Underwater borrowers – Fannie Mae mortgages

Borrowers of all kinds continue to be up to their necks, or worse, on their mortgages – a problem that isn’t going away. So, it’s worth coming to terms with borrowers’ options, which vary depending on the type of loan a borrower has. Last week I kicked off the topic with Federal Housing Administration (FHA) loans – the ones supervised by the Department of Housing and Urban Development (HUD).

This week, we’ll branch out from an official Federal government program (FHA) and tackle a semi-official program run by the Federal National Mortgage Association (FNMA), commonly referred to as Fannie Mae. I say “semi-official” because Fannie is a government-sponsored enterprise (GSE) instead of being an actual Federal agency, although thanks to Fannie’s bailout by the Feds, Fannie has become a Federal agency for all practical purposes.

Fannie’s younger brother (it was created later), the Federal Home Loan Mortgage Corporation (FHLMC), commonly called Freddie Mac, is also a GSE and a bailed-out, semi-official Federal agency. But Freddie will have its day next week.

For now, let’s talk about Fannie.

If you read last week’s segment, you know that because HUD runs FHA, HUD also makes the rules. Same goes with Fannie. Because Fannie buys loans from lenders, Fannie dictates how the loans are set up and – critically in today’s perilous economic climate – how troubled loans are restructured or unwound.

Fannie has three ways of helping underwater borrowers avoid foreclosure: refinances, modifications, and short sales. Refinances and modifications are designed to keep borrowers in their homes. Short sales are not. Let’s go over each in turn.

Some borrowers haven’t been hit especially hard by the economic meltdown but are suffering because of the kind of loan they have. For example, if borrowers have an adjustable or variable rate and their interest rate has gone up, their payment may now be so high they can’t handle it. Refinancing to a fixed rate may solve the problem. But for borrowers who have taken pay cuts, a refinance won’t necessarily work. Why? Because refi borrowers – like all borrowers these days – have to qualify for the refinanced loan. Borrowers with drastic pay cuts will be out of luck. But whether borrowers qualify or not depends on the Home Affordable Refinance Program (HARP), a Federal plan encouraging lenders to rework mortgage loans for qualified borrowers.

Before going on, a word here about how the secondary mortgage market works, because the first question most borrowers ask is: “Okay, I don’t make payments anymore to the lender where I got the loan, so who do I talk to?” Answer: the servicer. Who’s the servicer? The firm the borrower now makes payments to. Does the servicer own the loan? Probably not. Who does? Most likely, a whole lot of bondholders who have bought shares of a pool of mortgage loans which generate income as borrowers make their monthly payments of principal and interest. These are the infamous mortgage-backed securities (MBS) we’ve heard so much about. Infamous because, when borrowers begin to default on their mortgages – and borrowers have defaulted in spades – the servicers have to kick in the missed payment to the pool. Not a good deal for servicers unless somebody’s going to reimburse them. Which is what Fannie does in Fannie loans. Which, in turn, is why Fannie lost its shirt and needed a Federal bailout. Which is why we taxpayers are footing the bill.

So there it is: an underwater borrower who wants to refi needs to contact his or her servicer.

Same goes for borrowers who want to modify. But what’s the difference between a refi and a modification? In both, borrowers have to qualify to prove they can make the new payment. But the chief difference is that modification borrowers are in deeper water than borrowers seeking to refi. Most have taken hits in pay which means they can’t afford their monthly payment, even if they originally could. But if their loan could be restructured to meet their current income, things would be all right. Usually, that means knocking off some of the principal balance to a level borrowers can afford. But the amount knocked off isn’t forgiven. Instead it becomes a junior note behind the newly reduced loan, and it’s secured by a junior mortgage. In other words, ultimately it will have to be paid off. Problem is, if there’s already a junior lien, such as a home equity mortgage – and usually there is – a modification won’t work.

Which leads to short sales.

Clearly, short sales are less favored by Federal programs designed to keep people in their homes. On the other hand, they’re a practical way for unworkable mortgages to be wound down. In a nutshell, the lender agrees to accept less than is owed when the house is sold to a new owner. How much less depends on Fannie.

