SHOW ME THE "MONEY!"
Is a Date Down Endorsement Really Necessary?

By V. Gina Giannelli
Assistant Regional Counsel
Chicago Title Insurance Company

INTRODUCTION
Attorneys frequently ask me the following question, "Do I need to obtain a Date Down Endorsement to an existing Loan Policy if lender and borrower are about to amend the insured mortgage?" As a title insurance underwriter in the State of Illinois, I reply, "The answer depends on two factors: 1) is there any 'new money' involved; and, 2) did the original mortgage instrument impart notice to third parties that a change or modification would be contemplated?" If there is "new money" or if a modification is not authorized in the original mortgage, then I always recommend that the lender obtain a Date Down Endorsement.

This article will discuss why and when a loan policy Date Down Endorsement should be requested on loan modification transactions. It will also describe the procedures title companies follow when issuing a Date Down Endorsement for property in Illinois.

MORTGAGE MODIFICATION TRANSACTIONS
In order to determine whether an endorsement is desirable, the lender or its representative must determine whether junior lienholders or claimants will be prejudiced by the contemplated modification to the mortgage instrument. If the mortgage is to be changed in such a way as to harm the junior creditors, then the lender will want to know whether this change adversely affects the priority of its mortgage lien. Case law in Illinois is well established: the priority of the first mortgage will not be disturbed, unless the first mortgage is getting more than its mortgage instrument allows.

For example, first mortgagee and borrower agree to extend the maturity date of the mortgage. If the recorded mortgage instrument sets forth that an extension is possible, then a junior lienholder could not argue that its lien position has been harmed. Since the original recorded first mortgage had already imparted notice to subsequent lienholders that an extension was possible, the junior lien will remain in a subordinate position. The following is an example of the extension language to be included in the mortgage:

"This mortgage shall secure any and all renewals, or extensions of the whole or any part of the indebtedness hereby secured however evidenced, with interest at such lawful rate as may be agreed upon and any such renewals or extensions of any change in the terms or rate of interest shall not impair in any manner the validity of or priority of this mortgage, nor release the Mortgagor from personal liability for the indebtedness hereby secured."1

A modification agreement that simply extends the maturity date of the loan does not endanger the priority of the original mortgage.2 A junior lienholder's position is not prejudiced by this mere extension because when the junior lienholder perfected its interest by recording its lien, a review of the records would have disclosed the first mortgage, including all of the terms therein. For this type of loan modification situation a Date Down Endorsement is not necessary.

There are, however, other forms of loan modifications which do adversely affect the interest of junior lienholders. These adverse changes include an increase in the interest rate or an increase in the indebtedness. In these cases, the priority of the first mortgage can be partially impaired.3 The extent of the impairment is limited to the harm done to junior lienholders. For example, assume that the cost of repayment for a mortgage indebtedness, including 9% interest, totals $10,000.00, and the mortgage is modified to increase the interest rate to 10% and the total cost of repayment to $10,100.00. Any new debt attributable to the increase in interest is subordinate to any previously recorded lien claimants. Thus, if a contest arises over the relative priorities of the first mortgage, as modified, versus junior lienholders, a court would hold that with respect to the "new money" due the first mortgagee, said "new money" would have a subordinated priority.4 The reasoning behind this theory is based in equity; the junior lienholder would be prejudiced because the borrower, with a greater debt burden, may be less likely to repay all of its debt. For these cases, lenders should require Date Down Endorsements.

The equitable rule protecting junior lienholders will not operate with respect to an adjustable rate mortgage instrument. This type of mortgage includes a provision stating that at the time of the original loan the parties have agreed to a change in interest rate based on specified economic indicators. These variable interest mortgages impart notice to third parties that the interest rate can increase or decrease, and, therefore, any lienholder claiming an interest subsequent to this variable rate mortgage will not be harmed once the change of interest occurs. Title insurance companies will issue an endorsement specifically stating any change in interest rate will not disturb mortgage priority. Commonly called the "Adjustable Rate Endorsement," see Exhibit A for an example. A Date Down Endorsement will not be needed at the time the interest rate changes.

The equitable rule protecting junior lienholders holds true for loan modifications which increase the original mortgage amount, too. The priority of a mortgage is based on disbursement, namely the existence of a debt, and recordation of the mortgage instrument, notice to third parties that a mortgage lien exists. A debt created pursuant to modification agreement which increases the amount of indebtedness will have a lesser priority than the original mortgage debt. In fact, the priority for the increased amount will relate to the date the modification agreement is recorded rather than relate back to the recording date of the original mortgage. This does not mean that the modification agreement which includes an increased amount will disturb the priority of the original amount. It merely means that intervening lienholders will have priority over that portion of the total debt amount which is attributable to the "new money" disbursed pursuant to the modification agreement. A junior lienholder should be able to rely on the record in order to understand its priority position. Therefore, a mortgage instrument which does not contemplate an increased loan amount, and how could it since the new increased amount was not previously agreed to, would not impart notice to third parties. Date Down Endorsements should be required for the loan modification transaction which includes an increase in the indebtedness.

