MTP Versus Loan Policy

Transcription

1 Credit When Credit is Due R-3, R-4, R-5, R-6, R-7, R-8, and R-18 Presented by Richard Worsham Vice President/Underwriting Counsel MTP Versus Loan Policy 2 The State is going through a transition where it is abandoning the term Mortgagee Title Policy in favor of the label Loan Policy. TDI has updated the forms to all be entitled as Loan Policy but has failed to completely update the rules in The Basic Manual for Title Insurance. We will use the term, Loan Policy here, though many of the rules we refer to still say Mortgagee Title Policy. 1

2 Endorsement Charges 3 ALWAYS REMEMBER that when giving a credit for a policy, the credit does not apply to the endorsement charges, and endorsements should be calculated at the full basic rate without a credit. Example: Mary purchases a house and gets an OTP for $400,000 and a loan policy for $350,000. The R-5.A. rate is applied, so the loan policy costs $100. In connection with the loan policy, Mary s lender requires T-19 coverage, which under R-29 is charged at 5 percent of the basic rate or $25, whichever is less. The basic rate for a $350,000 loan policy would be $2, without the credit, so the charge for T-19 is 5 percent of that, or $ Note: If Mary requested T-19.1 with survey deletion, T-19.1 is 5 percent of the basic rate, but that is 5 percent of the OTP charge of $2445, so it will cost $ (plus 5 percent more for survey deletion). How Much Do I Insure For? 4 P-66. Determination of Amount of Insurance Owner s policy Issued for the amount of the current sales price of the land and any existing improvements appurtenant thereto, plus, at the option of the insured, the cost of improvements immediately contemplated to be erected thereupon. If no sale, owner s policies issued for an amount equal to the value of the land and any existing improvements appurtenant thereto, plus, at the option of the insured, the cost of the improvements immediately contemplated to be erected thereupon. If improvements are subsequently added, a new owner s policy may be issued in the aggregate amount of the original owner s policy, plus the cost of improvements. The premium for such policy shall be as provided in R-3. 2

3 How Much Do I Insure For? 5 P-66. Determination of Amount of Insurance Owner s policy Issued for the amount of the current sales price of the land and any existing improvements appurtenant thereto, plus, at the option of the insured, the cost of improvements immediately contemplated to be erected thereupon. If no sale, owner s policies issued for an amount equal to the value of the land and any existing improvements appurtenant thereto, plus, at the option of the insured, the cost of the improvements immediately contemplated to be erected thereupon. If improvements are subsequently added, a new owner s policy may be issued in the aggregate amount of the original owner s policy, plus the cost of improvements. The premium for such policy shall be as provided in R-3. How Much Do I Insure For? 6 P-66. Determination of Amount of Insurance Loan policy All loan policies shall be for the amount of the loan(s) insured, when the land covered in the policy represents all of the security of the loan(s). When the land covered in the policy represents only part of the security of the loan(s), then the policy shall be written in the amount of the value of such land or the amount of the loan, whichever is the lesser. When requested by the insured, the policy may be issued in an amount equal to the original principal amount of the indebtedness plus legal interest, not to exceed 25 percent of the said principal amount. A previously issued mortgagee policy insuring variable rate mortgage loan may, when providing for negative amortization, be reissued (or endorsed), effective as of the date of the original loan policy, increasing the face amount of the loan policy from the original principal amount of the loan to an amount not to exceed 125 percent of the original principal amount upon the payment of additional premium as provided in R-4. When a loan policy is issued subsequent to either an owner s policy or loan policy pursuant to Rate Rule R-6, it shall be issued in the amount of the current unpaid balance of said indebtedness. 3

4 How Much Do I Insure For? 7 P-66, Generalized: OTP Sale - Insure the purchase price. No Sale - the value of the property On either, can add value of improvements, whether completed or contemplated. Loan policy Balance owed or, in the case of reverse mortgages or variable mortgages, the amount that can accrue. Limited to 125 percent of original loan balance on other than reverse mortgages. 8 R-3 Owner's Policy - Improvements Subsequently Added If improvements are subsequently added, a new owner's policy may be issued in the aggregate amount of the original owner's policy or policies, plus the cost of improvements, as provided in Rule P66. If a single original owner's policy was issued, the premium for the new policy shall be the basic rate less the premium which was paid for the surrendered original policy. Surrender does not require actual physical delivery. If multiple original owner's policies were issued, the premium for the new policy shall be at the basic rate less the currently promulgated basic rate for the aggregate of the surrendered original policies. 4

