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Caught! April 28, 2008

A most wonderful diet to sustain escrow during crunch time. I heard rumors of a secret stash, but this is too much. I won’t name names.

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Title and Escrow - Who Chooses? April 27, 2008

In this post I will address the topic from a practical standpoint, in chronological order, based on ”Common Practice”.  This post is written from the standpoint of “common practice” in the Seattle area, where Title and Escrow are two separate functions, and not combined as they are in “settlement” vs. “escrow” areas.  Areas that have “a settlement or ‘event’ closing”, operate differently.  After reading this, you will likely feel that something should change.  So posting on this topic is a great way to influence change, a side benefit to blogging in “transparent” fashion.

Nothing changes until its weaknesses are illuminated by discussion…so here goes.

1) The first thing an owner does (or the listing agent does on behalf of the owner) is contact a Title Company.  Most often, this is done BEFORE the property is listed for sale.

Most Title companies offer three levels of information/service:

a ) a “listing packet”

b) “Preliminary Title”

c) A full Title Insurance Policy

Often an agent will order a “listing packet” upon first getting a request to visit an owner at their home to discuss the property being listed for sale.  This level of information provides a basic legal description, a plat map, and some basic and general info regarding the property.  Some companies provide sale comps, but most experienced agents don’t rely on the Title Company for “comps” and do their own.  Personally I tell a Title Company not to waste their time or the paper producing comps for me.  I never find them to be useful, or as useful as the ones I do myself.

While in theory “the seller” orders Title as “common practice”, and By Law the Buyer is supposed to choose the Title Company (see RESPA below),  most often the agent has already been in contact with a Title Company before they even meet the seller. 

2) “Preliminary Title” is usually ordered by the agent as soon as they know that “they have the listing”.  Sometimes I do this as a first step, if I know the owners well enough to know that I will be listing the property before I go to the first meeting to discuss getting the property ready for market.  That gives me more info up front than the “listing packet” and saves the Title Company some time, and possibly a few trees, if we get “hard copies” or print out the info.

When an agent lists a property, part of the intitial input into the mls system is a field question that asks “Has Preliminary Title been ordered?”  Then there is a drop down box where you enter “Yes” or “No”.  The presumption is that the answer should be “YES” and often the Title Order # is included in the Agent Remarks section “Title Company is X order #X”.  To comply with RESPA, the buyer is supposed to choose the Title company.  So possibly this provision in the mls listing input should be eliminated.  You be the judge.  For now, that’s how it is.

In order to write an offer on a property, the agent for the buyer needs to access the legal description.  As soon as there is “mutual acceptance” of the contract, the lender needs to access the Title Order by company and Title Order #.  So without regard to the Insurance aspects of Title Insurance, the process of involving a specific Title Company happens long before there is a need to actually insure the property with regard to Title Issues.  At time of offer, the buyer has the option to choose Title and Escrow as part of the offer and is NOT obligated by law or contract to use the one who provided the owner and listing agent with services to date.  Still common practice does not follow that thinking…or at least hasn’t do date.  Maybe the people reading ths post will change that in the future.

3) Title Insurance Policy - Now we get into who pays and who chooses.  Up to this point, no one pays.  If the property never gets “signed around” and escrow is never opened, the Title Company has provided all of the services for free.  The title Company up to this point, provided these FREE services to the listing agent.  The balance is that the agent most often uses the same Title Company all of the time or most of the time, and so there is an offset of paid for services against the free services.  If owners ordered and paid for the services up to this point (vs. the agent), there would likely be a cost for the first stages that are currently offered free of charge if the house never sells.

Here in the Seattle Area we have OWNER’S Title and LENDER’S Title.  Owner’s Title Insurance is the manner in which an owner conveys “clear title” to the buyer.  The cost is based on the Sale Price and is paid for by the seller.  Lender’s Title is all about the buyer.  If it is a cash buyer, there is no Lender’s Title.  If the purchase is financed, then the buyer pays for that portion of the Title Insurance that insures the Lender and is based on the loan amount vs. the Sale Price.

RESPA - Basically RESPA provides that “the owner” gets to choose Title.  In this post I refer to “the owner” as the person who owns the property prior to closing.  Common pactice here is that the owner at time of listing the property “orders title”, at least Preliminary Title.  RESPA (Real Estate Settlement and Procedures Act) “entitles the homeowner to choose a title insurance company when purchasing or refinancing…”  and gives that right to the BUYER as “owner” and not the seller as owner.  In fact any seller who mandates the Title Company to the buyer is subject to a penalty of 3 times the cost of the Title Insurance.  This makes perfect sense in settlement States, but is a bit odd in in escrow States.   But it is what it is.  Back to common practice.

