Uniform Law Commission Mortgage Modification Act.

The Uniform Law Commission at its annual meeting in July approved the final version of the Uniform Mortgage Modification Act (the “Act”), subject only to possible non-substantive revisions as to style and revisions to the comments that accompany the Act. The Act is attached as Annex A. The Act is intended to provide clarity to the common law relating to mortgage modifications, which provides in general that a modification of a loan secured by a mortgage will cause the mortgage to lose its priority as to any other mortgage, lien or interest that was granted or otherwise became an encumbrance on the mortgaged property after the date of recording the mortgage in question, unless the mortgage loan modification does not materially prejudice the holder of such junior mortgage, lien or other interest. The Act spells out the types of modifications to a mortgage loan that will not materially prejudice junior interest holders and that will not constitute a novation of the loan. The Act is intended to save time and expense for borrowers and lenders and to facilitate agreed upon loan modifications to avoid foreclosure when loans are in distress.

To the extent applicable, the Act should avoid the necessity and cost to the borrower of preparing, negotiating and recording a mortgage modification, obtaining an endorsement to the mortgagee title insurance policy as to the mortgage modification, and issuing the customary legal opinion on the mortgage modification and/or the mortgage as modified. In this respect, both the Act and the statute adopted by Virginia in 2021 regarding mortgage modifications, which was the subject of a previous article in OpinionsMatters, may help to facilitate the mortgage modification process. However, the Act will likely be less useful to opinion givers than the Virginia Statute or other similar laws because of the Act’s more limited applicability.

The Act applies only to the following “safe harbor” modifications of a mortgage loan, which the Committee determined would not materially prejudice holders of junior interests:

1. Extension of the maturity date of the secured loan;
2. Decrease in the interest rate of the secured loan;
3. If the change does not result in an increase in the interest rate as calculated on the date the modification becomes effect, (a) a change to a different nationally-recognized index if the previous index 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, and (d) a change from a fixed rate to a floating or adjustable rate based on a nationally-recognized index;
4. Capitalization of unpaid interest;
5. Forgiveness, forbearance or other reduction of principal, accrued interest or other monetary obligation;
6. Modification of a requirement for maintaining an escrow or reserve account for payment of taxes, insurance premiums or another obligation;
7. Modification of a requirement for acquiring or maintaining insurance;
8. Modification of an existing condition to advance funds;
9. Modification of a financial covenant; and
10. Modification of a payment amount or schedule resulting from any of the foregoing.

Any other loan modification would be governed by other law in determining whether it is secured with the same priority as the original mortgage.

If a mortgage loan modification fits within one of the safe harbors of the Act described above, the mortgage will continue to secure the loan as modified and will retain its priority regardless of whether a mortgage modification is recorded in the land records, and the loan modification will not constitute a novation.

By contrast, the Virginia Statute applies to all types of modifications to any mortgage loan if the mortgage securing such loan does not encumber residential real estate containing not more than one dwelling unit and by its terms states that it secures modifications to the original loan, with exceptions for only loan modifications that: (1) increase the principal amount of the indebtedness secured by the mortgage, (2) change the lender of the loan secured by the mortgage or (3) extend the maturity date of the loan secured by the mortgage if the maturity date was set forth in the mortgage. If any of the foregoing exceptions applies, the effect of the mortgage loan modification will be determined by the law governing mortgages outside of the Virginia Statute; otherwise, any type of loan modification would not require a modification of the mortgage in order for the mortgage to secure the loan as modified with the same priority. In addition, the Virginia Statute does not attempt to define what type of mortgage loan modification constitutes a novation of a mortgage loan; instead, it provides that, subject to the foregoing three exceptions, a mortgage as described above will secure a loan modification without affecting priority regardless of whether the loan modification also constitutes a novation of the secured loan.

If the Act is enacted into law in any state, there’s good news and bad news for lawyers who are asked to issue an opinion under that state’s law to the effect that a mortgage is not required to be modified in order for a mortgage loan modification to be secured by the mortgage without affecting its priority. The good news is that the Act should enable lawyers to issue such opinions if the loan modification fits entirely into one or more of the safe harbors enumerated by the Act. The bad news is that, if the loan modification does not fit entirely within one or more of the enumerated safe harbors, lawyers will probably still be reluctant to issue such an opinion.