Deciding whether to record a new mortgage whenever the bank makes a loan modification will depend on the specific facts of each situation. We can provide a framework for analyzing the issue, but we cannot state whether or not to record a new mortgage in every loan modification situation.
Under applicable Illinois law, if the modified loan is considered a new agreement — a “novation” — the bank should record a new mortgage to secure the new debt. A new agreement is considered a novation if a four-part test is met: there must be (1) a previous valid obligation, (2) a subsequent agreement by all of the parties to the new contract, (3) the extinguishment of the old contract, and (4) the validity of the new contract. First Midwest Bank v. Thunder Road, Inc., 359 Ill. App. 3d 921 (3rd Dist. 2005), citing Aluminum Co. of America v. Home Can Manufacturing Corp., 134 Ill.App.3d 676, 682 (1st Dist. 1985). If a modified loan extinguishes the prior loan, it will be considered a novation, and the Conveyances Act would require recording of the new mortgage before it could take effect. 765 ILCS 5/30. You will have to examine the loan modification documents to see whether they are intended to extinguish and replace the original loan agreement or merely to extend or supplement the original loan agreement.
While the validity of a recording is governed by Illinois law, it is helpful to look to federal law in deciding whether a loan modification is considered a new loan. For example, if a transaction is considered a refinancing under federal regulations, then that would support an argument that the mortgage securing the refinanced loan should be recorded.
Regulation Z and the RESPA regulations state that a refinancing requiring new disclosures occurs only when an existing obligation is “satisfied and replaced by a new obligation undertaken by the same consumer” (Regulation Z) (or “by the same borrower” under RESPA). 12 CFR 1026.20(a)24 CFR 3500.2(b). The regulations also specifically exempt the following transactions from the definition of a “refinancing” (12 CFR 1026.20(a)24 CFR 3500.2(b)):
(1) A renewal of a single payment obligation with no change in the original terms;
(2) A reduction in the annual percentage rate as computed under the Truth in Lending Act with a corresponding change in the payment schedule;
(3) An agreement involving a court proceeding;
(4) A workout agreement, in which a change in the payment schedule or change in collateral requirements is agreed to as a result of the consumer’s default or delinquency, unless the rate is increased or the new amount financed exceeds the unpaid balance plus earned finance charges and premiums for continuation of allowable insurance; and
(5) The renewal of optional insurance purchased by the consumer that is added to an existing transaction, if disclosures relating to the initial purchase were provided.
Also, because most of your mortgages have terms of five years, they will be well within the statute of limitations for mortgages. Under Illinois law, the lien created by a recorded mortgage that does not state the loan’s maturity date will be valid for thirty years after the date of the mortgage. 735 ILCS 5/13-116(b). Further, banks can extend their rights to enforce mortgages beyond thirty years by recording either an extension agreement or affidavit. Id.