It would seem that the seller should CHOOSE and pay for Owner’s Title and the Buyer should CHOOSE and pay for Lender’s Title, simply due to the fact that the owner and listing agent need to review title information long before the buyer is a known entity.  Practical application and the law do not seem to be in sync here.  Most often the ACTUAL title policy is an automatic via the company that offered Preliminary Title.  To “perfect” the system, there should be a separate administrative charge for the Listing Packet and Preliminary Title that is paid by the seller, and a Buyer Election to choose the Title Insuror, without regard to who provided the a) and b) services.  My opinion, of course.

Up to this point, the agent needs to find the things the owner doesn’t often know about the property.  Or the agent needs to prove that what the owner BELIEVES is so, is accurate, which is not often the case.  We as listing agents are using Title Companies to ascertain liens, easements, encroachments, etc..  We don’t want to find out that the owner is incorrect AFTER the property is in escrow.  Often the owner thinks they own the driveway, when they do not.  By being in contact with the Title Company in advance of listing the property, we often find out that both owners own the driveway.  Sometimes and often four feet each.  In my most recent study of a soon to be listed property, the ownership of the driveway is 4 1/2 feet vs. 3 1/2 feet…odd but true.  Most owners do not know these things, or worse yet are WRONG about these things.  So in my book, misrepresenting the property (IMNSHO) is worse than worrying about waiting for the buyer to be a known factor, before consulting with a Title company. 

Still it is the buyer’s right, under RESPA to choose a different Title  Company later in the process, so the common practice of Preliminary Title moving straight to an ACTUAL POLICY, should not happen as it does, without the buyer’s direct election of Title Company.  From my standpoint this is MORE important in areas where the Title Company is also the Closing Agent…so let’s move on to “choosing escrow”, so you can see why I feel this way.

4) CHOOSING AN ESCROW COMPANY/CLOSING AGENT.  While the Listing Agent may have in the agent remarks field “Title Company X Order # X and Escrow TO BE X or Y”, the escrow company is not utilized or chosen (most times) in advance of the buyer’s offer.  Only Title services are needed prior to offer (with some exceptions).

Most reasonable people agree with me :) that Title should be ordered by the Seller and Escrow should be chosen by the Buyer.

This post is probably going to open a big can of worms, but in the interest of Transparency, the resultant fallout is of value.  Most buyers and sellers get “whooshed” through the whole and very important process of Title and Escrow services.  So talking about it is important, even if we all don’t agree.

It is important to note that NEVER in the 18 years I’ve been in this business have I seen anyone choosing title and escrow services based on cost (or home inspection, or anything important to the process).  Given the relatively minor differences in cost, the small amount you save is not worth the anguish you might later face by having chosen based on cost vs. competency.

When there are five offers on a property, well making a big deal of buyer choosing escrow may not be appropriate.  No one wants to lose the house fighting over who is handling the escrow.  But often, even in multiple offer situations, the listing agent will understand that the buyr should chooses escrow, and Title Company too if they want to.  The problem with the RESPA rule is that if the buyer makes a big stink over  who chooses the Title Company in a multiple offer situation at time of offer, they may not get the house.  No one can prove that they didn’t get the house because of the battle over Title Company.  So for all practical purposes, seller chooses “all services” when there are multiple offers often wins, because of market conditions.

But with the market changing, it is important to highlight that common practice over who chooses should CHANGE when there is only one buyer in the room, and the “common practice” of a strong Seller’s Market should not continue into a balanced or buyer’s market.  That is one of the reasons I am writing this post at this time.  My biggest criticism of “common practice” is that agents do not make enough effort to swing it back and forth to match “market conditions”. 

Common Practice should reflect the actual needs of the buyer and the seller and change as market conditions dictate, and not simply be “the way we have always done it”.

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Salvaging a dead transaction: when a client refuses to sign. April 10, 2008

Never underestimate the power of a cup of coffee

A few months ago I met with a client at their home in the Woodinville area. After introducing ourselves to each other we sat down at the kitchen table and started going over paperwork and loan documents. The gentleman slowly started to go over the loan documents in a methodical manner which is not unusual. Prior to each signing appoinment one of the very first things I mention to our client is that I’m not in a rush and they can take all the time they need. I indicate that there are a few important documents they need to pay particular attention to while the other bulk of the loan package is a series of disclosures, much of which is boilerplate and typical of most lender loan packages.

