Protect Sellers From Loan Modification Claims

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As of 12/11/23, Stewart issued Bulletin SLS2023020 regarding loan modifications in the chain of title. As explained in the bulletin, starting in 2008, several government-backed loan modification programs (including the Home Affordable Modification Program (HAMP)) were created to assist struggling borrowers by bringing monthly mortgage payments to an affordable level and avoid foreclosures.

Many of these programs achieved these goals by deferring the payment of a sum of money owed by the borrower. This sum, sometimes called a partial claim, stops accruing interest for the borrower, but requires payment in full at the time of a sale or refinance. Because these partial claims mortgages rarely require monthly payments, borrowers are often unaware that these modifications result in an additional encumbrance on their home. Further, some lenders identify partial claim mortgage loans with the same loan number as the primary or first mortgage loan.

If your title search discloses a modification of an existing lien, the recorded modification document must be reviewed carefully and in its entirety to determine if the modification secures a mortgage or deed of trust to HUD or otherwise requires a payment to HUD.

If the modification references a partial claim or states that it is a mortgage or deed of trust granted to HUD, the issuing office must obtain payoff information from the secretary-held mortgage servicing contractor, pay the claim in accordance with the payoff instructions, and follow up to confirm the release is received and/or recorded. You should not rely on a statement from the primary or first mortgagee that no payoff or additional funds are due as a result of the modification or partial claim.

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If you have questions about this article, or if you encounter a loan modification document in your title and are not sure whether an additional payoff is required, please contact your local underwriting counsel. As always, reach out to your local Stewart representative for more information.

Looking for more tips? Check out these articles:
Underwriting for Cash Transactions
How to Handle Mechanic’s Lien Issues as a Title Agency
Staying Ahead of Seller Impersonation Fraud