- November 22, 2010
- All Texas Issuing Offices
- Equitable Subrogation
The doctrine of equitable subrogation places a person or entity providing funds to pay off an existing loan with the same lien position as the existing loan. This doctrine appears to be under attack from many quarters and although it resolves many issues, the uncertainties require modification to our former expansive use of equitable subrogation.
One issue that frequently arises is the release of a lien instead of an assignment of that lien by the current lien holder. Stewart policy is that equitable subrogation can be relied on if the new deed of trust has express language that the lien is given in renewal and extension of the existing/prior lien. Reasonable detail as to the existing/prior lien is required: At least the lender, amount and date must be shown. Recording information is strongly preferred. If no renewal and extension language or reasonable detail is shown, do not rely on equitable subrogation without approval from an underwriter.
An acceptable renewal and extension clause will read substantially as follows:
The Note renews and extends the balance of _______ DOLLARS ($______) that Grantor owes on a prior note in the original principal amount of ______ DOLLARS ($______which is dated ______, executed by______, and payable to the order of______. The prior note is more fully described in and secured by a deed of trust on the Property, which is dated ______and recorded in ______of the real property records of ______County, Texas. Grantor acknowledges that the lien securing the prior note is valid, that it subsists against the Property and that by this deed of trust it is renewed and extended in full force to secure payment of the Note.
Some lenders will put into their loan documents a generic subrogation clause rather than use renewal and extension language. We are willing to rely on this clause at this time. Such clauses will read substantially as follows: Bank shall be subrogated to any liens, claims and encumbrances that are paid or discharged through payment by Bank or with any loan proceeds, whether such matters are cancelled, released or discharged by the owner/holder thereof.
Unless the new deed of trust carries renewal and extension language or equitable subrogation language similar to the language provided above, do not insure over matters that would be subordinate if the prior lien was assigned rather than released without underwriter approval.
If you have any questions relating to this or other bulletins, please contact your local underwriting personnel or Stewart Legal Services.
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