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

The New RESPA Rule – The rest of the 1100-series

In the last few issues we’ve covered the meat of the 1100-series of the new HUD-1 – mainly lines 1101, 1102, 1103, and 1104 – and how each ties in with Blocks 4 and 5 of the GFE. To summarize, line 1101 and Block 4 cover title services and lender’s title insurance; line 1102 addresses settlement or closing fees (and is rolled up into line 1101 and included in Block 4); and line 1103 and Block 5 pertain to owner’s title insurance. Line 1104 isolates the lender’s title insurance premium outside the columns, the charge being rolled up into line 1101 and included in Block 4.

While these four HUD-1 lines and two GFE blocks constitute the meat of the charges having to do with title insurance and closing/settlement services, the remaining lines in the 1100-series provide useful information for sellers and borrowers, some of which hasn’t been seen before in the world of residential real estate transactions. Having said that, the numbers on lines following 1104 are shown outside the column because they don’t figure in to the totals that either the seller or borrower has to pay. In short, the numbers seen on lines 1105 through 1108 are for information only and may be a HUD effort in transparency.

So, let’s see what these lines are all about.

Line 1105 sets out the dollar amount of coverage of the lender’s title insurance policy being issued to the borrower’s lender. Policy specifics (long-form or short-form ALTA 2006 policies) aren’t detailed here, only the level of coverage. Usually, the face amount of the lender’s policy is the same as the loan amount. In most cases, the loan amount is less than the purchase price, although some loans may be the same as or exceed the purchase price. Given the sub-prime and other high-risk loan program issues from past years, however, and the consequent financial meltdown, we’ll probably see fewer loans equal to or higher than the presumed value (sale price) of the property.

Similarly, line 1106 confirms the dollar amount of coverage of the owner’s title insurance policy being issued to the borrower/buyer. And, as you might expect, neither the type of policy (usually, ALTA 2006 or ALTA 2008 Homeowner’s – the latter sometimes referred to as an enhanced policy) nor the name of the title insurance company (underwriter) is revealed here either, only the policy limits. Normally, the coverage amount equals the purchase price.

Taken together, lines 1105 and 1106 don’t add much value to the HUD-1 because the title insurance commitment previously issued and circulated to the parties, including the lender, have already dished out that information. So, about the best that can be said for repeating the information is that the HUD-1 is validating the policy coverage stated earlier.

Now, on to lines 1107 and 1108.

For some reason, HUD decided it was pertinent for the settlement statement to reveal the compensation details between the title insurance underwriter and its agent. This is what appears to be HUD’s effort toward transparency. What the parties are supposed to do with this information is unclear. In most cases, though, these lines will show that the agent keeps the lion’s share of the premiums collected. Several conclusions could be drawn from that, the most obvious being the agent does all the work. A second might be that the risk being undertaken by the underwriter is comparatively small, given that the premium being paid is small as well, especially when it’s digested that, unlike homeowner’s and car insurance, the premium is paid only once. And, for those who see HUD-1s over and over, a third might be that not all splits are the same, meaning not all title agents’ contracts with underwriters have the same terms. For what it’s worth, Indiana’s Department of Insurance is looking into some of these issues, but that’s a discussion for another day.

So, the splits. Line 1107 shows how much of the total premium (owner’s, lender’s, enhanced coverage, endorsements, etc.) goes to the title insurance agent. And, as you would expect, line 1108 shows the amount going to the underwriter. Interesting to some, I suspect, but probably not a real attention-getter.

What about lines after 1108? Often, none will be needed. The basic HUD-1 form stops with line 1108, although HUD-1 software programs are designed to expand to line 1199 if necessary. (Let’s hope it isn’t.)

But, when might additional lines be used? If either the seller or buyer/borrower hires an attorney to represent them during the transaction and the attorney is paid at closing, an additional line would be used to collect for these charges. Or, if the buyer/borrower wanted a land survey (which wasn’t required by either the lender or the title agent), an additional line would be used. These charges themselves would be shown inside the column of whichever party is incurring the charge with the name of the payee service provider shown outside the column.

To make a point, though, let’s tweak the land survey charge. Suppose the borrower didn’t want a survey, but the title agent required one to issue the title insurance. What happens then? The survey bill would be shown outside the borrower’s column in, say, 1109 along with the surveyor’s name, while the amount of the bill would be rolled up into line 1101 (because by the title agent requiring it, the survey bill becomes part of “title services and lender’s title insurance”). To take this a step further, if the lender knew of the title agent’s survey requirement, that amount should be included in Block 4 of the GFE. On the other hand, if the lender didn’t know and didn’t disclose accordingly, there may be a tolerance issue, depending on the cost of the survey. Most likely, though, the lender can claim a change of circumstance and issue a revised GFE, eliminating the tolerance issue.