Probably 15 minutes into the signing it was evident that the demeanor of the client was changing. Not only was the scrutiny of the documents going slowly but question after question started to flow, one after the other. The client decided to stop the appointment and make a phone call to his loan officer. After a brief discussion, the client hung up the phone and informed me that the transaction would be on hold.

Naturally, your mind starts to spin a bit and I sensed that the gentleman wanted to digest the information more carefully, perhaps without the pressure of anyone being present. I informed the client that it was not a problem and I would be in touch to schedule another time to mutually get together and sign the documents.

coffee cup

We’ve been in each other’s company for about an hour by this time and I told him to “not worry about the transaction, at least I met another new friend!” At this point the gentleman offered me a cup of coffee. Hmm. That sounded really good and was my invitation to build trust. We sat down at the table over the coffee. I’ve never had a better brewed latte—this guy really knew what he was doing. Silky smooth and wonderful. We started to discuss absolutely everything: his house, our families, kids, the real estate market, interest rates, etc….

The gentleman was from Turkey and it was another lesson in assisting clients from other cultures and the way in which you build trust. The rest is history. Three and a half hours later I had a happy client, happy customers (loan officer/agent), and signed documents in my hand ready for a funding package to be completed and overnighted to the lender.

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Buyer’s question at signing March 26, 2008

A recent buyer asked us at signing (a day or two prior to closing):

“I’ve noticed that the fees charged by my loan officer are about $1,600 more than my Good Faith Estimate. I recall only being charged 1% loan origination. Is there any explanation for this?”

What are the re-disclosure laws (both state and/or Federal)? Obviously, this buyer was a bit under pressure and did not want to create waves to delay the purchase.

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Does it matter who you list with, who you close with or who your loan officer is? March 8, 2008

apples

Being in the escrow business is really fascinating. You see lots of things. You hear lots of things. You get to observe what is efficient and what slows down transactions.

Escrow can be confusing too. We really serve two masters: those that are our clients (the principals such as the seller or buyer or borrower) and those that are our customers: agents and loan officers who suggest and refer work to us or any other service provider. It’s also something to experience such a large transaction “quality control” chasm between different agents working for different brokerages even within a major brokerage franchise network.

But this post really is about how agents and consumers decide what you decide.

1) For example, an interesting thing occured. In the mail, I received a post card from Greg Perry of John L Scott marketing a home not far from my place. It’s not strange that I receive things in the mail from Realtors, but that the owner of the home is a broker from another company—why did they hire another agent to list the house? I know this owner because our kids play together and we’ve closed transactions for him. It is a fascinating move.

2) We have had several transactions with repeat clients who have used a different service provider (agent or loan officer) the second or third time around. Why are they doing this?

3) In escrow we work in high collaboration with just about every title company. Obviously, we do not have primary contact with the sales staff (title reps) but rather the attorneys, title officers and back office staff that are largely the engine under the title insurance hood.

One of the things that I have always wondered and one question that my wife actually raised while we discussed business matters is the following: how do agents choose one title company over another since the perception of agents in the market is that title insurance companies (heck, even escrow firms) all do the same thing and the end result of issuing a title policy or a closed transaction is the same result? In other words, agents have a tendency to say they receive good service, but what is that service they receive? Agents have very little if no contact with the title company other than the with the title rep. How are the title companies differentiating themselves especially when many are using just another name plate but are in fact a subsidiary of a large national title company.

Consumers have no idea how to differentiate Pacific Northwest Title (First American) from First American Title. Or, comparing Land America Title from Commonwealth or Rainier Title (Land America companies). It is kind of like comparing the Nissan Quest with the Mercury Villager. Both are virtually the same vehicle. Consumers rely upon their agent to differentiate for them. How do the agents differentiate between service providers for their customer?

4) Along those same lines, competition is cut-throat between service providers such as escrow and title, especially in a market where sales volumes are significantly lower than over the past four years. Agents are very fierce in fighting for their respetive loan officer or title or escrow company if involved in a sale. Tradition has it’s place, but what is the compelling proposition of one service provider or closing agent over another?

5) What is more important to an agent when suggesting a loan officer: closing the transaction, lowest rates and fees for their customer or client, or a combination? For example, one of the loan officers we work with does average volume but gives phenominal service to the client, loan docs are usually ready days in advance and nothing has ever not closed due to a problem created by this LO. On the other hand, we work with LO’s that due boat loads of loans and there are the occasional problems with service to their clients or other issues.

