GLITCHES AND GOTHCHAS to Avoid in Title Insurance New Mexico Banker’ Association Annual Lender’s Conference April 7, 2017

Gordon S. Little, Esq., Of Counsel, Miller Stratvert P.A. Presented By: Gordon S. Little, Esq., Of Counsel, Miller Stratvert P.A. 505-842-4765 glittle@mstlaw.com Orlando Lucero, Esq. Counsel, of Fidelity National Title 505-332-6291 Orlando.Lucero@fnf.com Elizabeth Mason, Esq. Counsel, First American Title 505-888-8206 emason@firstam.com Stephen Rhoades, Esq. (retired, formerly Council to nearly everyone) 505-235-1551 srhoadesnm@gmail.com

If this Banker finds any loan coverage – You’re fired !

Disclaimer: Use of Materials and Program Discussion: Information, materials and comments of the presenters do not represent the policies, opinions, procedures, or practices of the speakers, their respective employers or clients. Rather, information is presented as general industry information, based on the speakers’ general background and experience. These materials and the ideas and issues discussed by the presenters are not intended, and may not be taken, as legal, coverage, or technical advice, opinions, or representation. The presentation, materials, and discussion are intended solely as a discussion of possible issues, presented for general, theoretical, and educational review. Nothing contained herein, discussed during the program, or suggested by the presenters or any participant may be relied on as any form of legal, coverage, technical, or ethical advice.

Zoning and Other Coverage

ZONING ENDORSEMENTS NM 64 Zoning – Unimproved Land Endorsement NM 64.1 Zoning – Unimproved Land – No Applicable Zoning Ordinances Endorsement NM 65 Zoning – Completed Structure Endorsement NM 65.1 Zoning – Land Under Development Endorsement NM 65.2 Zoning – Completed Structure – No Applicable Zoning Ordinances Endorsement

There is no such thing as a “Construction Loan Policy” NM abolished the Construction Loan Policy in 2014 Loan Policies are either Non-expiring or Expire in two (2) years. Check Schedule B - Part I (Exceptions from Coverage) for:

Broken Lien Priority = Lien Claims by all Subs and Suppliers - - - ahead of your Mortgage

NM Mechanics Lien Statute: 48-2-5. Preference over other encumbrances NM Mechanics Lien Statute: 48-2-5. Preference over other encumbrances. (1991) A. (Mechanics and Materialmen’s liens) are preferred to any lien, mortgage or other encumbrance which may have attached subsequent to the time when the building, improvement or structure was commenced, work done or materials were commenced to be furnished; also to any lien, mortgage or other encumbrance of which the lienholder had no notice and which was unrecorded at the time the building, improvement or structure was commenced, work done or the materials were commenced to be furnished. B. Liens filed by registered surveyors shall have priority equal with other mechanics' and materialmen's liens, but work performed by registered surveyors shall not constitute the commencement of construction. (underlining added) This means – every contractor, every subcontractor, and every materials supplier on the project has a lien ahead of a broken priority mortgage. Title Companies are not required to insure against mechanics liens if there is a broken priority. Even if the Title Company insures, the cost is great and coverage can be very limited. (or functionally of no value to the lender)

Title Company Options – Broken Mortgage Priority Refuse to insure for Mechanics Liens. Mortgage is not a 1st lien; every Claim of Lien filed is ahead of the Mortgage 2. NM 83 - Insure only against claims for work listed for payment in advance and actually paid out. 3. NM 83.1 - Insure only against claims already paid by the title company or by the lender with written approval by the title company. 4. NM 83.2 - Insure only against claims already paid by the lender. Cost = standard policy cost, plus $5/1,000 (extra $25,000 for a $5 million loan policy)

Loan Title Insurance Worth what your Customer pays For it ? ? ?

DEFECTS KNOWN TO THE INSURED AND - OTHER WAYS TO LOOSE COVERAGE Exclusions from Coverage, Item 3(b): “loss or damage, costs, attorneys’ fees, or expenses that arise by reason of: . . . 3. Defects, liens, encumbrances, adverse claims or other matters . . . (b) not Known to the Company, not recorded in the Public Records at Date of Policy, but Known to the Insured Claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the Insured Claimant became an Insured under this policy . . .” “Known” means - “Actual knowledge, not constructive knowledge or notice that may be imputed to an Insured by reason of the Public Records or any other records that impart constructive notice of matters affecting Title.” Conditions, Item 1(h).

What the Lender knows at the time of the loan – could result in a denial of coverage! Examples: start of construction before Mortgage recording signature authority or false signature defects disclosed in the Appraisal ( boundary conflicts, easements) tenants in possession, unpaid assessments litigation not “visible” to the title company zoning violations false or incorrect affidavit by borrower to title company, if Lender is aware of off-record matters or false statement.