For now, that’s it for the 1100-series of the HUD-1. See you next week, if not sooner.

- Morrie Erickson

The New RESPA Rule – Owner’s title insurance

Now that we know what Block 4 of the GFE and line 1101 of the HUD-1 are all about – HUD labels these “title services and lender’s title insurance” – let’s move on to GFE Block 5 and HUD-1 line 1103. HUD calls these “owner’s title insurance”.

The first question most people ask is: Why does HUD insist that lenders disclose to borrowers what owner’s title insurance costs? Lender’s title insurance, fine. But, owner’s? If, after all, HUD’s goal is to make sure lenders inform borrowers as accurately as possible what getting the loan will cost, what does the cost of owner’s title insurance have to do with that? The answer is, of course, nothing.

So, why has HUD included Block 5 on the GFE? Only HUD knows for sure, but if you look at Block 5 carefully you’ll see that buying owner’s title insurance is completely optional. So, it’s conceivable that Block 5 is there simply for full disclosure – as though the lender is saying, hey borrower, the lender’s title insurance you’re paying for protects us, not you, so if you want your title protected you’ll have to buy owner’s title insurance.

In many markets (like most of Indiana), sellers pay for owner’s title insurance anyway. But not everywhere. Take Evansville, for example. Or across the border in Cincinnati. There, sellers seldom buy owner’s title insurance for buyers. If buyers want owner’s coverage, they’re on their own. So, to make sure all buyer/borrowers are fully informed, HUD requires lenders to let buyer/borrowers know they can buy owner’s title insurance and how much it will cost. The FAQs make it clear that, regardless of whether in a given region the seller typically pays for owner’s title insurance, the lender still must disclose to the borrower how much it costs. The only exception is in non-purchase transactions, such as a refinance.

As for the HUD-1, the cost of owner’s title insurance goes on line 1103, inside the column. But which column? Seller’s or buyer’s? At this point, not everyone agrees, even if the purchase agreement makes it clear the seller is paying. Some lenders are instructing title agents to put the owner’s title insurance fee inside the seller’s column. Presumably, that’s because the seller is paying for it. Typically, those lenders have not disclosed the cost of owner’s title insurance to the borrower in Block 5 of the GFE. But, according to the FAQs and Appendix C, they should have.

But most lenders we’ve dealt with are instructing us to put the owner’s title insurance fee inside the borrower’s column. And, as you might expect, these lenders have (correctly, I believe) disclosed its cost in Block 5 of the GFE. The FAQs and Appendix C are especially clear on this point, even going so far as saying that’s the way it’s supposed to be even in areas where sellers typically pay.

By the way, the fee for owner’s title insurance HUD is taking about in the FAQs and Appendix C is the owner’s title insurance premium. Nothing else. Just premium.

But, back to disclosure vs. who pays. If the seller really is paying for the owner’s title insurance, how is that going to happen if the actual fee is put inside the borrower’s column on line 1103? The answer: by using a debit-credit. The seller will be debited and the borrower credited the cost of the owner’s title insurance on page 1 of the HUD-1. Doing it that way allows the lender uniformly to disclose the cost of owner’s title insurance in Block 5 of the GFE (and be in compliance with HUD) without having to see a purchase agreement to find out who pays. All things considered, HUD’s procedure makes sense.

Now, let’s take this a step further by taking a step backward. In an earlier blog I noted that all costs having anything to do with issuing title insurance are bundled (remember the “kitchen sink” approach?) into the category called “title services and lender’s title insurance” from Block 4 of the GFE and line 1101 of the HUD-1. But at the end of that discussion, I dodged the question of into whose column (borrower’s or seller’s) “title services and lender’s title insurance” goes. The answer turns out to be (drum roll here): the borrower’s.

I’ll be the first to point out that not everyone agrees. But based on Appendix C, the FAQs, and experts’ presentations, it’s apparent that’s the way HUD wants it. For me, the clincher is consistency of disclosure: lenders can disclose the same way to all borrowers without waiting to find out which services each party has agreed to pay. But let’s wrestle with it for awhile, anyway.