5 9 R-3 Owner's Policy - Improvements Subsequently Added Note that R-3: Is NOT used as a credit for a prior construction policy, but where someone has made improvements and then comes back for a new OTP. R-18 applies where there are P-8 exceptions in the prior policy. Unlike R.5.C., there is no four-year time limit; customer can come back and get an R-3 credit at any time. Clerical error in the Basic Manual - R-3 was extensively rewritten three years ago, and the portions providing for the T-34 OTP increased value endorsement were moved to R-15, but P-9(a)(2) still refers to R-3.c., which no longer exists. R-4 Variable Rate Loan Policy 10 Requirements: Previous loan policy insured a variable rate mortgage. P-66.B.4 implies it must have a negative amortization, but that is not in the much older R-4. Policy being reissued or endorsed, effective as of the date of the original loan policy Note, P-9(b)(3) requires a new policy if principal is being added to the note. Lender is requesting loan policy principal amount increase by up to 125 percent of the original principal amount. 5

6 R-4 Variable Rate Loan Policy 11 Premium Calculation Basic rate (as it existed on the date of the original loan policy), minus the greater of: The premium charged for the prior loan policy. The premium for the prior owner policy. If prior loan policy was issued as a simultaneous issue, you still apply the basic rate, not the simultaneous issue rate. You CAN charge less than the minimum basic rate here. R-5 Simultaneous Issue 12 R-5 applies when you are issuing a loan policy and an owner s policy at the same time and provides three scenarios, labeled A., B., and C., each with sub-parts. It really is several rules rolled together. In some simultaneous situations, the tie goes to the runner except when you re Vlad Guerrerro, apparently. He was out. 6

7 R-5.A. Simultaneous Issue 13 THE general rule If you re issuing a loan policy & an OTP at the same time, the OTP is at the basic rate and EACH loan policy is $100. If the loan policy exceeds the OTP, the loan policy costs the basic rate difference between the two, plus $100. Mathematically The basic rate calculated on the loan policy amount MINUS the basic rate charged on the OTP, plus $100. R-5.A. Simultaneous Issue 14 R-5.A (parenthetical) If new OTP has P-8 exceptions, you give a full credit for any prior OTP, paid by any party for said previously issued Owner Policy. You may then issue the loan policy for $100 (plus endorsements). Conditions: The prior OTP covered the identical property. New OTP issued within four years of prior OTP. No change in ownership of the property. Premium for new OTP can be no less than the minimum basic rate (currently $229). Essentially giving the same credit as R-4, except you can give it for improvements yet to be built. Simultaneous Jump Essentially the R-5.A. parenthetical provisions provide the R-3 credit on the OTP with the improvements pending and a simultaneous issue rate on the construction loan policy. 7

8 R-5.A. Simultaneous Issue 15 R-5.A cannot be used to issue a series of loan policies being apportioned to individual units in connection with a master policy covering the total indebtedness. R-8 has essentially the same limiting provision in it. Example of what you CANNOT do: Create a housing development with one master owner s policy with P-8.a exceptions, and as you complete units, issue each loan policy for $100 each. Also could not give a credit even if an OTP was issued for each one. Individual Mortgagee Policies must be issued at the Basic Rate. R-5.B. $5 Million Policies 16 Simultaneous Rate for OTP Issued With a Loan Policy The OTP must Meet the requirements of R-2(b) and have P-8a exceptions. Essentially, a construction policy exceeding $5 million Bear the same date as the loan policy. Insure the identical land or a portion of the land described in the loan policy (meaning you can t add other land to the OTP that is not in the loan policy). Premium for OTP shall be $100.00, since loan policy is being paid for in full. Provided, if the OTP exceeds loan policy, calculate the basic rate for the OTP, add $100, then subtract the basic rate charged for the loan policy, to get the OTP price. 8