MORTGAGE MODIFICATON ENDORSEMENTS 3 forms available: NM 80: standard NM 80.1: insures over subordinated jr. lien NM 80.2: insures additional advance (new loan proceeds) Individual title company underwriting standards apply The Modification MUST NOT include a “Novation” of the debt. A Note Modification = OK A Renewal Note = -0- coverage under the existing loan policy Solution – if you have an loan policy on the Mortgage, ALWAYS modify the note. NEVER replace the original note with a renewal note.

Lender Actions Can Limit Coverage The Loan policy also excludes coverage from – “matters created, suffered, assumed, or agreed to” by the Insured. Claims related to off record agreements with the borrower or actions by the lender that may impact enforcement of the loan may be denied on this basis. Exclusions from Coverage, Item 3(a). Examples of Post-Closing Lender actions: Actual Release by Lender Actions resulting in waiver or release of Mortgage provisions Lender action which result in limiting remedies in loan documents

Insuring Mortgages with Property in two (or more) Counties Include legals for each Counties; record in each County; single policy for the Mortgage. Use separate Mortgage for each County; Policy insures all Mortgages (all Mortgages must secure the same loan) [Single Policy amount must be allocated between Counties/Properties.] Separate Mortgage, separate Policy for each County. [ Cover amount must be allocated between each policy]

Multiple Properties – Multiple Mortgages – Continued BUT - Single Loan Policy NOT allowed for: Multiple Mortgages - same property (cannot insure a 1st and 2nd liens on same policy) Multiple Mortgages – for separate loans (requires separate policies0

SURVEY COVERAGE Standard Exception 3 excludes coverage for survey problems: “(3)           Encroachments, overlaps, conflicts in boundary lines, shortages in area, or other matter which would be disclosed by an accurate survey and inspection of the premises.” (underlining added) The exception can be deleted only by: furnishing a recent survey to the Title Company, (showing no problems) “shortage of area” exception may/may not be removed exceptions in the survey will be listed as exceptions in the policy Survey must be “acceptable” to the title company

NM HLPA – Does it apply to Commercial Loans? Commercial Loans may include Mortgage on the Owner/Guarantor’s house The Home Loan Protection Act defines a “home loan” as any loan: secured by a mortgage (or deed of trust), on real estate in NM, with a 1-4 family structure, occupied by a borrower as the borrower's principal residence, When the loan size does not exeed FNMA max (currently $424,100). “borrower” – includes a co-borrower, cosigner, or guarantor. Special provisions of the HLPA supersede provisions in loan documents. violation of the HLPA constitutes an unfair or deceptive trade practice pursuant to the Unfair Practices Act – think treble damages and attorney fees.

Deed of Trust - Who can be the Trustee?? If qualified to do business in New Mexico, a: bank, trust company, savings and loan association, escrow company, or title insurance company (including an agent or underwriter); (2) A New Mexico Attorney; or (3) an organization which is licensed, or regulated by the FDIC, OCC, FHLB, or NCUA; or the parent or wholly owned subsidiary of an above financial institution. BUT - - No trustee of a deed of trust (or parent or subsidiary of a corporate trustee which is a trustee of a deed of trust) shall be the beneficiary of the deed of trust. (your bank or an affiliates - cannot be the Trustee) (underlining added, §§48-10-6. Trustee of deed of trust; qualification.)

OTHER COMMON ENDORSEMENTS NM 17 Revolving Credit Endorsement. This insures that the amount of insurance will vary depending on the outstanding balance of the loan and insures the priority of all advances under the loan. NM 25 Additional Advance Endorsement. This insures the validity and priority of additional advances under an open end mortgage. NM 62 Assignment of Rents or Leases Endorsement. This insures that there are no defects in the execution of an assignment of lessor’s interest in a particular lease or rents and no prior assignments of record. The cost is $100. NM 70 Commercial Environmental Lien Endorsement. This insures against existing recorded federal or state environmental protection liens. NM 14 Variable Rate Mortgage Endorsement. This insures against invalidity, unenforceability or loss of priority because the loan has a variable rate. NM 51 Land Abuts Street Endorsement.* This insures that the insured property is contiguous to a public right of way. NM 52 Location Endorsement.* This insures that the named improvements are located on the land and that the improvements are identified by an address. NM 67 Access and Entry Endorsement.* This insures that the property as actual physical access to a public right of way (as a title insurance policy only insures legal access, not actual access). NM 69 Utility Access Endorsement.* This insures against loss if there is a lack of right of access to specific utilities due to gaps or gores or the termination of easement rights. NM 78 Same as Survey Endorsement.* This insures that insured land is the same land shown on the survey. * Survey required.

“MORTGAGE OF CONVENIENCE” Not a title company or legal term. Not provided for in title company regulations or forms. “Term of Art” ; historically a mortgage: filed to establish lien priority, to allow the start of construction, when the lender has not yet committed a loan. NMSA 48-7-9 allows a mortgage to secure “future advances”, . . .and the mortgage shall have priority from time of recording, . . .whether advances are obligatory or discretionary . . . So, what’s the problem?? [ DETAILS PROVIDED ONLY TO PROGRAM ATTENDEES ]