. What’s the problem?

Plus, now we get to re-apply for a home that we’ve been living in for three years. I’d love to have one of the White House staff sit through this process of phone calls, e-mails, papers, faxing, etc., that we do now on a daily basis in order to save my home. They would probably hand over the cash in one day just to be relieved of the headache.

A: As frustrating as it may seem, there are a number of issues here:

First, the “lender” may not be the loan owner and therefore may have little or no authority to modify your current financing.

Second, the FHASecure program, which was introduced as a federal plan to help borrowers facing foreclosure, has had little impact. According to HUD’s official records, in the period between October 1, 2007 and April 30, 2008, only 2,276 delinquent conventional borrowers were able to refinance with an FHA mortgage.

Third, the “problem” is your credit history. It may well be that you have a lot of equity in the property, but the concern is that payments have not been made on the present loan.

Fourth, is there a second loan on the property? If yes, that could hinder any effort to refinance.

Many states have now established programs to help borrowers facing foreclosure. Call your state representative or governor’s office immediately. Also, contact a real-estate attorney. You may have certain rights that can delay a foreclosure.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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