What is a mortgagee clause?

You might be familiar with this term if you “own” a home, but still owe money to the bank via your mortgage. Let’s square away some basic mortgagee clause definitions before we go into detail.

Mortgagor: This is you. The borrower.

Mortgagee: This is your lender. It may be a bank, credit union or any other entity that lends you money to purchase a home. In a mortgage transaction, the lender serves as a mortgagee. Ninety-nine percent of the time, you are borrowing money and paying it back with interest.

However, it may be possible that you have worked out a deal, likely with a family member, in which you only have to pay back the principal and not interest. Lucky you.

Most people get a mortgage to finance their home or real estate. In order to minimize the risk, the lender in the transaction makes a priority legal interest in the value of the property, reducing the probability if the mortgage is not paid in full if the borrower defaults on the mortgage loan. This can be done through perfected lien and title ownership.

A mortgagee represents the interests of the financial institution in the mortgage deal.

The rest you should already know; when you borrow money to purchase any property, the property itself acts as the collateral on the loan. The home is taken back, usually through foreclosure proceedings, in the event you stop making payments.

This scenario has become all too familiar as one of the worst outcomes of the real estate bubble that popped and sent the U.S. financial markets into a tailspin in 2007.

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What is a mortgagee protection clause?

The mortgagee clause is the legal description of the entity that has financial interest in any piece of property. Typically, the mortgagee clause contains the name and address of the mortgage lender as well as the loan number. Pretty straightforward.

You may also see the following letters or words contained in the mortgagee clause: ISAOA & ATIMA. These are the ones that give people trouble.

ISAOA: This stands for “Its successors and or assigns.” This simply means the rights of the mortgagee can be transferred to any entity that purchases your bank (and subsequently now owns your mortgage) or that the bank can “assign” the rights of financial indemnity (in the event of a loss) to another company. This is when your loan is sold or serviced by a different organization than that which lent you the money…which is common nowadays.

ATIMA: This stands for “As their interests may appear.” This basically means the same as ISAOA. Ultimately, it is legal speak that guarantees the rights of indemnification to the entity that lends money for property, rather than to you.

The mortgage clause is a protective provisional agreement between the lender and property insurance provider. This type of clause protects the lender/loan provider from financial losses in the event the mortgage holder becomes damaged. The mortgage clause indicates that if the property incurs loss or damage, the insurance company would make mortgage payments to the mortgageee.

In a real estate transaction, a mortgagee provides a mortgage loan to a mortgagor who offers the title of the property as a collateral. So, if a mortgagor cannot pay the monthly mortgage payment and defaults on the loan, the mortgagee can foreclose on the property and sell it in order to reimburse the money.

However, if the property is damaged, the mortgagee’s investment is at risk. That’s why the mortgagee clause comes in, to ensure that the mortgagee will be paid out even if the mortgagor is responsible for the damage to the property.

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What does a mortgagee clause look like?

BAC Home Loans Servicing, LP
ISAOA/ATIMA
PO BOX 12345
Dallas, TX 75087
Loan Number: 1234567890

How It Works

It is important because it stipulates who has legal right to financial reimbursement in the event the property in question is devalued by a loss.

If you take out a loan to buy a home, you must purchase insurance to protect the lender’s financial interest in the property, often referred to as a loss payee. If the home were to suffer a loss, perhaps a fire, the insurance company would make sure to pay any money due to satisfy the lender’s financial interest.

You may be asked to provide the mortgagee clause when you switch homeowners insurance companies or first purchase a home. You will remember the requirement to purchase hazard insurance in order to satisfy lender requirements.

Your new insurance company is simply making sure they have an exact record of who has financial interest in the property. That way, if there is a loss, they can make sure the right people get the money owed to them.

Related: Is homeowners insurance included in the mortgage?

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