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What I love about this business: the people January 10, 2008

Escrow is one of the toughest jobs in real estate, for a lot of different reasons. But, it is by far the most interesting from our experiences in that both Lynlee and I have sold (circa 1990) as licensee’s, bought and sold homes as homeowner’s and today as owners of an escrow company.

For example, in a recent day at the office we have had people curse at us, a customer who threatens to sue everyone in the deal including the clerk at the corner 7-11, an angry client yelling at their loan officer so loud that other tennants in our building start calling to see if everything is ok, then, before we have a chance to catch our breath, my wife comes smiling out of the signing room after meeting with a client. Looking at her, I say, “what are you grinning about?” To which she wryly remarks, “that customer just told me, ‘please don’t take me the wrong way, but you are a very pretty lady.”

You can be the scum of the earth to someone at 10am in the morning and then a hero just twenty minutes later.

In escrow you meet the most interesting people: From rock stars, to brain surgeons, shakers ‘n movers, CEO’s, farmers, war hero’s, teachers, politicians, pro-athletes and more. And, the occasional world famous writer to boot.

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Major Proposed Changes for Residential Closings in 2008 December 12, 2007

Alternative sexier titles to this post are: “Your Escrow Officer is a NARC” or “No More Quicky Closings” or how about “The Escrow Hills have detctive 1Eyes”. There are some major changes brewing with how escrow will be practicing their business in 2008. Escrow companies may become “undercover” fraud agents for the lender under the current draft of the Uniform General Closing Instructions.

Here are some of the changes proposed in the current draft:

If a lender has not provided escrow documents two days before the scheduled signing appointment, the lender must notify all parties “that the scheduled Signing has been postponed to a date and time at least two Business Days after receipt of required information from Lender”.

The Settlement Agent (ie the escrow company) “must obtain Lender’s written approval of an estimated Settlement Statement at least one Business Day before Signing”.

“If Lender has not provided Borrower with copies of the Loan Documents and Lender’s contact information at least one Business Day before the scheduled Signing, then the Signing must be postponed until this condition is met.”

I think it’s great to provide escrow with plenty of time to review loan documents. And for the borrower to have a chance to review them as well. This puts the burden of providing loan documents to the borrower before their escrow appointment and this may delay or prevent “rush closings”. Do borrowers really want to automatically receive the entire set of loan documents before their closing appointment?

If Settlement Agent uses a Signing Agent, Settlement Agent is responsible for selecting and directing Signing Agent and is responsible for the actions of any Signing Agent utilized in this transaction. Settlement Agent shall not designate as a Signing Agent Lender, any real estate agent or broker involved in the transaction, or Mortgage Broker, or any of their employees.

Say good bye to signings using a notary not employed by the Escrow Company. What happens if the signing is in another country? How can the Escrow Company (Settlement Agent) be held responsible for a notary in Argentina?

Are you sitting down yet? You’ll find this under the Fraud Prevention section:

“If a Lender employee, Mortgage Broker employee, or real estate brokerage employee or agent attends the Signing, Settlement Agent shall not permit such a party to overtly pressure Borrower at Signing or encourage Borrower to Sign prior to reading the Loan Documents, act as interpreter, or in any way obstruct the ability of Settlement Agent or Signing Agent to perform its duties. It must not be suggested by any party that Borrower use the rescission period to read Loan Documents or to address questions or objections raised at Signing. In the event any such conduct set out in this paragraph occurs, Settlement Agent shall stop the Signing and contact Lender’s designated ‘Fraud Prevention Contact”.

Will this encourage Loan Originators and Real Estate agents to not attend signings with their clients?

Escrow must “as soon as reasonably possible of discovery of what it suspects may be unfair, deceptive, misleading or unlawful behavior by any Lender or Mortgage Broker employee in connection with the Loan. Lender indemnifies Settlement Agent and Signing Agent against any legal claims brought by a Lender employee or Mortgage Broker employee who is the subject of any suspicious activity report given in good faith”.

Many loans seem unfair and probably a significant amount are. When I was wearing my escrow hat, we would often think the lender was unfair or perhaps charging too much. Now that I’ve walked in “mortgage shoes”, I know that I was judging without knowing the entire story, programs, what the rate was on the day the borrower locked…etc.

“Any material fact that may…have an impact on Lender’s decision to make the Loan. A material fact includes but is not limited to, any significant information on changes in the value or title of the Property, financial condition of Borrower, changes in marital status or the legal status of Borrower, changes to the sales contract (if a purchase), changes to the financing, Borrower or Seller bankruptcy, enforcement of creditor’s rights against Borrower or Seller, or any other indication of suspicious activity.”

