09.30.08
Posted in Education, Industry News, Money and Finance, Mortgage and title Fraud, RESPA, Regulation of Insurers and Banks at 4:04 pm by Jeanne
Ever since the Enron mess, the government has required banks to give consumers reports that show a truer reflection of the current asset value on their books. This means when the value of a house drops, resulting change in the loan to value the loan will be considered a “bad loan.” Even though the homeowner may be current on all payments, the loan is now reported, on paper, as a bad investment.
For example, let’s say newly married Tom and Mary take out a mortgage with 5% down. So they have a 95% loan to value mortgage on their $200,000 home. So the the house is purchased for $200,000, the mortgage is $190,000, they put $10,000 down. They have conscientiously made all payments on time for the last 3 years. However, in the last three years their home’s value has dropped by 10%, reducing its asset book value to $180,000. The bank (or FNMA/FHLMC) depending on who holds the loan) must now must report the lower asset value on their books. This means they do not show enough value on the books to cover their loan in case of foreclosure.
In reality, if Tom and Mary continue to pay, there’s no problem. Except, it looks bad on the books, and the confidence level of the mortgage holder may wane.
But the financial institution now files its required report, and the investors see that the assets protecting their (mortgage backed) securities are no longer enough to repay the loan in the event of foreclosure. Remember, Tom and Mary are paying their mortgage on time, each and every month- as are the vast majority of people with a mortgage. Yet, if the loan to value is short because the house value dropped, the lender believes it may be in trouble and in need of funds to shore-up his balance sheet for the investors who purchased the securities backed by these mortgages. To some extent, it is a matter of confidence. Just as it is in the stock market. If Tom and Mary make payments, as most homeowners do, no problem. But what if they don’t. The mortgage holder’s confidence wanes. Will Tom and Mary continue to make their payments?
However, it gets worse. When people have taken out second and third mortgages worth significantly more than the property is currently worth, they made bail. This leaves the investor holding the bag, particularly because of the recent change in moving away from Private Mortgage Insurance. For many years PMI protected the lenders against falling asset value, by double checking the likelihood of repayment, and writing insurance against default. But in order to save the money on PMI, many took out first and second mortgages simultaneously (known as piggybacks) in order to circumvent PMI payments. The banks got a slightly higher yield on these loans, but much higher exposure because there is no PMI to fall back on.
There is no doubt that poor lending practices and greed are primary causes of this mess. Consumers lied on unethical and illegal loan applications, lenders were negligent in checking loan applications, financial advisers told the public to take out second and third mortgages to pay for cars and boats, to pay down credit cards, etc., and regulators, they did nothing. All of this has led to a tightening of credit that ought to help alleviate the problem in the future. However, today, tightening credit is a disaster for the average consumer. Because although most of us pay our bills on time, the system no longer trusts us to pay. The system doesn’t have the safety net of enough value in our houses, tightening credit. So legitimate, needed credit will be almost impossible to get. The parents wanting to send their child to college will not be able to pay because they can’t get a loan. The car that breaks down cannot be fixed because the owner can’t afford to fix it and can’t get a loan. The small business that has the cash flow problem and can’t get a loan, will be unable to make payroll, putting people out of jobs.
It’s not over. Our next round will be rise in rates for adjustable-rate home equity lines of credit (HELOC). Because of the dropped value of homes, many of these loans are now subprime. Many of these adjustable rate mortgages are set by the LIBOR. LIBOR went up 50% last week. A tightening of credit. Now, when they go to refinance out of this expensive adjustable-rate product, they will be in trouble because there’s no longer enough equity in their house to cover it. We got ourselves into this one. In order to get new computers, new cars, new boats, and the latest television sets, we all borrowed unwisely. Recognizing that we could write off the interest on that second mortgage, and recognizing that it had a lower interest rate than our credit cards, we bought, and bought, and bought. Those with 2nd and 3rd ARM’s are in trouble. They will have to make some tough decisions. Take a second job, sell the new boat, take Johnny out of that private school? But as consumers, we knowingly put ourselves there. In most cases, we have no one to blame but ourselves. Somehow we believed that the value of our house would always go up, up, up and we could sell it tomorrow for much more than we paid for today.