To take advantage of a short sale through Fannie, the underwater borrower must have a verifiable loss of income or increase in living expenses and must actually be delinquent on the mortgage loan. In addition, the property must qualify price-wise based on a broker price opinion (BPO) based on “as is” value. Borrowers can’t pay for repairs and, unlike FHA short sales, can’t receive cash at closing. The short sale won’t be approved without a closing date, which seems backwards because a potential buyer won’t want to put out much time, energy, and money unless it’s reasonably sure Fannie will approve. Programs that pre-approve a sale price make more sense.

The good news for brokers is they’re allowed a 6% commission (3% if only one broker). Because lenders tried to chisel down sales agents to receive more money themselves, Fannie cracked down on reducing commissions in its Servicing Guide, Part VII, Section 504.02, effective March 1, 2009. See Fannie’s Announcement 09-03 dated February 24, 2009 (you can Google it).

Also, see Fannie’s Announcement SEL-2010-05 dated April 14, 2010, which tweaked certain procedures. Be sure to Google Fannie and other programs regularly because they change often enough to be a moving target. Fannie’s website is www.efanniemae.com. It’s a good idea to check it frequently to stay up to date.

- Morrie Erickson

Underwater borrowers – FHA mortgages

Two weeks ago, my blog post covered an overview of options for underwater borrowers. The alternatives ranged from foreclosures to short sales, with deeds in lieu of foreclosure and modifications in between.

I mentioned Federal programs such as HARP (for refinances), HAMP (for modifications), and HAFA (for short sales) and that not all struggling borrowers are eligible for all programs because applicability depends on the kind of loan the borrower has. This is because different types of loans are supervised by different Federal agencies.

Today’s topic is underwater borrowers who have FHA loans.

Because FHA (Federal Housing Administration) loans are supervised by HUD (Department of Housing and Urban Development), it stands to reason that HUD also controls how FHA loans are implemented, modified, terminated, or otherwise unwound. Keep in mind that FHA doesn’t make loans, it insures them, which is a way of inducing banks and other lenders to make loans to borrowers who have little equity.

In response to the housing crisis and economic meltdown, HUD issued a series of letters to their mortgagees (participating lenders) outlining policies and procedures. Bear with me now while I list a few citations, but if you check these out you’ll get loads of specifics, so I’ll mention a few for your reading pleasure. Mortgagee Letter 2008-43 dated December 24, 2008, outlines procedures for short sales. A second letter – this one called Mortgagee Letter 2009-23 – was issued July 30, 2009, and announced a HAMP program for FHA (appropriately called “FHA – HAMP”) addressing loan modifications. (FHA loans weren’t covered by the original HAMP.) In a follow-up on September 23, 2009, Mortgagee Letter 2009-35 clarified modification procedures. Yet another Mortgagee Letter (this one 2009-52) came out December 16, 2009, and discussed the impact of selling short. All these letters are public and available online. All you have to do is Google them and take a look.

Like all Federal agencies, HUD publishes regulations. For those who like to hear it (or in this case, read it) from the horse’s mouth, check out 24 CFR 203.355 for FHA lenders’ options on default. For short sale procedures see 24 CFR 203.370 and, for modifications, 24 CFR 203.616. Google these and you’ll get plenty of hits.

In a nutshell, here’s what you’ll find. To be eligible for an FHA modification, the borrower must be at least 4 months but not more than 12 months delinquent. If the money situation improves (but not too much), the borrower may resume making payments but must be unable to catch up the shortage or payments missed. In other words, the borrower must be suffering from changed circumstances (changed, that is, from the time the borrower originally got the FHA loan).

If the borrower qualifies and a modified loan is put in place, the arrearage isn’t forgiven. Instead, the borrower is required to sign a junior promissory note and mortgage for the arrearage which gives taxpayers hope the loan will be paid in full. This junior note and lien requirement is a problem if the borrower already has a HELOC (home equity line of credit) in place, but with most FHA borrowers putting only 3% down at date of acquisition, there shouldn’t be a HELOC. But if there is, a modification is probably out.