9 R-5.B. $5 Million Policies 17 Simultaneous Rate for OTP Issued With a Loan Policy If an Owner Policy has been previously issued covering the identical property to be covered by the Owner Policy to be issued and provided there has been no change in ownership of such property, credit shall be given against the premium for the Mortgagee Policy to be issued for the amount of the premium paid for said previously issued Owner Policy. In other words, you give a credit on the loan policy for the prior OTP, and then issue the new OTP using the simultaneous rate set forth in R-5.B. 18 R-5.C Residential Property Post Construction Requirements: Available after improvements made to property. Prior policy must NOT have P-8 exceptions. Residential property only. No change in ownership. Must turn in the existing owner s policy. (Does not need to be from your company or underwriter.) New OTP must be for a GREATER amount than prior OTP. Identical land to prior OTP. Less than four years since prior OTP issued. Credit for the premium previously paid when purchasing a new owner s policy. Charge at least the minimum basic premium. Essentially the R-3 credit with a simultaneous issue on the loan policy, but only if done within four years. 9

10 R-3 and R-5 Summary 19 Increased value due to improvements If finished, issuing OTP only, credit for prior OTP, no time limit. R-3. If pending and loan being issued for improvements, credit for prior OTP if issued within four years, and simultaneous rate on loan policy ($100). R-5.A. If finished and loan policy being issued with OTP, give same credit provided by R-3 but with a simultaneous issue rate ($100) for loan policy. R-5.C. R-6. Subsequent Issuance of Mortgagee Policy 20 R-6 is divided into three parts, dealing with various situations where a loan policy is needed subsequent to closing. Provides for a credit when: Loan policy issued subsequent to the OTP. Loan policy issued on a previously insured loan. Loan policy issued to replace policy issued by defunct title underwriter. 10

11 R-6. Subsequent Issuance of Mortgagee Policy 21 R-6.a. Loan policy issued subsequent to the OTP is ½ the basic rate if the insured lien Is not being modified. Was excepted to in the owner s policy. Evidence of unpaid balance provided. Issued in amount of unpaid balance. Not in default and not accelerated. R-6.b. Loan policy issued on a previously insured loan entitled to a credit of 3/10th of basic rate provided it is not a modification. Modification endorsement (T-38) governed by Rule P-9(b)(3) R-6.c. Loan policy issued to replace policy issued by defunct title underwriter is entitled to a credit for ½ of the basic rate. Must be a court ordered receivership, which would include bankruptcy. 22 R-6. Subsequent Issuance of Mortgagee Policy R-6 Scenarios: Lender literally FORGOT to request a loan policy when they made a loan on a property with an owner s policy. (OTP must have excepted to the vendor s lien). Often it s a small lender that suddenly realized they re about to be audited. They no longer qualify for a simultaneous issue rate, but can get a loan policy at ½ the basic rate. 11

12 23 R-6. Subsequent Issuance of Mortgagee Policy R-6 Scenarios: Lender is an out-of-state lender and absolutely insists they need a new policy for the loan they purchased, though it was already insured. You should tell them that the definition of insured includes the owner of the Indebtedness and each successor in ownership of the Indebtedness, Consequently, it is difficult to understand why a lender might want this, but if they insist, you can sell it with a 3/10 th credit. 24 R-6. Subsequent Issuance of Mortgagee Policy R-6 Scenarios: Title underwriter goes bankrupt or into state receivership, and lender wants a new policy. Actually, the lender is covered by the State s guaranty fund, which we all pay into. However, that fund is not bottomless, and there s no guarantee the State would make up any shortfall. If the lender wishes a new policy, they are entitled to a credit of ½ the basic rate. 12

13 25 R-7. First and Subordinate Liens Issued Simultaneously Requirements Two or more new loans in a single transaction. Both are being insured. No R-8 credit is due. R-8 has different provisions for multiple liens. R-1 provides, In no event shall two or more Rate Rules be combined in the calculation of the premium for the subject transaction. R-7 will be used in refinance transactions only if the loan being refinanced is over seven years old and is being refinanced with multiple loans. Add up the total amount being borrowed on ALL liens in the transaction to calculate the basic rate on the 1 st lien, and charge $5 for each additional lien. Because the basic rate as a percentage of the insured amount declines as the amount increases, this gives a price break to the consumer, charging them the same as they would be charged if they had one lien, plus $5 for each additional lien. 26 R-7. First and Subordinate Liens Issued Simultaneously R-7 Scenarios XYZ Corp. decides to borrow against Blackacre, which has no lien on it, and lender structures the loan into two loans. R-7 would apply. Mary and John, a married couple, are refinancing their 2002 mortgage and are taking cash out in a 2 nd lien in the same transaction. Since a 2002 loan has no R-8 credit, R-7 would apply. Linda is refinancing her 2008 mortgage and taking a 2 nd lien cashout loan. R-7 would not apply, because Linda would be getting an R-8 credit on the 1 st lien, and you cannot mix rate rules. 13

