12.26 Mortgagee Policies (Loan Policies)

12.26.1

In General

A title insurance loan policy is specifically designed to insure the validity, enforceability, and priority of the lien of a mortgage, a deed of trust, or an assignment thereof. The Texas form of loan policy (form T-2 and Short Form Loan Title Policy) are promulgated by the Department of Insurance. Only those deletions or additions specifically set out in the Basic Manual of Rates, Rules and Forms for the Writing of Title Insurance in the State of Texas may be made to the policy forms. The loan policy contains several exclusions which are not applicable to an owner policy. It specifically excludes loss or damage on account of the invalidity of the insured mortgage because of:

  • Usury or consumer credit protection or truth in lending statutes.
  • Statutory or constitutional mechanic's, contractor's or materialman's lien for labor or material having its inception date subsequent to the date of the policy.
The Conditions and Stipulations contained in the standard loan policies are substantially the same as those in owner policies with the exception of modifications necessary because the insured is a mortgagee rather than an owner of an interest in the land. Schedule A of the loan policy is similar to that found in the owner policy except for an additional paragraph describing the mortgage and any assignments thereof. Schedule B of the loan policy lists exception similar to those found in an owner policy; that is, those specific defects, liens, or encumbrances that affect the title to the land being insured. Additionally, Schedule B of the loan policy contains an exception as to "Liens and leases that affect the title to the estate or interest, but that are subordinate to the lien of the insured mortgage." This exception means that the Company is not required to itemize in Schedule B of the policy liens and leases that affect title to the property but that are subordinate to the lien to be insured. However, in accordance with Procedural Rule P-64, the insured lender may request in writing that this exception (Schedule B No. 4) be deleted and then the Company must itemize such liens and leases that are subordinate. When insuring that a lien or lease if subordinate to the lien of the insured mortgage, the Company shall state: "Company insures the insured against loss, if any, sustained by the insured under the terms of the Policy if this item is not subordinate to the lien of the insured mortgage." Company Policy: Upon written request from a lender, this item may be deleted even if there are no subordinate matters.

12.26.2

Insuring A Mortgage

NOTE: The term "mortgage" also applies to "deed of trust".

The following items must be fully ascertained or complied with in connection with the insurance of a mortgage:

  • Has the mortgagor's title been thoroughly examined?
  • A complete examination of the fee title, leasehold estate, easement, or any other interest in real estate, capable of being mortgaged at the time of the execution of the mortgage, must have been performed.
  • Are there any liens or encumbrances affecting the property or interest in real property at the time of the execution of the mortgage?

    It is necessary to ascertain what liens and encumbrances, if any, are affecting the fee or interest in real property.

    All outstanding liens and encumbrances found of record to be affecting the fee or interest mortgaged or to be mortgaged must be shown as proper title exceptions.
  • Does the mortgagor have legal capacity to execute the mortgage?

    The general rules in relation to the legal capacity of the grantor are fully applicable to the mortgagor's legal capacity, that is;
    • Joinder of the spouse
    • Minor
    • Incompetent
    • Corporation
    • Partnership
    • Limited Partnership
    • Trust
    • Guardian, executor, administrator, etc.
    • Pension plan
    • Joint venture
    • Foreign corporation
    • Bank or savings association
    • Partnership
    • Partnership borrowing from a general partner
    • Limited partnership borrowing from a limited partner
    • Joint venture
    • Credit union
    • Pension fund
  • Property Covered

    It is vital that an insurable legal description be the subject matter of the mortgage instrument.
  • Easements

    It is necessary to ascertain the validity of the easement and to comply with all guidelines pertaining to the insurance of appurtenant easements.
  • Leaseholds

    It is necessary to ascertain the validity of the leasehold and to comply with all guidelines pertaining to the insurance of leasehold estates.
  • After-Acquired Property Clause

    Any mortgage arising on property as a consequence of a clause contained in a recorded mortgage extending the lien thereof to property subsequently acquired by the mortgagor is uninsurable.
  • Date of the Mortgage

    Is the title or interest to be the subject of the mortgage vested in the mortgagor at the time of the execution of the mortgage?
  • Description of the Debt

    Does the mortgage describe and identify the debt that it intends to secure?
  • Form and Contents

    Do the form and contents of the Deed of Trust comply with Texas requirements?
  • Disbursement of the Proceeds

    Has the full amount of the proceeds been disbursed?
  • Are the proceeds not being disbursed to the mortgagor?

    Is it necessary to include in the policy a pending disbursement clause under P-8?
  • Does the mortgage contain any recital giving notice of interests or encumbrances not appearing of record?

    Proper consideration must be given to any interest or encumbrance not appearing of record but notice of which is disclosed by the mortgage.
  • Signature

    Has the Deed of Trust been properly signed by the mortgagor?

