With refinances flooding our industry like a springtime deluge, we are getting a lot of questions about “reissue rates” and “substitution rates” (also sometimes generally referred to as the “refinance rates”). In some locales, the lenders sending refinance orders are beginning to expect the title insurance agents to automatically apply the discount, whether it qualifies or not. We need to be prepared to handle those expectations and either apply the discount properly or gently push back where the discount is not applicable. Let’s begin with a lesson on the lingo.
The reissue rate is based on a prior owner’s policy. This discounted rate applies where one owner is transferring property to another owner. The important thing to note with the reissue rate is that most, if not all, underwriters have a time limit on how old the original owner’s policy is. Some underwriters require that the original owner’s policy be issued within the last 7 years, while some allow it to go back as far as 10 years. If the ‘Jackson Family’ buys a property in 2018 and purchases an owner’s policy, then sells the property to the ‘Jones Family’ in 2020, this special pricing could apply. However, if the Jackson Family bought the property in 1986 and are now selling in 2020, there is no discounted rate available to the new buyer.
The substitution rate is a discount based on an existing loan policy regarding the same borrower on the same property. A typical refinance for a better rate, or to lower the monthly mortgage payment, is the most common scenario to which the Substitution Rate applies. Another common scenario is when a buyer buys an empty lot with a loan and mortgage, only to later take out another mortgage on the property for the construction of the building. The credit given for a substitution rate is the balance on the existing mortgage (not the face amount of the loan). So, if the Jackson Family has paid off their mortgage and are now putting a new mortgage on the property, they get no substitution rate discount for the first mortgage.
Although some use these terms interchangeably, there is a major difference between a “reissue rate” and “substitution rate”. Some underwriters may use the term “refinance rates” to refer to either of these discounts generally.
Even though you are now a lot smarter when it comes to these discounted rates, keep reading!!! There is a catch.
To issue these discounts, your underwriter requires “proof” of the prior title insurance policies on which you are basing the discount. Different underwriters require different levels of proof and you need to be keenly aware of what your particular underwriter requires. Some require you to obtain an actual copy of the original policy so you have the policy number to submit. Some will allow you to rely on a prior HUD-1 statement showing a line item for the policy premium. When it comes to proof of loan policy, some underwriters with more lax proof requirements agree that if the original loan was in favor of a larger lender (Wells Fargo, Chase, etc.), or one that always requires a title insurance policy and did so at the time that the original loan policy was issued, that mere fact is enough proof of a prior loan policy.
Because of this proof requirement, some title agents only issue discounts if they issued the prior policy or if the same lender is used for the old and new loan. The time and effort that it takes to track down a prior policy may not be worth the premium gained from that order. That is a policy decision that your company will weigh.
***This is not guidance on the actual calculation of discounted insurance rates. The actual discount calculations are done with the specific guidance of your underwriter and maybe automatically calculated with your closing software or web-based closing application.
“Has anyone ever asked you for a prior HUD or CD as part of a refinance?”