What are SWAP Endorsements & When Can they be Used? img

What are SWAP Endorsements & When Can they be Used?

calender icon 11/15/2022    poster icon  Mark Goodman

A SWAP endorsement ensures the priority of a mortgage in the event of a swap. A swap is a situation in which the borrower has decided to take out a mortgage and is either taking out that mortgage at a fixed interest rate or an adjustable rate. In order to hedge their bets against potential changes in the economy where the interest rate may go up or down, they enter into something called a swap agreement with another party.

In the event that the interest rates go up or down to a certain extent they can then swap interest rates with that other borrower on a different property. So they could swap from a fixed interest rate to an adjustable rate if the economy changes to a certain degree. It’s basically a hedge against changes in the economy.

We provide coverage in the form of a swap endorsement ensuring the priority of the mortgage will not change based upon the swap of the interest rate from the fixed to the adjustable or vice versa.

In order to provide the lender with the swap endorsement coverage ensuring that the priority of the mortgage remains in place despite the swap, we need to be provided with some documentation to review. One such document is called the master agreement for the swap transaction. Another is any of the attached addenda to that swap agreement. We also need to review the mortgage to make sure that the mortgage has terminology in it stating that there is a swap involved in this transaction.

We review those documents and then, ultimately, we want to see a document called the confirmation of the swap transaction when the swap is actually concluded. We want to review those documents in order to provide the swap endorsement. In reviewing those documents there may be some changes that we require to the mortgage or the swap documentation. Our underwriters generally consider a swap endorsement to be something called an extra hazardous risk and they generally want to review this documentation as well and provide approval to us to provide that type of an endorsement. So the earlier we get the swap documentation, the better.