Knowledge of potential or actual fraud, misrepresentations, falsehoods…including “any person involved in the transaction, including but not limited to Borrower, Seller, real estate broker, builder, Mortgage Broker, Title Insurer, appraiser, Signing Agent or Settlement Agent may have made a material misstatement or committed a falsehood that might affect this transaction.”

Whew…I think our escrow fees just went up!

This draft has been proposed to Mortgage Bankers Association (MBA), American, Land Title Association (ALTA) and the American Escrow Association (AEA). This proposal is open for comments until January 31, 2008.

There are many good aspects to this proposal. Is it fair to make escrow (who is suppose to be a neutral third party) “big brother” and placing this responsibility and possible liability on their shoulders?

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Common myths & misconceptions of Escrow. October 22, 2007

Please do not construe this as legal advice, it is not. The sampling below is general in nature and is referencing common escrow misconceptions we see in the course of conducting business.

Here are a few to get started.

1) Escrow firms produce and verify the validity of Legal Descriptions.

2) Escrow firms are bound by Northwest Multiple Listing Rules.

3) Escrow firms never have conflicts of interest or problematic transactional issues.

4) Independent Escrow firms are sued more often than attorney-owned escrow firms.

5) Limited Practice Officers at escrow firms are tested & licensed by the Washington State Dept. of Licensing.

6) Escrow staff work at all hours of the day and evening.

7) Loan officers and real estate agents are principals in the escrow transaction.

8) Escrow staff can produce, prepare and/or instruct their clients (buyer or seller) on drafting purchase & sale addenda for common things such as extending a closing date.

9) Loan documents are almost always perfect when submitted to escrow.

10) Escrow staff have no deadlines.

11) Once escrow has been opened and is progressing towards closing, Escrow cannot refuse to close a transaction.

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Utilities: Avoid post-closing disputes September 29, 2007

One of the functions of escrow is to pay lienable utilites. Lienable. There is a large segment of the real estate community that interprets that to mean all utilitites. It does not mean all utilities. In addition, escrow firms do not have access to seller’s account information. Sellers and/or their listing agents need to provide this information to escrow.

While Form 22K is clear in stating “lienable” utilities, there is much confusion by the real estate agents as to what constitutes a lienable utility. Escrow Instructions by any escrow firm or escrow department within a title company are very clear. All unpaid utilities not paid at closing by the escrow company are to be paid by the respective parties.

Which utilities are lienable (subject to property location)?

PUD and Puget Sound Energy (PSE) do not provide final utility bills to escrow and they are not lienable. PUD and PSE will send the final bill to the seller. Homeowners are responsible for paying all utilies, including phone, cable, garbage and so on.

To help your clients obtain a smooth and trouble-free closing, please have the Form 22K filled out properly with correct account information. Agents can avoid post closing phone calls from clients who are upset about utility bills that another party is responsible for by clarifying how the bills are handled during the escrow process. If you are uncertain or have questions, please contact your escrow office as they are eager to help you and the escrow staff avoid post-closing problems.

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What is escrow’s role when agent & loan officer are present at difficult signing August 13, 2007

In light of all the mortgage turmoil going on in the sub-prime arena I thought that it may be meaningful to address the awkward situation when a borrower is showing clear signs of “discomfort” with the loan terms presented by the escrow staff during a signing.

I believe that giving real and true versions of what escrow goes through helps everyone with understanding escrow’s role in a difficult situation, particularly when both the agent and loan officer are present during a difficult signing. We enjoy and encourage participation by Realtors and Loan Officers, although it is infrequent. Here is a real situation as it unfolded:

How would you react if you were presented with a similar situation and your escrow officer said those same words?

Under these circumstances, with both the Realtor and the Loan Officer present, it made for a very awkward situation. Escrow’s role is that of a neutral party, so our stance was to remove ourselves from the situation by inviting the borrowers to discuss the transaction in privacy and let escrow know if they elected to move forward or pause. They chose to discuss the situation with their Realtor and Loan Officer.

We wonder what the agent or loan officer said to our clients (buyers) that convinced them that their payment would be manageable.

I illustrate this to make the point that escrow is in a very difficult position when that neutrality is tested, particularly when the neutrality opens the door for consumers to walk away from a transaction. That being said, it is clearly not the intent of escrow to produce situations that encourage consumers to walk away. It is the job of escrow to maintain neutrality, but make certain that consumers understand the documents they are signing while at the same time fulfilling our obligations under the guidelines of the Washington State Escrow Act.

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