14 R-8. Refinance Credit 27 Credit Amount on Basic Rate Calculated on Payoff Balance a. 40 percent within two years from the date of the last mortgagee policy; b. 35 percent if more than two but less than three years c. 30 percent - three to four years d. 25 percent - four to five years e. 20 percent - five to six years f. 15 percent - six to seven years g. No credit after seven years (i) But then R-7 would apply R-8. Refinance Credit 28 Simple Calculation 1. Calculate the basic rate on the principal balance being paid off. 2. Multiply that figure by the credit percentage. 3. Subtract that amount from the basic rate on the new policy. 14

15 R-8. Refinance Credit 29 Texas Department of Insurance s Own R-8 Calculation form: s/rater-8.pdf R-8. Refinance Credit 30 Standard R-8 Calculation Payoff - $294, Payoff loan is four years old. Calculate basic rate on payoff amount and take 30 percent of that to get credit amount. New loan - $300,000 Calculate basic rate on new loan. Subtract R-8 credit. Calculate endorsements based on basic rate BEFORE the R-8 credit. 15

16 R-8. Refinance Credit 31 Two Loans From Different Years Being Refinanced by One In this case, one loan is three years old, and the other is five years old. Calculate the basic rate on each loan. Multiply credit percentage against each loan. Total up your R-8 credits. Subtract from basic rate on the new loan. R-8. Refinance Credit 32 Two Loans From the Same Year Being Refinanced by One Total the amount of both payoff loans. Calculate R-8 credit based on the total principal balance of both loans. 16

17 R-8. Refinance Credit 33 Two Loans Being Paid off by Two Loans Calculate the R-8 credits on both payoff loans. Subtract the total of the R-8 credits from the larger of the two new loans. Issue 2 nd loan policy at the basic rate. If no 2 nd loan policy, buyer still gets the entire R-8 credit on the 1 st lien. Same if only 1 lien is being refinanced by 2. R-8. Refinance Credit 34 When two loans are being paid off If created the same year, add them together to figure your principal for calculating your basic rate. If created in separate years, calculate the credit on each loan separately. s/title/documents/rate R-8.pdf When two loans are being created, give the entire R-8 credit on the 1 st loan, and charge the minimum basic rate (currently $229.00) on the smaller of the two loans. Endorsements Always calculate endorsements without the credit. 17

18 R-8. Refinance Credit 35 A credit shall still be allowed upon the premium as set forth in this rule even if not all of the new loans are insured or if only one of the new loans is insured. Common scenario Lender refinances with two loans, insures the 1 st, and then does not insure the 2nd. s/title/documents/rate R-8.pdf Lender STILL gets entire R-8 credit on the 1 st lien, even if they don t purchase a 2 nd lien policy. R-8. Refinance Credit 36 Requirements: There must have been a previously insured loan. Customer will not have to turn in a policy because owner does not get a copy of the Loan Policy of Title Insurance (MTP). You may ASSUME the prior loan was insured and that you may give the R-8 credit IF: It s a large institutional lender or bank, and the type of loan likely to be insured. Example 1: A 1 st mortgage purchase money loan for $90,000 through Wells Fargo Bank was presumably insured. Example 2: A 2 nd lien home equity loan from Wells Fargo for $90,000 done in 2006 is NOT presumably insured, because it was common practice at that time not to insure home equity loans under $100,000. Example 3: Seller loaned $90,000 to buyer to purchase property in a prior transaction. This is a non-institutional transaction you cannot assume was insured. The last deed of trust was filed of record by a title insurance company, and a GF# appears on the deed of trust. You obtain a HUD-1 from a prior transaction, and it reflects a loan policy premium was collected on the HUD. 18

