Why Title Insurance Endorsements?
Title insurance protects mortgage lenders when defects in a title to a property result in financial loss to the lender. However, basic title insurance may not always be adequate for real estate transactions with certain risks.
The American Land Title Association (ALTA), which manages the title insurance industry nationwide, promulgates standard title insurance policies and specific endorsements that expand coverage to protect the lender’s interest when particular title issues affect the real property. This alone is rarely adequate for most real estate transactions and may need to be expanded through specific title insurance endorsements based on the specific risks related to the property.
The following are common 2006 ALTA Loan Policy endorsements that we recommend our clients obtain when representing them in mortgage loan transactions.
ALTA 3 – Zoning Endorsements
Zoning endorsements provide coverage related to the zoning classification of the property. They are recommended when the use of the property will be changed, or the current use of the property is in question. The specific zoning endorsement applicable will depend on whether the land is improved, unimproved, or under development.
ALTA 4 – Condominium Endorsements and ATLA 5 – Planned Unit Development “PUD” Endorsements
These provide coverage when a unit and its common areas fail to be considered part of the secured collateral. They also insure against current restrictive covenant violations. Condominium endorsements are considered when a lender wants to confirm that a unit and its common elements are separately assessed for taxes, has concerns regarding encroachments of common elements, and wants protection against a right of first refusal that could have been exercised at the policy date.
ALTA 6 – Variable Rate Mortgage Endorsements
These provide the lender with insurance against the invalidity, unenforceability, or loss of lien priority of the insured mortgage. These risks occur when there are changes in the rate of interest or the interest on interest or the unpaid principal balance of the loan increases due to the addition of unpaid interest pursuant to a provision under the insured mortgage. The following should be considered:
(1) Loan programs containing periodic limits or caps on monthly payment increases
(2) to cover any negative amortization aspects
(3) to protect against a loss of priority resulting from a change in interest rate
(4) when “interest on interest” is legal in the relevant state.
ALTA 8 – Environmental Protection Lien Endorsements
These provide coverage against the risk of loss or damage resulting from any recorded environmental lien that is not an exception to the title policy. The endorsement for residential real estate (8.1–06) is where the lender is insured against loss of priority because of a federal or state environmental protection lien that is filled in the public records at the date of policy, or an environmental lien provided under state statute that is in effect at the date of the policy. For commercial real estate (8.2–06), this applies only to improved or unimproved commercial properties, and is inexpensive and customary to order for all loan transactions.
ALTA 9 – Restrictions, Encroachments, and Minerals Endorsements
These provide a variety of coverages associated with divestment of mortgage liens, restriction violations, and encroachments. We request ALTA 9 on all loan files.
ALTA 10 – Assignment Endorsements
These endorsements insure against loss that results when the assignment fails to vest title to the insured mortgage and any partial or full reconveyance or release of the insured lien recorded in public records. They should be considered when the loan is assigned to a new lender or when it is assumed to confirm that the new party becomes insured under the title policy.
ALTA 11 – Mortgage Modification Endorsements
These are issued when the parties agree to modify a mortgage after origination. They insure against loss resulting from the terms of a modification agreement rendering a mortgage invalid or unenforceable and confirm the priority of a modified mortgage and its continuance over any defects, liens, or encumbrances on the title existing at the date of endorsement.
ALTA 14 – Future Advance Endorsements
These insure the validity, enforceability, and priority of a mortgage as security for future advances of principal. “Advance” is defined as an advance of principal made after the date of the policy and includes protective advances. They should be considered when the loan is a revolving line of credit, there are future advances obligated under the terms of the loan, or when it is likely that a lender may make protective advances to mitigate a borrower’s failure to pay taxes or keep insurance current.
ALTA 17 – Access and Entry Endorsements
These insure against loss or damage if, as of the policy date, the land does not provide public access to and from a street, road, or highway, it is not physically open and maintained, and the insured has no right to use existing curb cuts or entries along it. These are considered when there is concern about access to the property or when easements exist that grant access to the property.
ALTA 22 – Location Endorsements
These insure against loss or damage from street addresses not located on the property or if the policy map is inaccurate. They should be considered when there is confusion about the street address, an address was recently issued, or there is vacant land.
ALTA 25 – Same as Survey Endorsements
These provide coverage for loss or damage from a difference in the land insured in the policy and the land described in a survey. These should be considered when there are concerns about the makeup of the subject property or there is vacant land. The lender will be required to obtain an ALTA survey to obtain this endorsement.
ALTA 26 – Subdivision Endorsement
This should be considered when the land is in a state or local jurisdiction that limits the ways that property can be legally subdivided. This ensures that the land identified in the policy is separate and lawfully created under state and local laws.
ALTA 27 – Usury Endorsement
This covers against loss or damage resulting from the insured mortgage becoming invalid or unenforceable due to the underlying loan violating the usury law of the property’s state. The factors include high interest rate loans, the type of property securing the loan, whether the state has a low usury cap, and the applicable governing laws. This endorsement is not applicable in Florida, Idaho, Kansas, Missouri, New Mexico, New York, Pennsylvania, and Texas. These do not modify policy provisions, prior endorsements, the policy date, or the amount of insurance.
ALTA 32/33 – Construction Loan Endorsements
These are for loan policies related to loans with construction loan advances. These help prevent lenders from losing lien priority when making construction advances to insure they are not considered junior priority to other junior liens and/or mechanic lien claimants.
While only one endorsement is issued from the ALTA 32 Series, a new ALTA 33 endorsement is issued with every advance of construction funds. All the ALTA 32–06 Series endorsements insure against loss or damage due to the lien of the insured mortgage becoming invalid or unenforceable as security for every Construction Loan Advance made on or before the date, and lack of priority of the insured mortgage’s lien as security for every Construction Loan Advance made on or before the date of coverage over any publicly recorded lien or encumbrance that is not excepted from coverage. We recommend forecasting how many advances will be required under the loan and ordering the 33 endorsements in bulk to reduce ongoing costs as the loan funds are distributed.
The list above is not an exhaustive list of all endorsements available to a title policy. Mortgage lenders would be wise to work with counsel in all their transactions to make sure they are adequately mitigating risks.