That’s when a short sale enters the picture.

To be eligible for a short sale, the borrower must be in default and have negative equity, but the property can’t be in foreclosure yet. The borrower also must be the owner-occupant (not an investor, although there are a few hardship exceptions) and have been actively trying to sell the property for 3 months. So, timing is critical.

Generally, for a short sale to be considered, the property must be listed for sale at its “as is” appraised value as determined by an FHA appraiser. A real estate commission up to 6% is allowed, assuming more than one sales agent is involved. Otherwise, the maximum commission is 3%. The seller may not make repairs as a seller concession (with some exceptions), the goal being to maximize the sale price and minimize the shortage to the lender (and, in turn, the cost to FHA and taxpayers).

The actual sale price allowed (compared to the loan balance) depends on a tiered pricing structure, based in part on how long the house has been on the market. As an incentive to underwater borrowers, FHA allows the seller/borrower to receive $750-$1,000 cash at closing (for first and last month’s rent since the seller/borrower won’t be buying another house). Incentives up to $1,250 go to outgoing FHA lenders too, with another $250 thrown in for title searches and recording fees. There’s more. Despite senior lenders’ not liking to pay junior liens when they’re not being paid in full themselves, FHA will allow up to $2,500 of the sale price to make junior lienholders go away. And, up to 1% of the new buyer’s loan may be used for seller’s closing costs if the buyer is obtaining a new FHA loan.

So, the FHA programs are in place, with short sales likely trumping modifications in most cases. To answer your questions – or at least to get a strong start – read Mortgagee Letter 2008-43. It contains loads of details.

- Morrie Erickson

So, you want to close at month-end?

It’s a request we get month in, month out. And there are good reasons for it…sometimes. But month-end closings can present problems. So, like most choices in life, balance is critical: the upside has to outweigh the down.

First things first. Why are month-end closings so popular?

For buyers getting new mortgages, the nearer to the end of the month a settlement takes place means less interest paid up front. For example, if closing occurs on March 30, the borrower’s first mortgage payment won’t be until May 1 (which includes interest for April). Consequently, at closing the borrower will have to prepay interest for only two days (March 30 & 31). That’s a good thing.

But suppose closing occurs on April 2. The borrower will have to prepay interest for 29 days (April 2-30). Whoa! That’s a lot more than a measly two days. But consider this: the first mortgage payment won’t be until June 1. So, which is better? Coughing up 29 days interest in advance and putting off your first payment for almost a month more or paying less at closing but starting your mortgage payments a month earlier?

For borrowers squeezed for cash, closing late in the month makes sense. But if cash at closing is not an issue, why jockey for a closing date when title companies and lenders are busiest? It’s no secret that the end of the month is when title companies’ closing schedules get hectic. Which means closings are stacked up hour after hour. In turn, efficiency suffers and the chances of mistakes go up. In fact, if problems do occur, the closing may have to be delayed until the following month. Meaning more up-front money. Not a good thing for borrowers who can’t afford it.

These days, end-of-month (and Friday) closings have another issue to deal with: wire transfers. In Indiana, all funds of $10,000 or more (per person, per lender, etc.) must be sent to the title company by electronic transfer. Often, lenders don’t send funds until all closing requirements are met – in other words, at the closing table. Given that many banks cut off sending wires at 2:00 p.m., afternoon closings probably won’t be funded until the next business day. Sometimes, the next business day is the following Monday – or Tuesday if Monday’s a holiday. And it all goes downhill from there, because if sellers haven’t received their money (and they won’t until funding occurs), most sellers won’t let buyers move in. So, if the buyer has a moving van waiting to unload, the movers will have to cool their heels until funding. Definitely not a good thing.