    Has the mortgagor's spouse (if married) also signed the Deed of Trust?
  • Acknowledgment

    Has the mortgage been properly acknowledged?
  • Recording

    Has the mortgage been properly recorded?
  • Recorded in the Chain of Title

    Is it necessary to have the mortgage re-recorded if it was recorded prior to the deed through which the mortgagor acquired the title or interest being mortgaged?  The doctrine of after acquired title makes this unnecessary for title insurance purposes although the lender may insist.

12.26.3

Describing the Mortgage in the Mortgagee Policy

  Mortgages and deeds of trust should be identified as clearly and simply as possible. The description should avoid any reference to the terms of the document.
 
  Occasionally, lenders ask title agents to describe other instruments in Schedule A of the policy. These instruments include collateral assignments of leases, financing statements, and security agreements. Do not describe these instruments in Schedule A when describing the insured mortgage. The policy does not insure them. Instead, do one of the following:
 
  ·   Describe the instruments in Schedule B
 
  ·   Place the following note in Schedule A or B:

“Note: The indebtedness secured by the lien of the insured mortgage is additionally secured by the following:__________ (for example, collateral assignment of leases).”
 
  The only permissible reference may occur in regard to an assignment of a mortgage or deed of trust when the assignment is intended to be insured. For assignments of Rents/Leases see Procedural Rule P-60 and discussion in Bulletin TX000079.
 
  The following language is recommended for description of liens in mortgagee policies (Schedule A):
 
  ·   Deed of Trust Lien

Deed of Trust dated ________________, executed by __________________ to ___________________, Trustee, securing the payment of one note of even date therewith payable to _________, in the principal amount of $______, said deed of trust filed for record in the office of the county clerk of ______________ County, Texas, on _____________, under Clerk’s File No. ______.
 
  ·   Vendor’s Lien

Vendor’s Lien retained in Deed dated ___________, executed by __________, to ______________, securing payment of one note of even date therewith in the principal amount of $__________, payable to _____________, and said note being additionally secured by deed of trust of even date therewith to _________, Trustee, said Deed of Trust filed for record in the office of the county clerk of ______________, County, Texas on _________, under Clerk’s File No. _________.
 
  The following language in recommended for description of liens in mortgagee policies (Schedule B):
 
  ·   Deed of Trust Lien

Deed of Trust dated ______, executed by ________________, securing the payment of one note of even date therewith payable to ______________, in the principal amount of $________, together with all indebtedness of whatsoever nature, secured or to be secured by said deed of trust, and being subject to the terms, conditions, and stipulations contained in said note and deed of trust.
 
  ·   Vendor’s Lien

Vendor’s Lien retained in deed dated ___________, executed by _________to _________________, securing the payment of one note of even date therewith in the principal amount of $______________, payable to ________________and being additionally secured by Deed of Trust of even date therewith, together with all indebtedness of whatsoever nature, secured or to be secured by said deed of trust, and being subject to the terms, conditions, and stipulations contained in said note and deed of trust.

12.26.4

Insuring An Assignment Of Mortgage

·  Using an Assignment of Lien Endorsement (Procedural Rule P-9(b) 1 & 2, Rate Rule R-11(a)

NOTE: The term “mortgage” also applies to “deed of trust”

The following items must be fully ascertained:

¨  That the mortgage is an insurable mortgage.

¨  That the assignment is recorded.

¨  That the mortgage is not in default or released.

¨  That any modification of the mortgage is shown as an exception in the endorsement.

¨  That the assignment and any prior assignment constitute an uninterrupted chain of ownership from the first mortgagee to the last assignee.

¨  That, if there is a chain of assignments, no assignment contains any language indicating that the assignment has been executed only as security for a loan from the assignee to the assignor.

If this is the case, the following exception must be shown in the endorsement:

Terms and conditions of the assignment described above and consequences of the failure to properly perfect the assignee’s interest.

¨  That a search has been made for federal tax liens against each lender who had assigned the mortgage. Such as search should be made in the county where the land is located and also in the county of residence of the assigning lender. It would not be necessary to execute the search if the assigning lender is a bank, savings and loan association, insurance company, or substantial corporate mortgage banker.

¨  That the full title examination is made since the date of the original policy unless prior assignment endorsements have been issued. Any findings or matter disclosed by the record searches must be shown as exceptions in the endorsement. Great care must be exercised in determining whether the mortgage has retained priority over these subsequently recorded matters.

¨  That a waiver of defenses be obtained from the original borrower or from the present record owner (depending on the circumstances) acknowledging that the mortgage is still valid and unpaid. (This requirement may be waived in many instances.)

·  Issuing a Mortgagee Policy Insuring An Assignment of A Mortgage

All of the items set out above in A. above must be adhered to along with the following:

¨  The policy date should be the date of the recordation of the assignment of the mortgage.