Start with the proposition that various services need to be performed for both sellers and borrowers that fall into the bundled category of “title services and lender’s title insurance”. Who pays for some of these services varies from region to region by custom or tradition. Or by what’s negotiated in the purchase agreement. Hypothetically, either the seller or the borrower could pay for all “title services and lender’s title insurance”. Hypothetically, yes; typically, no. The norm is for the seller to pay for certain items, the borrower for others. For example, the settlement or closing fee is often split; the seller pays for the title search and exam; the borrower pays for a judgment and lien search; the seller pays for prep of the deed, non-foreign certificate, and vendor’s affidavit; the borrower pays for prep of the mortgagor’s affidavit and sales disclosure form; both pay courier fees; both may be charged for photocopying and scanning; the borrower most always pays for the lender’s title insurance premium. Suffice it to say, both parties incur expenses that are classified “title services”.

That being the case, it’s unrealistic to expect a lender issuing a GFE to know how the various “title services and lender’s title insurance” fee components are to be allocated. So the simplest solution for lenders is to put all fees for “title services and lender’s title insurance” into Block 4 of the GFE and for the settlement agent to put the same gross fee inside the borrower’s column on line 1101 of the HUD-1. By the time the HUD-1 is prepared, of course, the settlement agent knows who’s paying for what between the borrower and seller, but handled this way, the GFE and the HUD-1 are consistent. The debit-credit procedure is then used on the HUD-1 to allocate payment of the “title services and lender’s title insurance” fee as agreed in the purchase agreement.

Consistency between the GFE and HUD-1 also keeps lenders on the straight and narrow by holding them to the HUD-mandated tolerances. I haven’t gotten to page 3 of the HUD-1 yet, but that’s the page where the numbers in the various blocks of the GFE are matched up with the numbers in the various lines of the HUD-1. Like “High Noon”, page 3 is the showdown page. Page 3 is brand new and exists to make sure the fees actually charged at closing haven’t strayed beyond the tolerances allowed by HUD and specified in the GFE. But more about that later.

Next time out, we’ll explore the rest of the 1100-series of the HUD-1 and other blocks of the GFE that have HUD-1 counterparts.

- Morrie Erickson

The New RESPA Rule – Title services and lender’s title insurance

If you like learning new terminology, the New RESPA Rule is for you.

Let’s start with “title services” which is actually part of a longer term called “title services and lender’s title insurance”. The dollar amount for “title services and lender’s title insurance” is to be disclosed by the lender in Block 4 of the GFE and entered by the closing or settlement agent in line 1101 of the HUD-1.

But, first things first: what does “title services” mean?

According to RESPA’s Appendix C (the instructions for completing the GFE, which are rather skimpy), the term “title services” includes title searches and exams, and all closing services by third party settlement service providers, regardless of whether the services are paid for by the borrower, seller, or loan originator. Remember that last part about it not mattering who pays.

But because Appendix C doesn’t really tell us much, let’s look at HUD’s FAQs, the latest version as of this writing being January 28, 2010.

From the part of the FAQs discussing Block 4, we learn that “title services” includes title searches and examinations, “…and all charges associated with title services and settlement (closing) agent services.” Charges for delivery and notary services and the actual settlement (closing) fee are also part of “title services”. So is the charge for issuing the title commitment.

Now we know more but could use a little more flesh on “title services’” bones. For instance, what about document preparation fees and costs associated with clearing up title problems? What about photocopying? Or printing 100+-page loan documents? Then printing 100+-page revisions? The FAQs for Block 4 of the GFE don’t get into that. But the FAQs for the 1100-series of the HUD-1 do.

According to the 1100-series FAQs, “title services” includes “[A]ny service in the provision of title insurance, including but not limited to: title examination and evaluation, preparation and issuance of commitment, clearance of underwriting objections, preparation and issuance of policies, all processing and administrative services required to perform these functions (e.g. document delivery, preparation and copying, wiring, endorsements, and notary); and the service of conducting a settlement.” Grammatically strained, perhaps, but clear enough to understand the bottom line: HUD is throwing every imaginable fee having anything to do with issuing title insurance and conducting a closing into the “title services” pot, including the proverbial kitchen sink. (Caveat: FAQs discussing Block 4 of the GFE confuse the issue by saying, “Charges that the seller pays as a matter of common practice and experience are not disclosed on the GFE.” Whether that comment is intended to override the kitchen sink approach to “title services” isn’t clear. Yet, when mentioning the settlement fee, the HUD-1 FAQs say line 1101 “…must include any amount for conducting the settlement that was paid by another person on behalf of the borrower.” So, if sellers typically pay part of the settlement fee, we’re left to wonder which sellers’ fees the GFE FAQs are talking about, especially since Appendix C expressly states the total for “title services” must be disclosed to the borrower on the GFE regardless of who pays for any portion of the services.)

