Deeds of Trust Collateral Update

On July 11, FHLBank communicated that we were re-evaluating a collateral issue regarding the eligibility of first mortgage loans with deeds of trust with unlimited future advance language. Specifically, FHLBank viewed loans with deeds of trust with an unlimited future advance language as eligible collateral as long as the current unpaid principal balance did not exceed the recorded deed of trust amount. In the event the current unpaid principal balance exceeded the recorded amount, the loan was deemed ineligible given the underwriting requirement that states, “The mortgage amount must equal or exceed outstanding principal amount on the note.” The unlimited future advance language made it difficult to ascertain a value for the amount of the deed of trust, which created a challenge for members to comply with the underwriting requirement identified in the Schedule of Eligible Collateral in FHLBank’s Member Products and Services Guide.

However, after receiving additional guidance on this matter from outside counsel, FHLBank will consider assets pledged with the unlimited future advance clause for members that have executed an Advance Pledge and Security Agreement – Blanket Pledge as fully secured and eligible collateral under the following conditions:

• First mortgage loans with unlimited future advance clauses where the unpaid principal balance exceeds the amount listed within the deed of trust: FHLBank will require the member obtain a title search which identifies no other liens, specifically construction liens, impede the future advance most recently made; and
• The first mortgage loans must meet all other underwriting requirements identified in the Schedule of Eligible Collateral.

The proposed process change will not require amendments to the Member Products Policy underwriting guidelines, but is rather an interpretation shift of the underwriting requirement highlighted above. In addition, this proposed process change is effective immediately.

Also, a special thanks to both Allen Fugate, Attorney at Law, and Mike Jacobson, President & CEO of NebraskaLand National Bank, for bringing this issue to FHLBank’s attention and assisting with a prudent solution to help expand the eligible collateral base for our Nebraska members.

If you have any questions, please contact Lance Liby, Chief Credit Officer, at 785.478.8140 or Dedra Duran-Gray, Director of Collateral Safekeeping Operations, at 785.478.8203.