Open-End Mortgages and Protective Advances: An Overview

What is an open-end mortgage? It is a mortgage that secures unpaid balances of loan advances that are made after the mortgage is delivered to the county recorder for recording, but only to the extent that the total unpaid loan principal does not exceed the maximum amount of loan indebtedness which the mortgage states may be outstanding at any time.   With such a mortgage a borrower could repay principal on a mortgage loan and then borrow additional funds, all secured by the same originally recorded mortgage up to the stated cap.

For the lender to ensure its lien placed on the borrower’s real property secures these advances, the mortgage must comply with O.R.C. 5301.232.

O.R.C. 5301.232 requires the mortgage must state:

·         that the parties intend the mortgage to secure any future advances;

·         the maximum amount of unpaid loan indebtedness, exclusive on interest, that may be outstanding at any time; and

·         at the beginning, the words “Open-end mortgage.”

However, there are certain exceptions to the lender maintaining a first priority lien on the entire outstanding balance under its mortgage loan.  First, if the lender receives written notice  of a lien or encumbrance on the real property that is subordinate to lender’s lien, and lender proceeds to make an advance to borrower that it was not obligated to make, then the outstanding balance of the advance will not receive priority over the subordinate lien or encumbrance. Second, the same result may occur with respect to mechanic’s liens on the real property. The lender will not maintain its senior secured position on advances it makes after receiving notice of a mechanic’s lien if it was not obligated to make the advance.  (See O.R.C. 5301.232(D) regarding requirements for any notice.)  The lender is “obligated” to make the advance if it has a contractual commitment to make the advance, even though the making of the advance is conditioned upon the occurrence or existence, or the failure to occur or exist, of any event or fact.

What about funds advanced by a lender to protect its secured position on the mortgaged property?  O.R.C. 5301.233 addresses advances a lender might make that are frequently referred to as “protective advances”, such as payment of taxes, assessments, insurance premiums or costs incurred for the protection of the mortgaged premises.  These protective advances, if unpaid by the borrower, may also be secured by the mortgage if the mortgage states that it is intended to secure the unpaid balance of such advances.  A mortgage that complies with this revised code section is a lien on the premises from the time the mortgage was recorded for the full amount of such advances plus interest, regardless of when the advances were made.