Uniform Laws Update

The Mortgage Modifications Act Endeavors to Clarify Patchwork of State Laws

Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602. Contributing Author: Jane Sternecky, Legislative Counsel, Uniform Law Commission.

Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.

In 2021, the Uniform Law Commission began drafting the Mortgage Modifications Act, which aims to remove uncertainty in the law addressing the making and interpretation of modifications to recorded mortgages. The Mortgage Modifications Act is currently being drafted by a committee consisting of Uniform Law Commissioners, an ABA advisor, and observers from the title insurance, mortgage lending, and property records industries. The act aims to clarify and refine the law by introducing clear parameters for when and how mortgages can be modified and the implications of various types of changes.

Mortgage modifications may be initiated for many reasons, including as a common alternative to foreclosure for both residential homeowners and commercial borrowers. Typical modifications may include extending the loan’s maturity date, changing the interest rate or the method for capitalization of interest, increasing the principal amount of the loan in exchange for additional advances, or adjusting insurance requirements, escrow requirements, or financial covenants. A lender may agree to a modification in response to a borrower’s actual or prospective default on payments or in light of changing conditions in debt markets.

The common law serves as a baseline for mortgage modifications, but there are several gaps in the common law when applied to modern mortgages. First, the common law does not provide clarity regarding whether the modification of a loan or other obligation secured by a mortgage affects the mortgage’s priority against junior lienholders. Furthermore, the common law is unclear on whether recording a mortgage modification agreement is an adequate basis for maintaining mortgage priority. To complicate matters further, case law indicates that when a modification results in a novation of an obligation that is secured by the mortgage, then the mortgage no longer secures the obligation.

Beyond the common law, each state establishes its own rules for recording mortgages and determining mortgage lien priority. This patchwork of mortgage modification law creates confusion as borrowers move between states and complicates the administration of mortgage loans by national entities. This confusion can result in foreclosure, even when a borrower and lender have agreed to a modification. A uniform law on mortgage modifications would benefit residential and commercial borrowers by providing predictability in transactions and reducing delays associated with mortgage loan modifications. Additionally, the Mortgage Modifications Act should reduce costs by significantly decreasing the need for a borrower to pay to record an amendment or bear the cost of a title policy endorsement or legal opinion.

This project is a work in progress. As currently drafted, the Mortgage Modifications Act will permit safe harbor modifications of mortgage loans and other transactions secured by a mortgage. Permissible modifications will likely include: (1) extension of the maturity date; (2) decrease in the interest rate of an obligation; (3) modification to the method of calculating interest if it does not increase the rate; (4) change to capitalization of unpaid interest or other unpaid obligations; (5) forgiveness, forbearance, or reduction of principal, interest, or another monetary obligation; (6) addition, modification, or elimination of escrow or reserve requirements; (7) addition or modification of insurance requirements; (8) modification of existing conditions to an advance of funds; (9) addition or modification of an obligor’s financial covenant; and (10) change to the payment amount or schedule. The drafting committee chose to include these modifications as part of the safe harbor because they either are changes that do not affect the priority of a junior interest holder or are changes that are not typically materially prejudicial.

For these safe harbor modifications, the Mortgage Modifications Act plans to ensure that the mortgage will continue to secure the obligation as modified and that the priority of the mortgage will not be affected. Additionally, the act as currently drafted will not require recording of modifications to retain priority and states that a safe harbor modification will not constitute a novation. Similarly, senior interests, including tax liens with statutory priority, should not be affected by the modification.

Under the current draft, modifications that occur outside of the safe harbors, such as modifications that increase the principal or interest rate in a way that was not contemplated by the original loan and which would materially prejudice a junior lienholder, will still be governed by existing law. Additionally, the Mortgage Modifications Act will likely defer to state law for the required contents of a mortgage agreement, the statute of limitations for enforcing obligations or mortgages, and the procedures for recording.

The Mortgage Modifications Act is expected to be finalized at the Uniform Law Commission’s annual meeting in the summer of 2024 and should be made available for state-level enactment in the fall of 2024.

The Mortgage Modifications Act strives to reduce costs and facilitate modifications to avoid foreclosure whenever feasible. Mortgage modifications are common, regardless of the economic climate, but they are an especially valuable tool for borrowers and lenders during times of economic uncertainty and turmoil. The final version of the Mortgage Modifications Act could significantly benefit borrowers and prevent unnecessary foreclosures in the event of another financial crisis. The act will aim to provide much-needed clarity for homeowners, commercial borrowers, and all entities involved in the mortgage lending and title industries.