FUTURE ADVANCES--DISTINGUISHED FROM MORTGAGE MODIFICATION
Through "future advances," mortgage indebtedness may be increased without a mortgage modification agreement. Three forms of future advances will be discussed here. First, future advances may be made by the mortgagee to preserve its interest in the land secured by the mortgage. These advances, such as for the payment of real estate taxes or for payment of necessary repairs, will not adversely affect the priority of the mortgage. These future advances have the priority of the original debt. This rule is based on the doctrine of economic compulsion.5 Lenders are very concerned with maintaining the worth of their collateral, e.g. the land and improvements. If a lender disburses funds to redeem delinquent taxes, then that disbursement (future advance) would not disturb the mortgage's priority. With respect to advances falling under the doctrine of economic compulsion, Date Down Endorsements would not be necessary.

Second, future advances may be made pursuant to a clause in the mortgage instrument whereby the mortgagee may make an advance solely at its option. A mortgage instrument may include a provision that the mortgage secures future advances; but these future advances are made entirely at the option of the mortgagee. The mortgagee has no obligation to make the future advance. This type of mortgage is commonly known as an "open-end" mortgage.6 Although, in the open-end mortgage, the recorded mortgage instrument reflects that future advances are possible, due to the non-obligatory nature of said possible advances, the priority of the advances when made will relate to the date of disbursement and not relate back to the recording date of the mortgage.7 The priority of the amount of this type of future advance is in danger of being disturbed by intervening lienholders whose interests appear of record before the date of the advance.8 When a non-obligatory advance is made under this type of mortgage, the priority of the original mortgage will not extend to the "new money" being disbursed.9

Third, future advances may be made pursuant to revolving credit arrangements secured by mortgages. As long as the recorded mortgage instrument includes certain elements relative to imparting notice to third parties that said mortgage is securing a revolving credit loan, most title companies will issue a standard Revolving Credit Endorsement when the mortgage is recorded if state law recognizes such loans as having priority. See Exhibit B. The elements are taken from the Illinois revolving credit statute, 205 ILCS 5/5d: the mortgage must include a statement that the loan is a revolving loan, whereby the priority of the future advances relates back to the original disbursement; the mortgage must be for a term of twenty years or less; and lastly the mortgage must include a maximum indebtedness amount. Date Down Endorsements are not necessary for revolving credit loans.

Illinois has a general "future advances" statute, 735 ILCS 5/15-1302 which states that "except as provided therein, advances made more than eighteen months after a mortgage is recorded, the mortgage shall be a lien as to subsequent purchasers and judgment creditors only from the time such advances are made." Although this statute indicates that advances made within eighteen months have the original priority, title companies do not rely on this statutory provision. As of this date, there have been no cases decided on this particular point of law.

In addition, the Northridge Bank v. Lakeshore Commercial Finance Corporation, 8 Ill. Dec. 144, case brings to light a new issue for the "future advance" mortgage. In that case, the court ruled that a mortgage which includes future advances language but did not include a ceiling on the amount of any future advances, did not impart constructive notice to third parties. The entire mortgage debt (and not just the additional advance amount) was without any priority. Subsequent lienholders had a superior lien position over the entire mortgage amount. Therefore, to avoid the consequences of the Northridge Bank case, a mortgage instrument which contemplates future advances needs to include "cap" language such as the following: "Notwithstanding any provision herein to the contrary, in no event will the principal indebtedness secured hereby exceed ________ dollars." It is essential that this blank be filled in. Because the earlier recorded mortgage had failed to impart constructive notice due to the fact that the mortgage did not state the amount of the indebtedness it purported to secure, this case states that a later recorded mortgage was a "subsequent purchaser without notice," as defined in Section 30 of the Illinois Conveyancing Act, 765 ILCS 5/30.

DATE DOWN ENDORSEMENTS
There are many types of loans and many types of loan modifications. The basic rule of thumb should be: IF THERE'S NEW MONEY, then a Date Down Endorsement to the original loan policy should be requested from the issuing title company. The priority of this new money could relate to the recording date of the modification agreement and not relate back to the recording date of the original mortgage. In order to secure future advances under a mortgage instrument, the amount secured must be specified in the mortgage.10 Title company staff will examine title records subsequent to the original mortgage recording date and review the proposed modification agreement. The title company will then report the current status of title and the relative priority of the new money. The Date Down endorsement will insure the priority of the new money, subject to any intervening lienholders shown in the report.