What do month-end closings mean for sellers? As just mentioned, there’s the downside of waiting for their funds, which can create a domino effect. If the seller intends to use the money from the sale to buy another home later that day, the seller’s purchase will have to be delayed. You don’t even want to think about the consequences if it’s the seller’s last day to close or the seller’s (soon to be buyer’s) new mortgage rate-lock expires. Late funding also means the seller’s outgoing mortgage won’t be paid off as early because the title company can’t wire the payoff until the sale has officially closed, adding extra days of interest and possibly late fees. Worse, if the seller has an FHA mortgage, the cash outlay racks up even faster because FHA charges interest for the whole month regardless of when payment is made. So if the closing is pushed back from the end of March until the first of April, the seller will have to pay all April’s interest (even if closing is on April 1^st). Most sellers won’t be pleased. Some April Fool!

With the first-time homebuyer tax credit deadline looming (June 30, 2010), savvy sellers, buyers, and their brokers won’t want to risk a late June closing. The consequence of losing the tax credit because something went wrong at the last minute would be devastating. This deadline is written in stone, unlike a rate-lock that might be able to be extended. But Uncle Sam doesn’t extend. Either the closing occurs on or before June 30, or the tax credit goes down the drain.

The word to the wise, first-time homebuyer or not, is to plan ahead – and conservatively. Shoot for early or mid-month. Don’t take a chance on saving money and getting the deal closed. And remember, not only will title companies be pulling their hair out end of month, so will lenders. Just as title companies can close only so many sales within a certain period of time (only so many hours in the day), same goes for lenders who can process only so many loans. Because most lenders will be pulling out all the stops, mistakes can be made which may cause delays.

So get your deal closed early and rest easy while the ones who didn’t plan ahead break into a sweat.

- Morrie Erickson

Options when you can’t pay your mortgage

As everyone knows by now, the economic meltdown has turned the housing market on its head, leaving millions of Americans faced with losing their homes. Can anything be done to keep people from being put onto the street?

The Federal government has set up programs such as HAMP (Home Affordable Mortgage Program), HAFA (Home Affordable Foreclosure Alternatives) program, and HARP (Home Affordable Refinance Program), but none has been as effective and far-reaching as hoped. But before delving into the specifics of HAMP, HAFA, and HARP (which I’ll save for another day), let’s start with the options borrowers and lenders have when borrowers can’t make their payments.

Foreclosure

This option doesn’t work for borrowers who want to stay in their homes. Foreclosure means borrowers are sued and eventually kicked out, and their home sold at public auction. More often than not, the lender ends up with the house then turns around and sells it – or tries to.

Another downside of foreclosure is that when the smoke clears, the borrower may still owe the lender money – the difference between what the house is worth and how much the borrower owed.

The good news though is that junior liens (like second mortgages) are wiped out. Still, the borrower ends up on the street looking for a new place to live. But if a borrower is so underwater (the house is worth far less than the borrower owes), foreclosure may be the only option. Borrowers who recognize this have been known to turn in their keys and walk away.

Deed-in-lieu of foreclosure

Foreclosure is avoided when this procedure is used, but the borrower still ends up losing the home. Deed-in-lieu amounts to a formal way of turning in the keys and walking away.

No lawsuit is necessary to pull this method off, but the lender has to be on board in order to do it. Because the public auction orchestrated through the foreclosure lawsuit is what wipes out junior liens, no lender is going to allow a deed-in-lieu if the home is burdened by junior liens because those liens would have to be paid off when the lender sells it. So for a deed-in-lieu to work, the home can’t have any baggage that comes along with it.

The trade-off the borrower ought to be looking for here is full and complete release from the debt the mortgage secures. Depending on circumstances, release from most of the debt (instead of all of it) might be acceptable too.

Modification

Without getting into specifics of HAMP, HAFA, and HARP, these are Federal modification programs designed to keep people in their homes. Any lender can modify its borrower’s loan, but lenders don’t keep their loans anymore. Instead, they sell them on the secondary market which packages them as securities and sells them to investors, meaning a borrower’s mortgage may be one in a package owned by a pension fund in East Chainsaw, Oklahoma. So, who does the borrower talk to about modifying? Thus the Federal programs.

