Bulletin: MU000040

Dear Associates:

The Company is frequently faced with an underwriting decision to insure the priority of a third party mortgage, deed of trust or trust indenture where there is recorded simultaneously a vendor ("seller") mortgage, deed of trust or trust indenture on the same land. This circumstance poses a special risk to the Company that necessitates the agent making additional requirements or take additional precautions before insuring the priority of the third party purchase money mortgage over that of the vendor purchase money mortgage.

Typically, agents rely upon the recording statutes to determine priority. The Company has not been successful making this argument based upon who recorded first. The

Court usually determines that since both came out of the same transaction that the vendor should be protected and the third party purchase money lender loses.

There have been situations where a title agent, attorney or closer has simply held the vendor purchase money mortgage without recording allowing a significant period of time to elapse between the recording of the third party purchase money mortgage and the vendor purchase money mortgage. The courts have treated such situations quite harshly in some cases pointing to such holding of the vendor mortgage as being an intervening fraud. The result is then that the vendor is elevated in priority over the third party purchase money mortgage, even though a forced period of time existed between the recording time of the mortgages. The courts look at both mortgages as coming out of the same transaction and still favor the vendor.

To resolve the issue, agents must require a subordination agreement executed by the vendor acknowledging the lower priority and recognition of the third party purchase money mortgage as being senior. Both legal treatises and case law on the subject have supported this notion. The subordination agreement and its provisions is an area that deserves its own special treatment and will not be addressed here. Simply stated, such an agreement would need to acknowledge the priority of the third party purchase money mortgage and contain an acknowledgment that the vendor has reviewed the senior mortgage and promissory note. As with any subordination, should there be terms, conditions and limitations contained or inferred from the agreement, there should be an exception added to Schedule B of the policy. Additionally, you must consider that such actions are not in violation of any closing instructions from any lenders concerned in the transaction.

Any questions or concerns should be directed to your underwriting contacts.