INSURING TWO MORTGAGES
Frequently, ATG members are asked to insure a first and second mortgage as part of the same transaction. Sometimes the lenders want the mortgages insured under two separate policies. Sometimes the lender wants both mortgages insured on the same policy. This article will review how to accomplish either of these tasks.
Insuring Two Mortgages on Separate Policies:
On the policy insuring the first mortgage, the first mortgage is listed on Schedule A as the insured mortgage. Schedule B is then split into two parts: Part I lists all matters superior to the first mortgage, such as taxes, easem*nts, and covenants; Part II contains exceptions for all matters inferior to the first mortgage, such as the second mortgage. Schedule B, Part II is prefaced with the following paragraph:
Schedule B, Part II
In addition to the matters set forth in Part I of this Schedule, the title to the estate or interest described or referred to in Schedule A is subject to the following matters, but ATG insures that such matters are subordinate to the lien or charge of the insured mortgage upon said estate or interest:
The second mortgage will then be listed on Schedule B, Part II as an exception following the above preface. The second policy will list the second mortgage on Schedule A as the insured mortgage, and it will contain a regular Schedule B listing all matters (including the first mortgage) that are superior to the second mortgage. Both the first and second mortgages should be listed as special exceptions on Schedule B of the Owner Policy.
Coincidentally, Schedule B, Part II may also be used to insure over any matter that would be inferior to the insured mortgage on Schedule A. Examples of this would include a purchase money mortgage in which there are prior judgments or tax liens recorded against the buyer, or a qualified construction loan for purposes of section 2032A.
Insuring Two Mortgages on One Policy:
Some lenders want to insure the first and second mortgage on the same policy. Such coverage is available where the property, owner(s), and lender are identical on both mortgages to be insured.
Inasmuch as the policy insures that the mortgage on Schedule A has priority over all matters except those shown on Schedule B, it would be incorrect to show two mortgages on Schedule A as the insured mortgages, since one of them does not have priority over the other. However, lenders are insisting, more and more, that this be done. In order to accommodate their requests, divide Schedule A, paragraph 3, into subparagraphs A and B. List the first mortgage under subparagraph A and the second mortgage under subparagraph B and attach the Multiple Mortgage Endorsem*nt (ATG Form 2058) to the final policy. This endorsem*nt insures the priority of both mortgages, but it states that the mortgage listed under subparagraph A has priority over the mortgage listed under subparagraph B.
Of course, if the lender wanted to sell the mortgages to two different investors, new policies would have to be issued to give separate coverage to each investor. Please further note that Paragraph 1 of Schedule A should show the total amount of both the first and second mortgage as the "Insured Amount."
Cross-Liability Endorsem*nt:
Sometimes a lender requests two mortgagee policies (MPAs) insuring two mortgages on two different parcels of real estate secured by the same Note. Although the lender may also want the Amount of Insurance on both policies to equal the amount of the original principal amount of the Note, the lender may not want to pay for duplicative coverage. For example, a lender holds a Note in the principal amount of $300,000. The note is secured by two mortgages; each executed on a separate piece of property. Each mortgage recites the full amount of the Note (i.e., $300,000), but the lender does not want to pay a premium on this Amount of Insurance twice. Because there is actually only one debt in the amount of $300,000, the lender only wants to pay for an insurance premium in that amount once.
You may accommodate the lender under these circ*mstances by issuing two MPAs (i.e., one for each parcel), each with an Amount of Insurance of $300,000 and each with a Cross-Liability Endorsem*nt attached. The Cross-Liability Endorsem*nt ties the two MPAs together, such that, if the lender recovers under the first MPA, the Amount of Insurance for the second MPA will be reduced by the amount of the recovery on the first MPA.
© ATG UB0609vol1no2
