John A. Washburn
GR Review

 Although a long laundry list of endorsements is often required by lenders in connection with asset based or real estate loans, certain endorsements are not well understood or the availability of them may not even be known to the lender in a transaction.  There are several endorsements that may not always be obtained which can be very helpful in specific situations to further protect the lender's interest.  Some may not be available in all states, but this can be determined by inquiring with the relevant title company.  It can be helpful for both lenders and borrowers to be familiar with some of these endorsements and how they can facilitate the closing of the loan transaction.Here a few of the endorsements which may be of particular value in specific circumstances:

First Loss.  This endorsement only relates to situations in which there is more than one parcel of real estate pledged to secure a loan.  The endorsement allows a lender to recover where there is a substantial impairment of a title against one of the parcels without requiring foreclosure against any of the other parcels securing the loan.  The endorsement normally contains a provision subrogating the rights of the insured to prevent a windfall in case any subsequent foreclosure results in payment in full to the lender.  The title company can require foreclosure against the parcel with a defect, but foreclosure against all of the other parcels would not be required.

Last Dollar or Application of Mortgage Payments.  Until recently, this was important where the amount of the loan exceeded the value of the real property.  This circumstance is common in situations where an ongoing business is financing its operations by a pledge of all of its assets of which real property is only a part.  It should be noted that the 2006 ALTA Loan Policy eliminates the need for the endorsement.  If the 1992 ALTA policy form is used, however, the last dollar endorsement would still be important.  The endorsement makes sure the partial satisfaction of the debt by the lender resorting to other collateral does not reduce the lender's coverage with respect to the real estate covered by the loan policy.  With this endorsement in place, liability under the loan policy is reduced only at such time as the outstanding balance of the debt has been reduced to an amount less than the coverage limit under the policy.  A special version of the agreement may be advisable where the mortgage secures a revolving line of credit.  In this way, the payment and re-advancing of monies and repayment of such monies under the revolving line will not adversely affect the coverage limit. 

Tie In Endorsements.  Tie in endorsements are useful where there are multiple properties securing a loan.  In order to save on premiums, the borrower paying for the coverage will often want to limit the amount of the policy for an individual parcel to the value of that property.  However, the lender may want to take advantage of an increase in the value of one or more of the properties in the event there is a loss.  Tie in endorsements allow the coverage for the individual policies to be aggregated in case there is a loss as to one of the parcels.  The amount available as to any one parcel is the amount of insurance available under that policy pertaining to that parcel plus the amounts under the policies described in the endorsement.  A condition which needs to be met for a tie in endorsement is that each mortgage must state that it secures the entire loan amount. 

Easements and Access.  Often access to a property may be dependent upon use of an easement over the property belonging to a third party.  In those cases, it is prudent to obtain an endorsement of contiguity to the easement and access of the easement to the street in addition to separately insuring the easement as a separate parcel. 

Doing Business.  Another endorsement which is available in certain states is a doing business endorsement.  This may be helpful to a lender when the property being mortgaged is located in the state where the lender is not qualified to do business.  It is very common for a bank with a customer in Illinois to have property in Florida or California that the customer wants to use as collateral.  Generally, most state laws do not prohibit lenders from obtaining enforceable mortgages against property in the state.  A lender can get greater comfort as to this issue by requiring the borrower to obtain a doing business endorsement.  The endorsement insures against loss or damage by reason of entry of an order which denies the right to enforce the lien on the grounds that the loan constitutes a violation of the doing business law of the state where the property is located.

Creditors Rights.  Another endorsement which lenders often request is the creditors rights endorsement.  Sometimes it will not be available due to underwriting concerns, but it can be an important endorsement.  It will protect against any loss arising from the loan transaction or related purchase being characterized by a court as a fraudulent transfer or a preference under Federal bankruptcy or state laws.  

Conclusion.  Every loan is different and whether or not a particular endorsement is appropriate must be analyzed on a case by case basis.  However, it is helpful to know that there is much help that can be obtained from the title company to protect the mortgage if one avails oneself of the proper endorsements.  

John Washburn is the Department Chair of Gould & Ratner's Corporate and Commercial Group.  He may be reached at 312.899.1609 or via email at jwashburn@gouldratner.com.