July 15, 2015
When lenders modify the terms of a mortgage loan they should be careful to obtain the necessary consents from any junior lien holders and to record the necessary documents memorializing the modification. In general, under New York law successive mortgages on the same property are entitled to priority in the order in which their respective mortgage liens have attached to the property. The mortgage lien generally attaches to the property when it is recorded in the county clerk’s office of the county in which the property is located.
A senior mortgage lien holder may enter into an agreement with a mortgagor/ borrower modifying the terms of the underlying note or mortgage without obtaining the consent of any junior lien holders. However, if the modification prejudices the rights of the junior lien holder or impairs its security, the senior lien holder must obtain the junior lien holder’s consent to avoid potentially losing its senior lien position to the junior lien holder.
Courts generally have held that (1) changing the interest rate on a loan, or (2) consolidating additional interest charges within the lien of the mortgage loan amount does prejudice a junior lien holder as these actions will increase the total amount of indebtedness due to the senior lien holder. Courts have also held that a senior lien holder does not prejudice a junior lien holder when it only extends the time of payment on the mortgage loan.
In general, lenders should be cautious when modifying mortgage loans and should as a matter of course record modification agreements whenever they modify the terms of a mortgage loan. Even if a junior lien holder does not exist at the time of the modification, a lender should record a modification agreement as a junior lien holder may arise in the future and the junior lien holder may rely upon the county clerk’s records in issuing its junior lien. In summary, lenders should always record modification agreements when modifying the terms of a mortgage loan in an effort to maintain their lien priority position.