Some modifications cut the rate of interest. Others extend the term to, say, 40 years instead of 30. Still others do both. Either way though, the full amount has to be paid back.

But cutting through the red tape, there’s no real reason for borrowers to shoot for loan modifications if they’re not able to pay. Will lenders modify loans for borrowers who’ve lost their jobs and have no income? No. Which means borrowers have to qualify for modifications to prove they can pay. Qualifying means credit scores, income, and debt are checked. For borrowers trying to modify so-called “liar loans” (borrowers who “stated” their income the first time around without having to prove it), this will be their first real shot at qualifying. Most programs also require borrowers to show their income, etc. has worsened since they got the loan they want to modify. But depending on how much they lied the first time around, maybe it hasn’t.

If a modification is pulled off, the borrower gets to stay in the house…at least until defaulting again. I’m not trying to be pessimistic here, but statistics say 20-30% of modified mortgages end up in default.

Modification plus note

An offshoot of a full modification is re-writing the mortgage by lowering the interest rate and knocking off some of the principal, which has the effect of lowering the monthly payment. But most lenders won’t be willing to eat the principal they’ve knocked off. Instead, they’ll require the borrower to sign an unsecured note promising to pay it back over time.

Why do this? To give the borrower a better chance to sell the home. If the home is encumbered by less debt, the sale price can be lowered making it easier to sell. So maybe the borrower will end up losing the home but on more honorable terms than being thrown out.

Short sale

If a borrower is underwater but not too far beneath the surface, a short sale may be the ticket. True, the borrower will be losing the home (by selling it) but will also be off the hook.

In a short sale, a lender agrees to accept less than the full amount owed on the mortgage. This option is for lenders who are practical – they see the handwriting on the wall. Usually, the borrower has been missing payments, knows it’s time to get out from under an unsustainable debt, and decides to sell. The problem is, if more is owed (but not too much more) than the home will sell for, how can the sale take place? It can’t unless the lender is on board. But more and more lenders (the savvy and prudent ones) realize it’s better to cut their losses and move on rather than go through the expense of foreclosure, take the house back, and still have to sell it.

In a short sale, a portion of the debt is forgiven. That’s good, right? Yes, but there’s a catch. To the IRS, forgiven debt amounts to income received. Which means the borrower will have to pay tax on it. And to be sure that happens, the forgiving lender will be sending the borrower a Form 1099.

Short sale with note

This option is like any other short sale except the amount the lender is shorted isn’t forgiven. Instead, the borrower signs an unsecured note promising to pay it back over time. Another good news, bad news situation. There’s no income tax to pay because the debt isn’t forgiven, but that means the debt doesn’t go away.

As with the modification with note procedure, this option allows the home to be sold, getting the borrower off most of the hook. But the “forgiven” debt still has to be paid.

- Morrie Erickson

Why title companies are picky – Recording

This is the first of a series explaining why title companies are fussy about details. For example, when we insist that documents be set up a certain way, we’re not trying to be technical for the heck of it. Instead, we’re being picky for a reason: compliance.

It’s true that our underwriters have rules based on risk assessment and loss avoidance. But more often than not, compliance means bowing to the law itself, whether Federal, state, or local.

Let’s start with names on documents. If Susan owns a house and her deed reads “Susan J. Blake”, that’s how her name must appear on the deed when she sells. But what if her name changes? Suppose Susan marries Alonzo Martin and becomes Susan B. Martin. Fine, but the deed will have to explain the details.

The practical reason for linking the two names? Making it clear the true owner is the seller. But the legal aim is to satisfy recording requirements under Indiana Code 36-2-11-16.

This statute dictates how documents such as deeds and mortgages must be drafted and signed. If not followed, the county recorder may refuse to record them. Obviously, if the closing has occurred, the title company will be up a creek if the deed and the buyer’s new mortgage can’t be recorded. Why? Because the title company must issue (or has already issued) insurance policies, which is the equivalent of saying recording has taken place. To avoid that problem, title companies have to make sure recording requirements are met.

