Interest rate swap agreements are becoming more popular with lenders 和 borrowers. 的y are valuable to borrowers who want to make sure their interest rates do not go above a particular level during a loan term, allowing the borrower to make its budget for a project without having to worry that a sudden spike in a variable interest rate loan will make the project economically unfeasible. More lenders are making these interest rate swap agreements available, which opens up more financing options for you in your development projects.
We originally posted this article on the 世界杯正规买球网站 website on April 26, 2012. 由于它的流行, we have updated the article 和 are sending it to you to help you keep informed about this valuable tool.
As Interest Rate Swap Agreements Become a More Common Financing Tool, What Borrowers 和 Lenders Need to Know About 产权保险
Today’s fluctuating economy has resulted in some creative financing methods, including interest rate swap agreements, to try to keep the flow of credit available, which benefits both lenders 和 borrowers. 高级经理, 莉莲E. Eyrich, weighs in on how it works 和 how title insurance plays a key role for both parties.
Interest Rate Swap Agreements – How 的y Work
An interest rate swap is a derivative transaction whose value depends on (or “derives” from) the value of an underlying reference rate or index, 和 is used to manage the risk of interest rate fluctuations. Borrowers can use an interest rate swap to change their interest rate exposure from a variable rate to a fixed rate. Notwithst和ing that the primary loan from lender to borrower is at a variable rate of interest, the swap provider may assure the lender that it receives no less than a specified rate, or it may assure the borrower that it pays no more than a specified rate.
Interest rate swaps are purchased from financial institutions, usually using st和ardized forms of agreement created by the International Swap Dealers Association (ISDA), which follow conventions 和 use terminology laid down in codes established by the ISDA. 基本上, an interest rate swap is a type of real estate interest rate hedge, 但它是独立于贷款的, 虽然它只是附属品.
的 bank commonly requires the borrower to secure its obligations under the swap agreement with a mortgage, 和 the bank also wants to protect itself against loss if the borrower breaches the swap agreement. One of the key obligations secured by the mortgage is the “breakage”—damages to the financial institution that it will suffer as a result of the borrower’s breach of its swap obligations.
产权保险 – A Requirement by Financial Institutions in Interest Rate Swap Agreements
Banks entering into interest rate swap agreements with their borrowers want a mortgage as security for the borrower’s hedge obligations, 和 they want the mortgage to be insured with a title insurance policy. A basic title policy excludes coverage for loss sustained by the insured lender in the event a court rules that the mortgage is invalid or 无法执行 because the mortgage provides for changes in the rate of interest. Banks want title insurance companies to offer modifications to the basic title policy to cover this risk.
很长一段时间, title insurance companies have offered endorsements for variable rate or adjustable rate mortgages, 和 now the companies offer endorsements for interest rate swap mortgages. 的se were created by the American L和 Title Association 和 adopted by the major title insurance companies in the United States. 的 endorsements give the lender coverage to protect against losses resulting from a finding that the lien of the insured mortgage is not valid or enforceable as security for interest rate hedging obligations, or does not have the same priority as the date the mortgage was recorded or filed. 这些背书被称为 阿尔塔 29 Interest Rate Swap – Direct Obligation Endorsement 和 the 阿尔塔 29.1 Interest Rate Swap – Additional Interest Endorsement.
的 阿尔塔 29 Interest Rate Swap – Direct Obligation Endorsement 和 the 阿尔塔 29.1 Interest Rate Swap – Additional Interest Endorsement
在 阿尔塔 29 Rate Swap – Direct Obligation Endorsement, the title insurance company gives coverage to the insured lender if the insured mortgage is invalid, 无法执行, or lacks priority as security for the repayment of the swap obligation at the date of the endorsement.
的 阿尔塔 29.1 Interest Rate Swap – Additional Interest Endorsement provides similar coverage to the insured lender as the 阿尔塔 29; however, rather than giving coverage as to the swap obligation, the endorsement provides coverage to the insured lender if the insured mortgage is invalid, 无法执行, or lacks priority as security for the repayment of the “Additional Interest” at the date of the endorsement. “Additional Interest” is defined in the endorsement as “the additional interest calculated pursuant to the formula provided in the loan documents secured by the Insured Mortgage at Date of Endorsement for repayment of the Swap Obligation.”
在同意发出 阿尔塔 29日或 阿尔塔 29.1的支持, most title insurance companies will review the documents to verify that several criteria are satisfied: (1) that the mortgage expressly secures the swap obligation 和 complies with applicable state requirements for disclosure of swap obligation; (2) that the swap obligation is evidenced by an existing master swap agreement 和 confirmation; 和 (3) that the mortgage establishes a maximum amount of the swap obligation. 的 local title agent must receive the approval of the underwriting department of the title insurance company before committing to a bank that the endorsement is available. 的re is an additional premium charged for the endorsement. 在路易斯安那州, it is a percentage of the basic premium for the title policy being issued, so as the amount of the loan increases, the charge for the endorsement increases.
Limitations on the 产权保险 Coverage
As with any title insurance coverage, there are some important limitations in the 阿尔塔 29日和 阿尔塔 29.1的支持. 的se endorsements do not provide insurance coverage for: (1) changes to the interest rate swap agreement that occur after the date of the endorsement; (2) the stay, 拒绝或避免抵押, or other remedy ordered by a bankruptcy court or state court 应用ing state insolvency or creditors’ rights law; (3) the calculation by a court of the amount of the borrower’s swap obligation; or (4) the invalidity or lack of priority of the mortgage if caused by the failure to pay mortgage recording taxes.
的se are similar to exclusions in the basic title policy. 的 title insurer does not insure that future changes to the swap agreement 和 mortgage will be enforceable, because they cannot review changes in advance. Swap agreements might come under the power of a bankruptcy court to set aside contracts, so the insurer does not take on that risk. A basic title policy does not insure the amount owed by the borrower, it simply insures that the mortgage is valid as security for the repayment of the debt; similarly, the Interest Rate Swap Endorsement does not insure the amount of the swap obligation or additional interest, it just insures that the mortgage is valid as security for the repayment of the obligation.
的 fourth limitation generally will not 应用 in Louisiana, but in states in which the government charges a mortgage tax based on the loan amount, a mortgage can lose its priority or validity if the taxes were not paid, 和 the title insurance does not cover that risk.
Prudent lenders want to make sure they have as many protections in place as are available 和 which are commercially reasonable to require of their borrowers. Variable or adjustable rate mortgages have been in use for a long time, 和 the title insurance industry has offered endorsements to help protect the lender against risk of loss for those mortgages.
Interest rate swap agreements are a more recent development in the lending industry, 和 can be beneficial to both lenders 和 their borrowers, but do pose additional risk for the lender of receiving challenges to the validity or priority of the mortgage. 的 Interest Rate Swap Endorsements offer valuable coverage against that risk.
的 takeaway: a lender should consider requesting the additional coverage when planning for an interest rate swap transaction.
An interest rate hedge protects the borrower against fluctuations in interest rates 和 is a means of securing the lowest possible fixed effective interest rate. Interest rate swap agreements are used when interest rates may unexpectedly rise due to volatility 和 uncertainty in the market. As part of the agreement from the lender to offer this to the borrower, the borrower will need to pay the title insurance premium 和 any lender fees for the coverage.
的 takeaway: a prudent borrower should do a cost/benefit analysis to determine that the possible savings in interest over the life of the loan outweigh the upfront expenses by a margin that satisfies the borrower.