In this difficult economic climate, many lenders and borrowers seeking to avoid foreclosure or other severe remedies have elected to negotiate amendments or modifications to existing mortgage loans. The method in which lenders choose to effect these amendments varies widely, often depending on the manner in which the original loan was documented. In the case of many commercial real estate loans, the key business terms are often contained in a stand-alone, unrecorded credit agreement that relies upon a largely boilerplate mortgage form to create its lien on the collateral property. As such, the modification of loan terms may not seem to require a recorded amendment, the consent of a junior lienholder or an endorsement to the existing title insurance policy, when, in fact, the material terms being amended were never in the public record in the first place. However, as we discuss in this article, the process of amending or modifying an existing mortgage loan may be more complex than anticipated and even technical details must be carefully considered to avoid unintended consequences.
When amending or modifying a mortgage loan, a lender must consider issues of enforceability against both the borrower and subordinate lenders. Whether an amendment or modification of a mortgage loan is recorded, or consented by an existing junior lien holder, should not affect its enforceability against the borrower, but may have significant implications with respect to the priority of the liens encumbering the mortgaged property. In a period of declining real estate values, lien priority may have a considerable effect on a lender’s ability to realize on its collateral.
