Bulletin: NJ000028

Dear Associates:

A new policy is now available to insure the continued priority of certain mortgages which contain "balloon" due dates.

Balloon mortgages are generally mortgages which are fully due and payable before the payments required by the terms of the mortgage note will fully repay the loan amount. For example, a mortgage may have been made January 1, 1993 for $100,000.00 with payments that are amortizing the loan at 10% per cent over thirty years. The long amortization period permits a lower monthly payment. However, the note and mortgage contain a "balloon" payment provision which requires the entire debt to be paid in five years, i.e. January 1, 1998. The borrower must either repay the loan in full, or refinance the loan on or before January 1, 1998 or face default.

The balloon feature is used in some loans to protect the lender from a significant change in the interest rate. If interest rates rise, the lender does not have to wait thirty years before it can call the loan. The benefit to the borrower is lower monthly payments. These loans are particularly attractive to borrowers who intend to sell the property within the five year balloon period or who believe interest rates will drop during the period.

As these balloon mortgages come due many lenders are willing to "roll over" the loans if the borrower is still credit worthy. Naturally the lenders believe that since they already have title insurance on their existing mortgage the title charges for the "roll over" should be less than the refinance rate. FNMA and other lenders holding these balloon mortgages in the secondary mortgage market have requested a special policy to cover the "roll over" aspect of the loan.

The BALLOON LOAN MODIFICATION LIMITED POLICY was filed by the New Jersey Land Title Rating Bureau and approved by the New Jersey Department of Insurance and Banking to accommodate the insuring of the "roll over" feature of these mortgages. The form is a policy, not an endorsement and therefore can be issued even if you or Stewart did not insure the original loan policy.

UNDERWRITING PROCEDURE:

Since the policy insures only the validity of the "roll over" and the continued priority of the mortgage, it is not necessary to do a full examination of the title. If you have insured the mortgage which will be "rolled over", you need only continue the title through the recording of the mortgage modification which extends the due date of the loan (Note: the modification may also change other terms of the loan such as the interest rate and payment terms, but may not increase the principle amount of the loan). If you did not insure the mortgage, it will be necessary for you to do a present owner search to verify the priority and lien status of the mortgage being modified. Should the searches disclose any liens filed or recorded either after the date of the mortgage being modified or which were not properly discharged at the time the original mortgage was recorded, such liens must be discharged of record before the BALLOON LOAN MODIFICATION POLICY may be issued. You may not rely on the mortgage modification statute to remove intervening liens between the date of the original mortgage and the date of the recording of the mortgage modification. If you are requested to do so, you must receive specific approval by calling the state office.

PERMITTED CHARGES:

Although you are required to do either a continuation search or a present owner search as set forth above (which searches must include a county search, upper court judgment search and proof of payment of taxes and assessments), the Department has only approved a $50.00 examination charge for these policies. This $50.00 examination charge includes, all outside search fees, your title examination, preparation of a commitment, if required, and policy production.

The underwriting charge for the policy is $150.00. In accordance with the terms of your Underwriting Agreement with Stewart you must remit to Stewart its portion of this charge. These policies must be reported on the standard remittance reporting forms and these policies should be coded 454.

A copy of the following new policy form, to be added to your New Jersey Manual of Forms is available through the references at the end of this bulletin:

NJRB 2-13 Balloon Modification Limited Policy (page 178).

This form was effective on January 5, 1998 and will be available shortly from our forms department in Houston.

The updated index to the New Jersey Manual of Forms is available from the New Jersey State Office.

If you have any questions pertaining to this new policy, or its permitted use, please do not hesitate to contact the New Jersey State office.