Let’s look at a couple of examples.

If you’ve watched documents being signed, you’ve probably noticed the signature line is always above the typewritten name. Why? Because IC 36-2-11-16(b) says it has to be. The statute also says the signature (seller’s on the deed, buyer/borrower’s on the mortgage) can’t obscure the typed name or vice versa (the tail of a signed y or g can’t make the typed letters unreadable). This is a rule of legibility, and it applies to the notary clause as well.

The statute goes on to say the name of the signer must appear the same way throughout the document. So, if Susan’s name appears with her middle initial in the body of the deed, it’s got to show up the same way below her signature line and in the notary clause. If for some reason it doesn’t, the inconsistency may be explained by an affidavit, provided the affidavit is presented to the county recorder along with the incorrect document. This is why title companies commonly have buyers and sellers sign a “name affidavit” which lists their name variations and states that all the names on the list refer to the same person.

But what if the signature doesn’t resemble the spelling? We’ve all seen signatures so scribbled (straight lines, crooked lines, flourishes, curlicues) they could belong to Susan B. Martin or a complete stranger. That’s where the notary comes in. It’s also one reason we check photo IDs. If the signature on the photo ID matches the version on the deed, we’re good to go. Let’s face it, people sign the way they sign; legibility doesn’t enter into it.

Fortunately, the statute gives the recorder plenty of wiggle room. If it’s clear who the document’s referring to, the recorder can let it pass.

An off-shoot of this consistency requirement is linking the names on the deed and mortgage. The recorder won’t care about that, but title companies and lenders do because it must be clear the owner of the house is the one mortgaging it. So, title companies and lenders have to stay alert. Here’s why. Unless told otherwise when an order is placed, title companies take the spelling of buyers’ names from the purchase agreement. But loan processing follows a separate track, meaning buyers’ names may appear differently on the loan paperwork. Because the title and loan tracks don’t converge until the loan documents arrive at the title company (usually late in the game), corrections are made on the fly.

Savvy real estate agents ask buyers how they want their names to appear on the title documents. Savvy lenders do the same thing. Hopefully, both get the same answer.

- Morrie Erickson

Trusts & companies – How entities own, buy & sell

Human beings aren’t the only persons who own, sell, buy, and mortgage real estate. So do firms and businesses. And don’t forget to add trusts, not-for-profits, and unincorporated associations. Taken together, these groups are often referred to as entities.

To legally exist, most entities must be formed according to state law. In many cases (in Indiana, at least), that means filing organizational documents with the secretary of state. Some would-be entities get forms online at the secretary of state’s website. Others hire lawyers to handle the particulars.

Among the types of entities that have to file with the secretary of state’s office are corporations (both for profit and not-for-profit), limited liability companies, and limited liability partnerships.

Entities that don’t have to file with the secretary of state to exist legally are partnerships, unincorporated associations, and so-called grantor or living trusts.

But, when it comes to entity-owned real estate, keep in mind that the entity itself is the owner, as opposed to the people who make up the entity. Human beings who are entity-owners (members, shareholders, managers) often forget this, thinking the entity they created is a mere formality. It isn’t. It’s the owner. So, for the entity to act officially, it must play by the rules it made for itself as outlined in its entity documents.

That means if an entity is borrowing or is selling, buying, or mortgaging real estate, title companies will ask for documents they don’t otherwise ask human beings for. For example, if Jim Jones is selling his house, the title company will be satisfied that Jim can sign the deed over to the buyer if Jim proves he’s Jim by showing a valid, government-issued photo ID. Jim won’t have to prove he exists (we can see and talk to him, after all, and match him up to his photograph). All he’ll have to do is link his physical person as the signer of the deed in this transaction to the name on the deed by which he took title to the house.

Not so with an entity. Unlike Jim, amorphous entities don’t have a physical existence. The entities’ owners do, but not the entities themselves. So, title companies need to verify the entities actually exist and can do what the entity is trying to do.

