With increased defaults, when is it prudent for servicers to record loan modifications?

A question we’ve received from clients with increased frequency is whether they can forgo recording their loan modification agreement in certain circumstances or jurisdictions without jeopardizing their mortgage lien. And, as someone who has litigated several lien priority disputes stemming from an unrecorded loan modification agreement, I can say the answer isn’t always straightforward. From the business perspective, there may be an opportunity to increase workflow efficiencies, reduce timelines, and save on title or recording fees by not recording. However, there is always the competing compliance perspective: maintaining compliance when the recording requirements are clear and successfully managing risk when the requirements are less evident.

If you haven’t evaluated your recording policies recently, now is a good time to start. The likelihood of a junior mortgagee raising a lien priority dispute tends to increase when foreclosure rates increase. With the possibility of increasing default rates looming on the horizon, I recommend sending a meeting invite to your compliance team to review your policies. Certainly, investor/insurer requirements will dictate when a loan modification agreement must be recorded. But when servicers have discretion to decide whether recording is necessary, how can servicers ensure their loan modification complies with applicable law? What state requirements exist for recording a loan modification agreement? In the absence of investor/insurer guidelines or state statutes, what criteria should you consider?

In the past, certain investor requirements identified when a loan modification agreement needed to be recorded or be in recordable form and involved factors such as the amount of arrearages being capitalized, the modified interest rate, the remaining term on the mortgage prior to the loan modification, and the modified maturity date. While these may no longer be express investor requirements, they are still important factors and are relied upon by many servicers. In fact, case law analyzing these questions take into consideration these same factors when assessing the impact of an unrecorded loan modification agreement and whether a junior lienholder has a genuine lien priority dispute.

Many states have laws that impose recording requirements. For instance, it goes without saying the loan modification agreement should be recorded in New York and Ohio. Yet, other states don’t speak to the modification agreement itself, but rather to loan characteristics like the maturity date or the expiration of the lien, which in turn are pivotal to the mortgage’s lien position and a foreclosure statute of limitation. States like Massachusetts, Texas, and Virginia have laws that require an agreement to extend the maturity date—and thereby extend the mortgage lien—to be recorded. If a loan modification does include an extension of the maturity date, failing to record the agreement could mean your mortgage lien expires much sooner than you think.

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

The purpose of the UMMA is to clarify the law governing mortgage modifications, while saving time and money by reducing legal uncertainties and transaction costs. The drafters of the UMMA recognized that by imposing different recording requirements, the states have created a patchwork system that prevents servicers from maintaining a singular approach. As a solution, the UMMA creates a “safe harbor” modification, meaning if a loan modification agreement satisfies certain criteria it will preserve the original mortgage’s enforceability and lien priority without having to be recorded. Several of the UMMA’s criteria are the same factors identified above, therefore the UMMA should serve to reinforce servicers’ policies once its adoption has become more widespread. It is important for servicers to not only navigate existing state requirements but also monitor the UMMA’s progress to fully ensure compliance with applicable laws.

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Mortgage Connect provides a number of critical communication and loss mitigation products and services, including title services and loan modification agreements designed for both recordable and non-recordable purposes. If you have questions or concerns about your existing policies and how Mortgage Connect can help you navigate questions like those addressed in this article, please feel free to reach out to Jane Kennedy, Executive Vice President, Servicing @ jkennedy@mortgageconnectlp.com.