While endorsements vary with each deal, there are certain endorsements that we recommend obtaining on every transaction we handle, no matter the terms. These common endorsements are generally available for most deals, but there are some caveats to keep in mind.
The first endorsement we recommend is the ALTA 9-06 endorsement, which provides coverage for unrecorded covenants, notices, encroachments, or setbacks at the property. This endorsement is very common and generally inexpensive to obtain. It is mainly used in the event there is a violation of a covenant, restriction, or encroachment where the lender’s lien may be involuntarily diminished, subordinated, or extinguished, or is otherwise invalid or unenforceable. It ensures that the lender can still recover the full value of the lien under their loan policy. The broad nature of this endorsement makes it vital to obtain for all deals.
Next, we recommend the ALTA 14 endorsement. This is a recent addition to our recommendations and provides coverage in the event future advances on a loan fail to maintain the same priority position or are unable to be secured by the existing deed of trust or mortgage. Future advances could include advancing more funds to the borrower but may also include the advancement of funds for property taxes, foreclosure fees, or other fees that could be added to the principal balance. Thus, even if you are not expecting to advance additional principal to your borrower, this endorsement is still important to obtain, especially when title is issuing a 2021 ALTA loan policy instead of a 2006 ALTA loan policy.
We further recommend obtaining the ALTA 22-06 endorsement. This endorsement ensures certain improvements, such as houses and other buildings, are actually located on the property and the associated address is accurate. It also covers instances where the map included with the policy is inaccurate as to the dimensions or location of the property. While we recommend this for all transactions, it is most important to obtain this when the property securing the loan is vacant land, has a newly issued street address, or if there is confusion about the street address for the property. Not every state allows this endorsement to be issued, so you should consult with counsel to determine how to proceed.
Rounding out the most common endorsements we recommend is the ALTA 27 endorsement. This endorsement insures against loss or damage resulting from the insured mortgage becoming invalid or unenforceable due to the underlying loan violating the usury law of the state where the property is located. This endorsement is particularly important for high-interest rate loans that risk being usurious. You should consult counsel to determine whether the type of property securing the loan is relevant to usury laws and whether the governing law state has strict usury laws. This endorsement can be costly to obtain however, so it can be bypassed if you know that there is a usury exemption available. An example of this is a California transaction where the lender holds a CFL license, or the loan is arranged by a DRE licensed broker. California provides an exemption from usury laws in this case, so lenders do not need to be as concerned about requiring this endorsement. While we do recommend the ALTA 27 endorsement on every transaction, there are many states that will not issue it, including Texas, Idaho, Kansas, Missouri, New Mexico, New York, Pennsylvania, Texas, and Florida, so you should be cautious of usury laws when dealing in those states and consult with counsel to help guide you through the applicable laws.
There are other common endorsements that we recommend but are not needed for every transaction. First, is the ALTA 8 endorsement. This endorsement insures against any environmental protection lien that may be recorded in the property records or in the relevant courts covering the subject property. We recommend this primarily on commercial properties, especially those that house mechanic’s shops or businesses that work with hazardous materials, among others, or if there is reason to believe that there have been environmental issues on the property.
We also recommend the ALTA 10-06 endorsement for deals that will be sold or assigned to other lenders. This endorsement insures against loss to the transferee when an assignment fails to transfer the proper interest in the underlying loan and ensures that the mortgage transfer is valid. This endorsement is essential when you are buying or selling loans to ensure any related losses are covered by title insurance.
ALTA 32 and 33
The most common endorsements we see outside of our standard recommendations are the ALTA 32 and ALTA 33 endorsements. These endorsements are intended for use with construction loans where funds are initially held back to be disbursed later. These prevent a lender from losing lien priority related to the construction advances made after the initial loan in the event a mechanic’s lien or other junior lien comes into the picture between the initial loan and the construction advance being made. As construction loans are at high risk of having these types of liens being placed on the property, we recommend these for all transactions that involve future construction advances.
When obtaining these endorsements, the title company will issue one endorsement from the ALTA 32 series at the time of closing, but a new ALTA 33 endorsement is issued with every advance of construction funds. We recommend prepaying for the number of draws that will be needed at loan origination to reduce ongoing costs. The number of draws may change down the line, so you can proceed with a simple estimate of how many draws you think will be needed at the time of closing and adjust later if needed. Since the ALTA 33 endorsements will not be immediately issued, they will not appear on a proforma, but upfront payments should be made so you can avoid payment complications when they are issued.
There are many other endorsements that may apply to your transactions that are not covered here – these are merely the most common endorsements that we see day-to-day. The best way to ensure that you are getting the most coverage out of your title policy is to consult with your counsel to ensure all applicable endorsements are obtained for your deals.
Contact the Banking and Finance Team at Geraci to determine which endorsements are necessary to obtain for your next deal.