¨  A description of the assignment followed by a description of the mortgage should be set out in Schedule A No. 4 of the mortgagee policy.

12.26.5

Amount of Insurance

The loan policy must be written for the original amount of the loan unless the land covered in the policy represents only part of the security of the loan. Then the policy shall be written in the amount of the value of the land or the amount of the loan, whichever is less. Procedural Rule P-66.Other conditions which may affect the amount of insurance are:

  • Insured Requests That the Amount of the Policy Be in Excess of the Amount of the Mortgage

    Pursuant to P-66, the policy may be issued in an amount equal to the original principal amount of the indebtedness plus legal interest not to exceed twenty-five (25%) of the said principal amount. A previously issued mortgagee policy insuring an adjustable mortgage loan may, when providing for negative amortization, be reissued (or endorsed) effective as of the date of the original Loan  Policy, increasing the fact amount of the Loan  Policy from the original principal amount of the loan to an amount not to exceed one hundred twenty-five (125%) of the original principal amount.
  • Mortgage Already of Record is Issued Under a Current Date

    If the loan  policy is issued under a current date for a mortgage already of record and after payments have been made, it may be written for the unpaid principal balance due on the mortgage.
  • Collateral Includes Personal Property, or Other Real Property, or Both, the Title to Which is not Being Insured - Policy to be Written for the Full Amount of the Mortgage

    If the collateral includes personal property or other real property, or both, the title to which is not being insured, the policy nevertheless may be written for the face amount of the mortgage, but the following must be inserted in Schedule B of the policy:

    NOTE: The indebtedness secured by the (mortgage) (deed of trust) described at No. 4 of Schedule A hereof is further secured by property other than that described in No. 5 of said Schedule A, the title to such additional property not being insured hereby.
  • Collateral Includes Personal Property, or Other Real Property, or Both, the Title to Which is not Being Insured, the Policy may be Written for an Amount Less Than the Amount of the Mortgage.

    If the collateral includes personal property, or other real property, or both, as above set forth, the title to which is not being insured, the policy may be written for value of the land being insured pursuant to P-66. In this event, the following must be inserted in Schedule B.

    NOTE: The liability of the Company is limited to the amount of insurance shown on Schedule A as the balance of the promissory note is secured by other collateral.
Please see bulletin TX000061 concerning the availability of T-16 Endorsement in these situations.

12.26.6

Endorsements to Mortgagee Policy

  ·   Assignment Endorsement (Procedural Rule P-9(b) 1 and 2)

The issuance of this endorsement was discussed in 12.26.4 above.
 
  ·   Partial Release, Release of Additional Collateral, Modification Agreement, Reinstatement Agreement and/or Release from Personal Liability (Procedural Rule P-9(b)3)

When a mortgagee policy has been issued covering the lien securing an indebtedness and the insured desires to:
 
  ¨   release a part of the land described in Schedule A
 
  ¨   release additional collateral securing indebtedness described in Schedule A
 
  ¨   modify the mortgage, deed of trust, promissory note etc..
 
  ¨   reinstate the mortgage or deed of trust
 
  ¨   release the mortgagor etc. from personal liability
 
  Upon payment of the premium prescribed in Rate Rule R-11(b), the Company may issue a T-38 endorsement to show that coverage has not been reduced or terminated solely by the modification, release or reinstatement. This endorsement may not be issued if:
 
  ¨   the modification agreement, reinstatement agreement etc. expressly creates or grants a lien or power of sale; or
 
  ¨   the indebtedness secured by the lien of the insured mortgage or deed or trust is evidenced by a new promissory note; or
 
  ¨   the insured mortgage or deed of trust is modified to secure additional principal indebtedness other than accrued interest or advances made pursuant to the insured mortgage or deed of trust; or
 
  ¨   the insured mortgage or deed of trust is cross-collateralized or otherwise modified to include property not described in Schedule A of the policy.
 
  ·   Down Date Endorsement (Procedural Rule P-9(b)4)

When a loan  policy is issued according to Procedural Rule P-8(b) and construction advances are made subsequent thereto, pursuant to Rate Rule 11(c) the Company may extend the effective date of the loan  policy and state the amount of coverage by issuing a down date endorsement. (See Rate Rule R-11(c))
 
  ·   Adjustable Mortgage Loan Instruments (Procedural Rule P-9(b)5)

When a loan policy is to be issued insuring the lien securing an adjustable mortgage loan note, the Company may attach Endorsement Form T-33. This endorsement may be attached either at the time the original policy is issued or subsequent thereto upon the payment of the applicable premium charge. (See Rate Rules 4 and 11(d))
 
  ·   Manufactured Housing Endorsement (Procedural Rule P-9(b)7)

When a loan policy has been issued covering property to which a manufactured housing unit has become so affixed so as to become a part of the realty, the Company may issue a Manufactured Housing Endorsement (T-31) after the premium set out in Rate Rule 11e is paid.