That means title companies ask for proof. For entities formed by filing papers with the secretary of state, title companies will want copies of those filed papers with the secretary of state’s seals and filing dates clearly visible. Because entities which file must renew their filings periodically or automatically cease to exist, title companies will need proof of that too.

There’s more. Because entities can’t do more than their official papers allow them to do, entities must prove they have the right to do what they plan to do (sell, buy, borrow, mortgage). And because entities can’t sign papers themselves – people involved with the entities must do that for them – title companies must have proof who the authorized signers are.

So, when a title company asks for copies of various documents and for an official entity resolution that authorizes the transaction and who can sign the documents, please don’t be offended or put up a fight. The title company isn’t trying to meddle in the entity’s affairs, only to verify that the transaction can proceed as planned.

Trusts are a little different, although the concept is the same. Most of the trusts title companies run into are formed by individuals and are revocable – meaning they can be cancelled at any time. These trusts spring to life with a trust agreement which doesn’t have to be filed anywhere (secretary of state, county recorder, or anywhere else). Usually, the reason trusts are created is to avoid probate. Although I’m painting with a broad brush here, when a person who owns real estate dies, heirs may have to go to court to determine who inherits the property. Trusts avoid this issue because the person (grantor) who forms the trust designates a beneficiary who becomes the owner automatically at the grantor’s death.

These trusts are a lot like wills and are not filed publicly. Unfortunately, what many owners (grantors) forget, is that once the real estate has been put into the trust, the grantors no longer own the property. Instead, the trust owns it (actually, according to Indiana Code 30-4-1-1, the trustee owns it). And, of course, what the trustee can and can’t do with the property (sell, buy, borrow, mortgage) depends on what the trust says. Which is why title companies have to see it.

Often, when title companies ask for copies of the trust, the trustee (who usually is the grantor) resists, thinking the trust provisions – who gets what when the grantor dies – are private and confidential. But, as with other types of entities, title companies need to know that the transaction is permissible and who is authorized to sign. Title companies don’t care who gets what at death, only that the i’s have been dotted and the t’s crossed so the transaction they’re handling will be valid. And, keep in mind that title companies need the whole trust, not just snippets here and there that the trustee thinks are pertinent. Because some clauses can override others, title companies need to see the whole shebang.

As for unincorporated associations – like some small churches – their existence may not be blessed by the secretary of state (although can be if the association files as a non-profit). But they still must have an organizational structure with rules about who governs, what types of actions the group can take, how decisions are made, and who can sign. So, title companies will ask for the same kind of paperwork, minus the official part from the secretary of state.

- Morrie Erickson

Title – What it is & how to hold it

If you’re new to real estate ownership or an experienced hand who wants to brush up, it’s a good idea to go over what “title” means and how buyers should hold it when they buy a house. If you’re a lender or real estate agent, you’ve probably heard all this before. Still, it never hurts to confirm what you already know or be reminded of what might have inched to the back of your brain.

First, a little clarification. I’ve referred to holding “title” in connection with buying a house. The same rules apply to buying commercial property, although non-residential property often is acquired in the name of a firm (i.e., partnership, corporation, limited liability company). That’s a separate topic we’ll save for later.

For now, let’s think residential.

Title companies who prepare deeds and insure ownership always ask how buyers want to take title. But that’s actually the second issue. The first is what sort of title are the buyers getting. Do I mean there’s more than one kind of title? Yes, although in residential transactions, owning less than what might be called full ownership is rare.

Let’s look a little deeper.

In real estate, “title” to property means ownership of a specified interest in that property. The ownership interest can take several forms, including “fee simple” (full or outright ownership), “life estate” (ownership limited to the length of someone’s life), and “leasehold” (long-term tenant’s rights under a lease for a specified period, often 30 or more years). It’s unusual for buyers of houses to acquire less than full or outright ownership or to share ownership with somebody else. That’s because most buyers want total control and because their lenders require it. How many lenders would be willing to lend money to buy a house if the buyer’s ownership ends when the buyer’s 80-year-old grandmother dies? Or when the buyer dies?

