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10 Good Reasons For Lenders To Say No To Priority Losses
By Matt Unangst, 23 Jan 00:21
1. Goodwill
Permitting the borrower to start construction before the lender’s deed of trust is recorded allows for the possibility that the title company refuses to accept an indemnity to issue the policy without exceptions for possible mechanics’ liens. A refusal to accept such an indemnity will prevent the lender from funding the loan, fostering enmity between borrower and lender.
2. Higher Costs
No matter if the title company winds up issuing the policy despite the lack of an indemnity or not, the title company may demand more money after recording any mechanics’ liens. The hours spent by the lender’s senior management and legal department will be expensive.
3. Closing Delays
A title company does not inspect a property for priority of a deed of trust until the recording of the deed is anticipated. If the company discovers that construction has begun when they are inspecting, closing will be delayed until the title company can gather the facts necessary to determine their willingness to accept the risk due to construction prior to the deed of trust being recorded.
4. Litigation Delays
Mechanics’ liens can delay the sale of a loan or its payoff because the title company may challenge the liens in court. The court process can last months, even years, during which time the loan cannot be sold or paid off. This deprives the lender of the control available with prior recordation of the deed.
5. Loss of Take-Out Lender
Recorded liens prevent a take-out lender from buying a loan or making a new one. Legally, many lenders are required to have a first lien position. An issuance of special insurance by a title insurer does not cover these requirements.
6. Marketability of Title
Mechanics’ liens may dissuade a possible buyer from buying the property, causing loaned funds to be tied up longer than originally expected, lowering earnings for the lender.
7. Negative Publicity
In a lawsuit, the lender’s name is used, not the title company’s. This can only have a negative affect for the lender’s image.
8. Bankruptcy Delays
A borrower could declare bankruptcy in order to avoid foreclosure on a mechanics’ lien. This results in the lender’s money being tied up far longer than what was anticipated at the time of the loan’s issuance.
9. Foreclosure Problems
A deed of trust issued before construction starts will usually eliminate any mechanics’ liens. A deed of trust issued after construction begins will not have the same effect. All liens having to do with construction have priority over the deed of trust, even if the deed of trust is recorded before the lien’s claimant began work. All lien claimants’ claims are dated from the date the construction began.
10. The Lender Loses the Control That Comes with Prior Recordation
The lender must anticipate any possible issues that may arise by refusing to issue a loan without the deed of trust having already been recorded. Any claims arising on a deed of trust issued prior to the start of construction has priority over mechanics’ liens arising from that construction, protecting the lender.
Tags: home loans foreclosure priority losses