This will be a difficult lesson for us all. Our parents and grandparents worked hard to pay off the mortgage. Remember the black and white movies where a grandma and grandpa danced as they tore up the mortgage? Where mom and dad saved to buy a new couch or dining room set. It’s a scene from the past. Somewhere along the line we lost the vision to own things free and clear, and the desire to be mortgage free. We saw our home only as an asset to be borrowed against for a new car or TV set. But I believe we are smart people, and that we can learn from hard knock lessons. Let’s hope the government steps up and bales us out from this disaster once again, there is no other way. Let’s hope we all learn from this. We must all pay our own way, as we go.
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Posted in Education at 3:57 pm by Jeanne
I read a news article today about the bailout. It was written for real estate agents on how to reassure their clients that everything is going to be okay. I understand the perspective, real estate agents are talking to homeowners who have listed their property for sale and want to know it will all be fine, that a qualified buyer can be found. It talks a bit about the bailout and how only 3% of homeowners are behind in payments and 1% are in foreclosure. Overall, a positive spin on a tough market. One to pep up the troops in a discouraging economy.
I understand where the author is and coming from, clients want to be reassured that all is okay, and real-estate agents want to assure them. But I t must say, the author missed the mark. I don’t think it’s helpful to talk about the bailout as something that can be glossed over with homeowner’s. It would have been more helpful for the article to have addressed that this is not really a bailout, it is about confidence. It is about shoring up a national and international level of trust that has been lost in the United States and its stock markets. The world is wondering if U.S. citizens will be willing to pay back what they have borrowed. They’re wondering if we will honor repaying our debts. The author never said the bailout is MUCH BIGGER than the 1% in foreclosure. It affects our stocks, our 401K’s, our ability to borrow, our jobs and our lives. This article may be helpful to an agent who is trying to quell fears of a party who has already listed her property, but it will not help the poor buyers who cannot get a loan. It won’t help the small business that needs a short term loan to make payroll, but can’t get it. Our entire economy is at risk.
The bailout needs to happen, and I am incensed that congress is not getting it done NOW
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09.29.08
Posted in Education, Industry News, Regulation of Insurers and Banks at 11:24 am by Jeanne
by Jarrod Clabaugh, Printed with permission from Source of Title
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Governor Arnold Schwarzenegger signed Senate Bill 133 into law on September 25, 2008. The legislation implements greater controls over the practice of title insurance in California. Introduced by Senator Sam Aanestad in January 2007, the bill focuses on inducements offered by title marketing representatives to real estate agents and brokers in exchange for the steerage of business to their title insurance companies. The bill was supported by both the California Department of Insurance and the California Land Title Association.
The bill provides the department of insurance with significant new powers to regulate marketing practices in the title insurance industry. In particular, the bill creates the first program in the country to register and regulate title company sales representatives.
According to the bill, a person is prohibited from being employed as a title marketing representative unless he or she holds a valid certificate of registration issued by the commissioner for a three-year period. Should a person market title insurance without a valid certificate, the commissioner can issue a cease and desist order prohibiting that person from further marketing.
Additionally, under the legislation, title companies must notify the commissioner when a title marketing representative is hired or terminated. It also establishes an application process for the certificate of registration and allows the commissioner to set a fee to obtain or renew a certificate in an amount sufficient to defray the actual costs of processing it. The legislation states this cost cannot exceed $200.
The submitted application must contain several facts about the applicant, including the person’s residential address, principal business address, and the applicant’s mailing address. The applicant must also submit a statement, signed by an officer of the business by whom the applicant is or will be employed, certifying that the applicant will be provided training within 60 days of the hiring date or date of application. The applicant must submit another statement as to whether he or she has previously had a certificate of registration revoked, suspended or denied.
Should a marketing representative violate any terms of the state’s title insurance code, the legislation states that the department can revoke, suspend, restrict or decline to issue a certificate of registration if it determines at a hearing that the representative did violate the law. Additionally, any title marketing representative who has his or her certificate revoked by the department is not permitted to reapply for another certificate of registration with the department for five years from the date of revocation.
The legislation also establishes that it is unlawful for any title insurer, underwritten title company or controlled escrow company to pay, directly or indirectly, any commission, compensation, or other consideration to any person as an inducement for the placement or referral of title business. The actual placement or referral of title business is not a precondition to a violation of this section, whether the violation is or is not a per se violation pursuant to subdivision.
