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."

Servicers face a tradeoff between operational efficiency and legal risk when deciding whether to record loan modification agreements. Not recording can speed workflow and reduce fees, but may expose mortgage liens to junior-mortgagee priority challenges, especially if foreclosure or default rates rise. Investor and insurer requirements often mandate recording, but state statutes and case law vary. In the absence of clear mandates, servicers should evaluate factors such as capitalized arrearages, modified interest rates, remaining mortgage term, and modified maturity date. Regular compliance review of recording policies and coordination with investors and counsel can mitigate lien-priority risk.

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