But, assuming buyers are acquiring full ownership (as mentioned above, the legal term is “fee simple”), do lenders care how title is held? Probably not, so long as the buyers are creditworthy and qualify for the loan. If one of a pair of buyers has credit problems, though, lenders may require that only the qualified buyer hold title. This is because regulators (or upstream purchasers of loans in the secondary market) don’t want a person with bad credit on the loan. There are reasons for this too, having to do with loans being packaged and sold in the form of mortgage-backed securities (MBS). Unless you’ve been hiding under a rock during the recent economic meltdown, you’ve undoubtedly heard of MBS. In any event, who holds title may be credit-driven instead of buyer’s preference.

Does who holds title (whose names are on the deed) really matter? Read on and decide for yourself.

As mentioned above, an owner holds “title” to whatever interest in the real estate is being acquired. Usually, that interest is “fee simple”. Full or “fee simple” ownership can take several forms if the real estate is co-owned (tenancy in common, joint tenancy with the right of survivorship, tenancy by the entireties), each form having different attributes and consequences.

Ownership as “tenants by the entireties” is reserved for married couples, so let’s save that for last.

First then, “tenants in common” and “joint tenants with right of survivorship”. Simply put, if two people own as tenants in common and one of them dies, the surviving co-owner does not inherit the decedent’s share. Instead, that share goes to the decedent’s heirs (among whom could be the co-owner but not necessarily). In contrast, if two people own as joint tenants with right of survivorship, on the death of one co-owner (sometimes co-owners are called “co-tenants”) the surviving co-owner becomes the owner of the decedent’s share. Casual friends who are co-owners may opt to own as tenants in common because each prefers for his or her share to end up in the hands of his or her heirs. On the other hand, co-owners who have more than a casual relationship (family members, domestic partners) may prefer the survivor to take it all. As mentioned above, typically lenders don’t express a preference how title is held unless the creditworthiness of one of the co-owners rears its head.

Now, “tenants by the entireties”. Unlike the other two forms of co-ownership, tenants by the entireties must be spouses. As with joint tenants, the surviving spouse inherits from the deceased spouse automatically. However, tenancies by the entireties provide other protections of marital property from the folly or misfortune of either spouse. For example, except for the lien of taxes filed by the IRS, in Indiana the debts of one spouse will not become a lien against property owned as husband and wife. This is because in Indiana a magic shield ring-fences spousal property. Conversely, neither tenants in common nor joint tenants enjoy similar protections. Most deeds conveying real estate to spouses refer to them as “husband and wife” instead of “tenants by the entireties”. But both terms mean the same thing.

What about states in which so-called domestic partners are allowed to marry? Are those domestic partners allowed to own real estate as tenants by the entireties? Probably so in those states, although a real estate lawyer in the particular state should be consulted to be sure. Having said that, I’m unaware of any Indiana court case which has addressed this issue. So, for a same-sex couple legally married in another state to expect Indiana (which has not blessed same-sex marriage) to honor tenancy by the entirety rules for Indiana property is risky.

So, boiling all this down, here’s where we end up. In a typical house sale, “title” is transferred by the seller to the buyer when the seller signs the deed and the deed is given (“delivered”) to the buyer. Deeds are then filed in the county Recorder’s office. In turn, the “title” is insured by a title insurance policy. The official owner is the person whose name is on the deed.

Let’s close with a practice tip. Say two people (married or not) want to co-own a house but one of them doesn’t qualify for the loan because of credit problems. Is there still a way for them to co-own? Yes. At the closing, the creditworthy person can take title alone and sign all the loan papers. Then, after closing, the creditworthy buyer can sign a deed to the two of them (which designates how title is to be held: tenants in common, joint tenants with right of survivorship, or tenants by the entireties) then record it. Most lenders don’t have a problem with this, but before doing it be sure to check.

And don’t forget to tell the title insurance company so it can change the name of its insured to the creditworthy buyer and his or her co-owner.

- Morrie Erickson