While the legislation sets many guidelines as to what is considered an inducement, one particular aspect that alarms title agents is they can no longer pay for anyone’s food, beverage or entertainment but their own.
“So no more free lunches for clients,” said Greg Knowles, an agent with Lawyers Title in Santa Barbara. “That is a huge change in our business. I am having a hard time thinking I can’t take a good customer to lunch. I can’t take one of them to a baseball game or local sporting event.”
“Competing specifically on the quality of the work we do and the price we charge probably isn’t the worst outcome in the world,” he added. “I do have many close friends in this business that my wife and I may invite over for dinner, is that illegal as well?”
The legislation mandates that representatives can continue to provide parties with promotional items with a permanently affixed company logo so long as each individual item’s value does not exceed $10. These gifts, however, cannot be gift certificates, gift cards or any other item that has a specific monetary value.
The legislation states that the provision or payment of any form of consideration as an inducement for the placement or referral of title business not specifically set forth in the bill will be considered unlawful and is, thus, prohibited.
“Restricting the illegal activities by title marketing representatives is a win for businesses and consumers,” said Steve Poizner, the department of insurance’s commissioner. “By curtailing the practice of real estate agents and brokers recommending a specific title insurer to their clients due to incentives provided by title marketing representatives, competition and transparency are fostered in the insurance marketplace.”
The legislation was the culmination of several years of effort by the department of insurance to address the growing problem of inducements. While such practices are illegal, the department had no enforcement authority over the individuals who used them before this legislation was signed. Now, the department is provided with regulatory oversight of title marketing representatives.
“Senate Bill 133 enhances consumer protection while maintaining the healthy, competitive title insurance marketplace in California,” said Craig Page, the executive president of the CLTA. “The legislation is just the latest example of the industry’s effort to promote consumer choice in the title insurance market. The competitive market in California has led to title insurance rates that are below the national average according to Bankrate.com.”
“Senate Bill 133 is win-win legislation for California,” Aanestad said. “It is pro-business and it is pro-consumer. By curtailing the practice of some real estate agents and brokers who recommend a specified title insurer to clients due to the use of incentives offered by some title marketing representatives, it promotes real competition in the title insurance marketplace. Competition among insurers can transfer into lower rates and a better deal for homebuyers.”
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09.16.08
Posted in E-recording, Industry News, Mortgage and title Fraud, Privacy and Public Records at 4:59 pm by Jeanne
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by Robert Franco, Source of Title
Reprinted with Permission
Website Stripped of Sensitive Information
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The governing board of the Iowa Land Records Website chose to restrict all access to records maintained on the site after a public backlash led to concerns by lawmakers and residents alike. Last week, the site indicated that it would ignore the request of Governor Chet Culver to block access to the records because many contained sensitive information like Social Security numbers.
Yet, officials indicated that its previous actions had failed to reduce fears of identity theft and privacy concerns and, thus, suspending access to the records was necessary.
Visitors to the site discover a statement from the operators indicating that “…until further notice all document images are restricted and cannot be accessed through this Website.” Phil Dunshee, one of the site’s project managers, said in a press release that access to the records would be suspended indefinitely.
“Recorders sincerely regret the disruptive impact this will have on people in the real estate industry,” Dunshee said. “It’s really the last place they wanted to go, but at this point, I don’t really think they have any further choice.”
Despite providing useful information to real estate professionals, many expressed support for the actions undertaken by the site’s operators.
“As mortgage lenders, we are seeing more and more identity theft on credit reports, so it’s imperative that Social Security numbers be redacted from those old documents,” said Christy Allison, the president of Iowa Mortgage Association, in an interview with The Des Moines Register.
Culver and Michael Maurro, the secretary of state, both had their Social Security numbers listed in documents that were maintained on the Website. After learning this, Culver asked the site to remove his information and block access to documents containing people’s private information last week. The site attempted to block access to thousands of records that contained sensitive information after receiving his request, but apparently failed to adequately do so. Thus, the operators decided to shutdown all access this week.
