With defaults on the rise, when is it wise for servicers to record loan modifications?

A question we have increasingly received from customers is whether, under certain circumstances or in certain jurisdictions, they can opt out of recording their loan agreement without jeopardizing their mortgage rights. And as someone who has litigated several lien lawsuits arising from an unrecorded loan modification agreement, I can say that the answer is not always simple. From a business perspective, there may be an opportunity to increase workflow efficiency, shorten timelines, and save on title or recording costs by not recording. However, there is always a competing compliance perspective: maintaining compliance when registration requirements are clear and successfully managing risk when requirements are less clear.

If you haven’t evaluated your withdrawal policy recently, now is a good time to start. The likelihood that a junior mortgage holder will file a lien dispute generally increases as foreclosure rates increase. With the possibility of an increase in defaults looming on the horizon, I recommend sending a meeting invitation to your compliance team to review your policies. Certainly, investor/underwriter requirements will determine when a loan modification agreement should be recorded. But if servicers have the discretion to decide whether withdrawal is necessary, how can servicers ensure that their loan modification complies with applicable law? What state requirements exist for recording a loan modification agreement? If there are no investor/insurer guidelines or state statutes, what criteria should you consider?

In the past, certain investor requirements were identified when a loan modification agreement was required to be recorded or in recordable form, involving factors such as the amount of delinquencies being capitalized, the modified interest rate, the remaining term of the mortgage prior to the loan modification, and the modified maturity date. While these may no longer be explicit investor requirements, they are still important factors that many service providers rely on. In fact, the case law analyzing these questions considers the same factors when assessing the impact of an unregistered loan modification agreement and whether a junior lienholder has a genuine lien priority dispute.

Many states have laws that impose withdrawal requirements. For example, it goes without saying that the loan modification agreement must be recorded in New York and Ohio. Yet other states do not address the modification agreement itself, but rather loan characteristics such as the maturity date or expiration of the lien, which in turn are crucial to the mortgage’s lien position and a statute of limitations. States such as Massachusetts, Texas and Virginia have laws that require an agreement to be recorded to extend the expiration date – and thus extend the mortgage lien. If a loan modification does involve an extension of the term, failure to record the agreement may result in your mortgage rights expiring much sooner than you think.

Another recent development is the Uniform Mortgage Modification Act (the “UMMA”), which was drafted by the National Conference of Commissions on Uniform State Laws and finalized in 2024. Beginning in the 2025 legislative session, states could consider adopting the UMMA or a version thereof. So far, Utah and Nevada have adopted the UMMA, and West Virginia and Wyoming have introduced legislation to adopt it. In a nutshell, the UMMA sets a standard for determining when a loan modification agreement does not need to be recorded and ensures that it does not negatively impact the mortgage, its enforceability, or its priority.

The goal of the UMMA is to clarify the law regarding mortgage modifications while saving time and money by reducing legal uncertainties and transaction costs. The drafters of the UMMA recognized that by imposing different registration requirements, states have created a patchwork system that prevents providers from adopting a single approach. As a solution, the UMMA creates a “safe harbor” modification, meaning that if a loan modification agreement meets certain criteria, the enforceability of the original mortgage and the priority of the lien are preserved without the need to record it. Several of the UMMA’s criteria are the same factors mentioned above. Therefore, the UMMA should serve to strengthen service providers’ policies once their adoption has become more widespread. It is important for service providers to not only navigate existing state requirements, but also monitor UMMA progress to fully ensure compliance with applicable law.

Mortgage Connect offers a number of critical communications and loss mitigation products and services, including title services and loan modification agreements, designed for both drawable and non-drawable purposes. If you have any questions or concerns about your existing policy and how Mortgage Connect can help you answer questions like those addressed in this article, please feel free to contact Jane Kennedy, Executive Vice President, Servicing @ [email protected].

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