In addition, if the original mortgage does not impart notice to third parties of the contemplated change or advance, prudent practitioners should request a Date Down Endorsement. Again, the title company will report on whether the contemplated change or advance will have any adverse impact on the mortgagee's priority.

Procedurally, while the borrower and lender are negotiating the terms of the loan modification or extension, a preliminary Date Down Endorsement should be ordered from the title insurance company which insured the original mortgage. The title company will conduct a search of the real estate records, the tax records and the judgment and miscellaneous records in order to determine whether any subsequent liens or encumbrances have been recorded against the land in question. The title company will issue a preliminary Date Down Endorsement which will extend the effective date of the original policy, will reflect any changes to the party in title, as well as list any new matters discovered in the searching process. Furthermore, it will identify all the required "clearance" matters necessary in order to issue the final Date Down Endorsement. The basic clearance requirements include the following: a current ALTA statement, a lender's disbursement statement, regular authority documentation, and lien waivers when construction is involved. The circumstances of the transaction will dictate whether additional clearance documentation is required. Also, the preliminary endorsement calls for the new loan document to be recorded and indicates that a second search of the records will be made to cover the recording of said document.11

Since Date Down Endorsements extend the effective date of the original policy, the Date Down Endorsement extends the effective date of all endorsements attached to that policy as well. For endorsements relating to the original mortgage, such as a usury endorsement, this is not a problem. For endorsements relating to outside factors or to changeable conditions on the land itself, such as the ALTA 3.1 endorsement (zoning) or Location 5 endorsement (survey accuracy), the title company will wish to undertake another review of the situation before agreeing to extend the effective date of these endorsements. Therefore, when dating down a policy which includes either or both of these two endorsements, a current-dated survey would also be required. In fact, the title company staff member will also rereview the current-dated municipal zoning ordinance when reissuing the zoning endorsement.

If matters were originally shown in schedule B-Part II to the loan policy (subordinated items) the title company will review the subordination agreements. The loan modification agreements will also be examined to determine whether it will affect the subordinated priority of these matters. The endorsement will show whether these items continue to be subordinate.

After the loan modification agreement is recorded and the title company has completed its second search of the records, a final Date Down Endorsement will issue to the mortgagee. Again, this endorsement will extend the effective date of the policy to cover the recording of the modification agreement. See Exhibit C. The form of this endorsement is commonly called a Date Down Endorsement No. 1. There are other forms of date down endorsements: Date Down Endorsement No. 1A, which insures an assignment of mortgage; and Date Down Endorsement No. 1B, which insures a mortgage modification agreement which increases the original loan amount.

CONCLUSION
There are many factors to consider when deciding whether a Date Down Endorsement is necessary. Just remember two things: IF THERE'S "NEW MONEY" PRIORITY IS AT JEOPARDY and SUBSEQUENT LIEN HOLDERS MUST HAVE NOTICE.

NOTES
1 R. Kratovil, Modern Mortgage Law and Practice, section 137.

2 State Life Ins. Co. v. Freeman, 308 Ill. App. 127 (Ill. App. 1 Dist. 1941).

3 Gardner v. Emerson, 40 Ill. 296 (1986).

4 Barbano v. Central-Hudson Steamboat Co., 47 F. 2d 160 (2d Cir. 1931).

5 Kratovil & Werner, Mortgages for Construction and the Lien Priorities Problem-The "Unobligatory" Advance, 41 TENN. L. REV. 311.

6 R. Kratovil, Modern Mortgage Law and Practice, section 114.

7 Any reference to construction loans is specifically omitted.

8 As to Illinois mortgagee, the assumption is made that these future advances are made after eighteen months from the original mortgage recording date.

9 Leche v. Ponca City Prod. Credit Ass'n, 478 P. 2d 347 (1970).

10 Farm Credit Bank of St. Louis v. Biethman, 262 Ill. App. 3d 614, 634 N.E. 2d 1312, 199 Ill. Dec. 958 (1994).

11 Further omitted is a discussion on how creditors' rights could be raised as a possible title concern. Situations which may present a creditors' rights risk include the following: increasing the amount of the indebtedness; increasing the interest rate or adding new forms of interest; capitalizing unpaid interest; adding new real estate to the lien of the mortgage; adding previously-existing and unrelated obligations to the borrower's obligation under the mortgage; and directing new or previously undisbursed funds to persons other than the borrower.