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09.14.08
Posted in Education, Mortgage and title Fraud at 2:53 pm by Jeanne
As a title insurance educator and having been in the title industry for 30 years, I am, unfortunately, quite familiar with theft of funds. I have had to remove good personnel from access to corporate accounts, just because of family illness. (When they ask for an advance on their paycheck, it is only prudent to take them off the corporate checking account. ) I once had a closer create a fictitious company, adding bogus charges to closing statements for that company, only to deposit the checks into her own personal fictitious company account. After I noticed that virtually all of her closings had an additional $350 payable to an unknown closing company, I looked at a copy of a canceled check only to see her signature. She was busted. I fired her. I was also involved with an employee for a Homeowners Association, who had a gambling problem, who diverted our checks to pay for her gambling disease. Access to significant escrow funds is truly a tempting devil. And title companies, because of the incredible dollars they handle in closing a transaction, and how quickly the funds move, are a prime target.
In that regard, title companies have been hit very hard over the last few years. Just Google “Title Insurance Fraud.” Defalcations have become prevalent across the U.S. Unlike a loss on a single policy, defalcations usually involve losses in the millions of dollars on a number of policies, and require hundreds if not thousands of man-hours to investigate and settle the resulting claims.
What is defalcation?
Defalcation is defined as “act of embezzling; failure to meet an obligation; misappropriation of trust funds or money held in any fiduciary capacity; failure to properly account for such funds, according to” Black’s Law Dictionary. In other words, in our business, defalcation is either a negligent or criminal act by a settlement agent or fiduciary resulting in a loss of funds that were supposed to be applied to a specific real estate closing. Defalcations can happen anywhere, in a real estate office, within a title underwriters’ office, by a title agent, an Atty., a paralegal in the attorney’s office, or elsewhere.
The most common defalcations occur as a result of an agent failing to pay off a preexisting lien, such as a mortgage, against the property. The agent instead “borrows” i. e. steals the funds intended for that closing and uses them for their own personal benefit. To cover the fraudulent act, the closer will then often continue to make monthly payments to a prior lender for a while to keep the loan current, and in order to avoid imminent detection. The fraud usually starts small, with the theft of funds from a single closing. It then balloons out of control as the closer is forced to use funds from other closings to make the payments on the mortgages that were not paid off.In other instances, the closer or title agency is negligent in reconciling their trust account. The shortage eventually comes to light when there are insufficient funds to cover outstanding checks. Another occurrence happens when monies to fund a loan or closing were never deposited into the account or the loan was never funded by the lender, or the lenders check out the camp was no good. While some states have good funds legislation, others do not, causing a risk to the settlement agent.
Common Red Flags for Defalcation: The following is a list of “Red Flags” for those involved in a real estate defalcation:
- Principal delegates too much responsibility to staff or paralegal without enough oversight
- Company shows little concern about closing issues or claims, “trusting” completely all employees
- Key personnel have chronic health problems, either themselves or immediate family members, and are frequently missing from work
- On the flip side, Staff who handle trust or corporate accounts, and refuse to take more than a couple of days off at a time may be hiding something
- Files and or office are poorly organized, making it hard to review files
- Specific files cannot be located when requested for audit or problem
- Staff or principals stretched too thin/always too busy to respond promptly
- Company is understaffed/ or has frequent responsible is staff changes
- Agent or staff difficult to reach/won’t return phone calls
- Monies held in escrow for pending assessments or other long term obligations are not regularly attended to
- Audits show sloppy work product and incomplete post closing work
- Extravagant lifestyle, major purchases by title agent, family member or key persons
- Family problems, particularly with expensive health issues
- Questionable reputation in the professional community
- Staff appear to be incompetent when asked specific questions
- Mistakes in files are common
- Addiction to alcohol, drugs, or gambling of principle or family members
- Poor business managers make theft of funds much easier
- Companies that fail to reconcile trust/ escrow account(s) each month
- Solo practitioners with control over all title functions
- A small family business with control over all functions
- High percentage of B&C paper lenders as clients
- High cancellation rates on files
- High Accounts Receivable, as a percentage of total work done shows poor management
- NSF Notices on trust or escrow account checks
- Multiple Escrow Accounts are fertile for check kiting
- Title Premiums paid from operating or personal checking account
- Handwritten HUD-1 statements or corrections on closing documents
- Multiple corrections on HUD-1 statements
- Staff evasive when asked about personal, title or financial matters
- Losses in the stock or real estate markets are key reasons for defalcation
- Operating cash flow or credit problems are key reasons for defalcation
- Closers or settlement agents with personal problems who have access to escrow accounts should be removed from the account
See also related blog article on Title Fraud.
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