Arguably then, the kitchen sink approach means required services such as overnighting by FedEx and UPS, wiring in and out, preparing deeds and affidavits, title searching and examining, copying and scanning, dropping documents off to everyone who needs them, uploading and downloading, printing and reprinting, archiving on the server and storing in the cloud, fixing title problems, getting an easement from the neighbor, knocking out a road maintenance agreement, closing, notarizing, hiring remote signing services, and on and on. In other words, everything – if done as part of the process of issuing title insurance and conducting the closing. We’re getting a little ahead of ourselves here, but if fees customarily paid by sellers aren’t bundled as borrowers’ fees on the GFE but are on the HUD-1, lenders may be out of tolerance in transactions in which sellers don’t pay.

In any event, lumping all possible “title services” charges in line 1101 is bundling at its best. But isn’t there a limit? Yes, there is.

If the borrower wants to hire an attorney to represent him or her at closing or to look over the title insurance, the fee for that is not part of “title services” because it has nothing to do with the title agent’s requirements to issue the title insurance and conduct the closing. In such a case, the borrower’s attorney fee would be shown inside the borrower’s column on a blank line in the 1100-series. (Software allows extra lines to be created on the HUD-1.) Same goes for a land survey. But if the title agent required a land survey to issue the title insurance, the surveyor’s fee would be part of “title services”, meaning it would be bundled in line 1101. Clear as mud, right?

Let’s move on to the “lender’s title insurance” portion of the term “title services and lender’s title insurance” as used in GFE Block 4 and line 1101 of the HUD-1. This one’s pretty straightforward, at least for now. (In a later blog, I’ll go into how HUD really wants lenders to disclose fees for “lender’s title insurance”, but let’s not complicate the issue yet.)

So, “lender’s title insurance”. According to HUD’s Appendix C, the lender must disclose in Block 4 of the GFE “…any lender’s title insurance premiums, when required, regardless of…” who selects the provider or who pays. As for the “when required” bit, let’s face it, lender’s title insurance will always be required. Lenders simply don’t make loans without being covered by title insurance. And clearly, the amount of the lender’s title insurance premiums must be included in Block 4, along with the cost (if any) of endorsements for extra coverage (environmental, adjustable rate, condominium, planned unit development, etc.).

Remember that Block 4 already includes the kitchen sink category of “title services”. So now we’re adding “lender’s title insurance” to it. Whatever that super-bundled number turns out to be goes on line 1101 of the HUD-1, although the cost of the “lender’s title insurance” is shown all by itself outside the columns in line 1104. But, does “lender’s title insurance” mean the premium and endorsements only, or the total the title agent charges to issue the lender’s policy when it’s issued alongside an owner’s policy?

The HUD-1 FAQs conflict.

Keep in mind that issuing two policies at the same time means the loan policy (in Indiana, anyway) is discounted to a flat rate. The procedure itself is commonly referred to as “simultaneous issue”. One FAQ answer says the charge for the lender’s title policy must be shown on line 1104 but doesn’t define whether charge means premium and endorsements alone. But another FAQ suggests the sum in line 1104 may be something else entirely, namely the undiscounted lender’s policy premium even though the borrower is actually getting a discount. That’s probably not right, though, for the FAQ goes on to point out that line 1104 of the HUD-1 should show outside the columns the “…actual charge the borrower will pay for the lender’s title insurance premium and related endorsements.”

(I’ve been using the term “outside the columns”. To clarify, “outside the columns” means the space to the left of the two right-hand columns on page 2 of the HUD-1. The left of the two columns is the borrower’s, while the right is the seller’s. Numbers inside these columns add to the total expenses for each party which are tallied in line 1400, while numbers “outside the columns” detail one or more specific fees that have been rolled into a bundled charge in that series [such as the 1100-series] and are for information purposes only.)

But back to the bundled charge for “title services and lender’s title insurance” which goes on line 1101 of the HUD-1. Into whose column does it go? Seller’s? Borrower’s? Or is it split somehow between both? We’ve cracked the door on that topic and it’s coming up, but we’re not quite ready for it yet.

On tap next is GFE Block 5, “Owner’s title insurance”, whose companion on the HUD-1 is line 1103.

- Morrie Erickson