Before issuance of such an endorsement, careful attention must be paid to whether or not the manufactured housing unit has been permanently affixed to the property. By permanently affixed it is meant that the unit has been disengaged from the trailer and towing tongue and has been affixed to a steel or concrete foundation.

See discussion under 12.24.2.
 
  ·   Revolving Credit Endorsement (Procedural Rule P-9(b)8

Periodically, title agents are asked to issue a loan  policy involving a revolving line of credit secured by a deed of trust. In these transactions, the mortgagee agrees to extend credit to the mortgagor over a definite period of time in a maximum amount to consist of periodic advances. The Company will approve these transactions for issuance of loan  title policies with the attached Revolving Credit Endorsement (T-35) pursuant to Rate Rule 11(f) provided that:
 
  ¨   the line of credit agreement has a definite time limit within which the credit may be extended; and
 
  ¨   the line of credit agreement sets forth a definite and certain amount which will not be exceeded; and
 
  ¨   the property in question is not the homestead of the borrower(s); and
 
  ¨   the lender under the line of credit agreement is obligated to make the advances; and
 
  ¨   the deed of trust makes reference to the line of credit, loan agreement, or revolving credit note.
 
  In describing the mortgage or deed of trust under which the title or interest is vested in the insured, title agents must refer to the deed of trust by date, and to the credit agreement or revolving credit note by date as referred to in the deed of trust. Additionally, title agents must issue the mortgagee policy for the full amount of the maximum line of credit provided it is secured entirely by real estate. Otherwise only the value of the land should be insured if it is less than the maximum authorized credit.
 
  ·   Environmental Protection Lien Endorsement (Procedural Rule P-9(b)9)

When issuing a loan  policy on land primarily used for residential purposes, the Company may issue the Environment Protection Lien Endorsement (Form T-36) upon the payment of the premium set forth in Rate Rule 11(g).
 
  ·   Balloon Mortgage Endorsement (Procedural Rule P-9(b)10

When issuing a loan policy on residential real property insuring a lien that contains a balloon rider, the Company may attach the Balloon Mortgage Endorsement (Form T-39) upon the payment of the premium set forth in Rate Rule 11(h). The balloon rider must be a part of the original lien document and must contain a conditional right to refinance.
 
  ·   Item 4 of Schedule B excepts to matters subordinate to the insured mortgage.
For other endorsements, see TX Endorsements 5.00.

12.26.7

Issuance of Mortgageeâ??s Policy Prior To Complet

  When a loan policy is issued prior to the completion of improvements on the property, the following language must be inserted in Schedule B pursuant to Procedural Rule P-8(b)1:
 
  “Any and all liens arising by reason of unpaid bills, or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the Insured against loss, if any, sustained by the Insured under this Policy if such liens have been filed with the County Clerk of ____________County, Texas, prior to the date hereof.” and
 
  “Pending disbursement of the full proceeds of the loan secured by the lien instrument set forth under Schedule A hereof, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without knowledge of any defects in, or objections to, the title up to the face amount of the policy. Nothing contained in this paragraph shall be construed as limiting any exception under Schedule B, or any printed provision of this policy.”
 
  Upon completion of the improvements, an owner’s acceptance affidavit and an all bills paid affidavit from the builder/contractor should be required before eliminating the completion of improvements and pending disbursement paragraph from the policy. If any unpaid bills for labor or materials are suspected, a thorough investigation of all circumstances should be made before a deletion is done. If this situation occurs, appropriate underwriting personnel should be contacted immediately.  See also discussion under Mechanic’s Liens TX 12.12.

12.26.8

Duplicate of an Original Mortgagee Policy

When requested to issue, in conjunction with the issuance of a mortgagee policy, a duplicate thereof, the following note must be shown after the last exception as the duplicate policy.

NOTE: This policy is a true copy of Stewart Title Guaranty Company Mortgagee’s Policy No. ___________, and this copy is issued by the Company and accepted by the Insured herein upon the agreement and understanding that no further or additional liability is assumed or incurred by the Company, by reason of the issuance of this copy of said Policy.

12.26.9

Duplicate of a Lost Mortgagee Policy

When requested to issue a duplicate mortgagee’s policy in lieu of an mortgagee’s policy which has been lost or destroyed, the following is required:

·  The duplicate policy number must be given a new number.

·  The following note must be shown after the last exception on the duplicate policy:

NOTE: This duplicate mortgagee’s policy replaces Stewart Title Guaranty Company Policy No. ______ which has been lost or destroyed. It is understood that this duplicate evidences the liability of this Company under its original policy and that such liability is not increased or diminished by reason of the issuance of this duplicate policy.