19 R-8. Refinance Credit 37 Requirements: Unlike R-5, there is NO requirement that the property be the SAME land, but there can be no ADDITIONAL land. Example 1: Mary purchased ten acres and got a loan for $190,000 for the property. Mary now wishes to refinance the loan on only one acre of her property so she can sell other portions of the ten acres. Mary can get an R-8 credit on the amount of the $190,000 loan being paid off in the closing, even though it is not the exact same property. Example 2: Mary has a 99-year lease with the Brazos River Authority (BRA), which lender has a lien on for $200,000. Mary is now buying the fee simple from the BRA and refinancing the $200,000 lien to be on the entire fee simple lot. The existing leasehold will be merged into her fee simple interest and no longer exist. Mary is NOT entitled to the R-8 credit because Mary is buying a greater interest in the property than she owned before; the fee simple interest is essentially NEW collateral. R-18. Refinance of Construction Loan 38 Requirements A prior construction loan policy issued with P-8 (pending disbursement) language in it. If prior construction loan closed with a different title company, they will need to provide the policy or a HUD-1 showing they purchased a prior loan policy. Many construction loans are done on a binder. There is no requirement the property be the same land, merely it be a previously insured mortgage: Example Lender took a lien on ten acres for construction of a home; in construction to perm lender intends to take a lien only on the one acre the house resides on. Customer is still entitled to the R-18 credit. Note that overburdening of homestead is not a problem. 19

20 R-18. Refinance of Construction Loan 39 Calculation If the new loan is the same or less than the prior construction loan, the refinance of a construction loan is at the minimum basic rate, currently $229. Occasionally a contractor will come in under estimate, and the permanent financing is less than the prior policy. There is no extra credit for this. If the new loan is greater, you calculate the basic rate on the amount previously insured and subtract that from the basic rate calculated on the new loan. Never less than the minimum basic rate If the new loan is divided into two loans, the R- 18 credit goes entirely on the larger of the new loans, and the second lien is always at the MINIMUM basic rate, regardless of the value of the second lien. As ALWAYS, calculate endorsements as though there was no credit. R-18. Refinance of Construction Loan 40 There is no limit to how many times you may use R-18. You may use R-18 credit for change orders, and use it again on permanent financing. Examples: The Jones house originally was to cost $350,000, for which construction loan was made. They added a pool, pool house, and numerous changes, and it now appears it will cost $450,000. Lender wishes to loan them additional money, modify their lien, and get a T-38 modification endorsement (the sort of request you get from the lender). Pursuant to P-9(b)(3), you may not use a T-38 modification endorsement where additional principal is being added to the loan. However, you may issue a new policy and give an R-18 credit for the prior loan policy. Mechanic s lien must contemplate additional money being expended and change orders, but standard Texas form has this language. Loan modification is required. 20

21 R-18. Refinance of Construction Loan 41 Common R-18 problem John purchases a lot for $30,000 to build a house, and gets an OTP. John subsequently borrows $300,000 to build a house. After the house is complete, John refinances to a permanent loan and asks for an OTP at the value of his land and improvements. R-18. Refinance of Construction Loan 42 Common R-18 problem John cannot get the simultaneous issue rate under R-5.B, because the improvements are complete. John cannot get the simultaneous issue rate under R-5.C, because it specifically precludes it being given when there were P-8 exceptions in the prior policy. John cannot mix the R-18 credit with a simultaneous issue rate because R-1 prohibits mixing rules. 21

22 R-18. Refinance of Construction Loan 43 Common R-18 problem Properly, John should have bought a simultaneous OTP under R.5.C. when he got his construction loan. You can t fix that after the fact when he comes to you for an OTP on a construction to permanent loan. John may blame you if you didn t bring this up at the time of closing the construction loan. You can give John a credit for his prior OTP under R-3 and a separate credit for the construction to loan policy under R-18, which might make him happy. John can still pay full price for an OTP and get a simultaneous issue rate on the loan policy, with no credit, and that is often cheaper than getting an R-3 and R-18 credit. Since John s prior OTP was on a $30,000 lot, in this case it is going to be cheaper for John to get a new OTP without a credit with the loan policy at the simultaneous rate. 22