Recording

The Future of E-Closing

A great article about the CFPB’s thoughts on the future of E-Closing at Lexology.  See it here 

State of Delaware Sues MERS

In a new twist, the State of Delaware is suing MERS under the Unlawful and Deceptive Trade Practices Act (UDTPA.) The suit claims that MERS has left for borrowers “no public trail by which anyone can identify the principals or verify the propriety of the (mortgage) transfer.” The private and obscure nature of their database makes it difficult for consumers “to know of or challenge inaccuracies in the MERS System”  i.e. – who the heck holds the mortgage and who the heck has the right to foreclose?  Read more at Delaware Online

Lenders Must Follow Local Recording Rules

An interesting case out of North Carolina. Orange County, No. Carolina has designated a PIN System (Property Identification Number) as the “official recording index.” In the case where two parcels were listed on a deed of trust, but only one PIN was listed on the DOT, the Court Ruled there was no constructive notice of the second parcel, even though the legal description and the names of the Grantors and Grantees were properly listed on the Deed of Trust. Therefore the typical rule that “if you can find it in the Grantor-Grantee Index, you have constructive notice” is out the window.

“…Because the deed of trust did not include the PIN for Tract I, it would not have appeared in any bona fide purchaser’s search for Tract I in the PIN Index. Requiring a bona fide purchaser to search the grantor/grantee index in addition to the PIN index would render the PIN Index superfluous and the North Carolina law adopting it meaningless.”

Read more at Legal Blog

Foreclosure Mill Sold to China

Read more at  Bloomberg News

Attorney David Stern made about $146 million when he sold his non-legal foreclosure business to a company originally formed to do business in China, according to a regulatory filing. The non-legal foreclosure businesses are paid fixed fees for work, such as $400 for title searches, according to the regulatory filing and Stern’s remarks at the investor conference, as quoted in the securities lawsuit. Profit, of course, depends on cutting costs and boosting volume. The business is also reported to be supported by an operation in the Philippines that provides data entry and document preparation, according to the filing. The company was renamed DJSP Enterprises.

Ohio Decides Case Against Race Notice Rule

 Printed with Permission from Robert Franco, Source of Title
“It is every title agent’s worst nightmare – a valid second mortgage is missed and the first mortgage is refinanced without paying it off. Then, the new mortgagee forecloses and discovers that its lien may be in second place.  The lender has a claim on their title policy, but all may not be lost… the doctrine of equitable subrogation can put the lender in the shoes of the original first mortgagee that they paid off, saving their priority.  But, should the court apply such a remedy to rectify the negligence of the title agent?  This was the focus of a recently decided case in the Court of Appeals of Ohio, Eighth District in Cuyahoga County – ABN AMRO v. Kangah.
On July 5, 2000 Kangah obtained a first mortgage from First Ohio Mortgage in the amount of $68,916, and a second from the Cuyahoga County Department of Development (“CCDOD”) in the amount of $7,500.  Both mortgages were properly recorded on July 12 with the CCDOD mortgage specifically referred to as the subordinate security instrument.

In May 2001, Kangah refinanced with ABN AMRO (“ABN”) and received proceeds totalling $77,000.  The ABN mortgage was filed on June 19, 2001.  First Class Title Agency failed to discover the CCDOD mortgage and paid off First Ohio, the outstanding taxes, and the fees and costs associated with the transaction.  On November 7, 2001 the First Ohio mortgage was released of record.

On November 8, 2006 ABN filed a foreclosure complaint and, not surprisingly, CCDOD filed an answer and cross-claim asserting that it had the first and best lien on the property.  ABN argued that the doctrine of equitable subrogation applies because it paid off the first mortgage and intended to hold the first and best lien on the property.  And, it was always the intent of CCDOD to hold a subordinate lien.

The general rule in Ohio is that the first mortgage that is recorded has preference over a subsequently recorded mortgage.  “The priority of a mortgage is determined by reviewing the recording chronology.”  However, the court went on to explain the exception to the rule.

In some circumstances, the doctrine of equitable subrogation can overcome the general statutory rule.  Equitable subrogation arises by operation of law when one having a liability or right or a fiduciary relation in the premises pays a debt by another under such circumstances that he is in equity entitled to the security or obligation held by the creditor whom he has paid.  In order to be entitled to equitable subrogation, the equity must be strong and the case clear.

In other words, a third party who, with its own funds, satisfies and discharges a prior first mortgage on real estate, is subrogated to all rights of the first mortgagee in that real estate.  Therefore, if the parties intended, a mortgagee who satisfies the first mortgage steps into the shoes of the first mortgagee.

The court went on to note that the doctrine of equitable subrogation has not been uniformly applied across Ohio.  Some courts have refused to apply it when the party asserting its applicability is negligent in its business practices (i.e., failing to record the mortgage in a timely manner), and the party is in the best position to protect its interests.  A couple of courts have declined to apply it when a title company failed to discover a preexisting and validly recorded mortgage, “in essence, eliminating the doctrine altogether.”  Other courts have allowed the equitable remedy where the title company “mistakenly failed to discover a preexisting and validly recorded mortgage.”

There are two competing policy concerns at issue with equitable subrogation in such a case.  First, the title agency was negligent in failing to discover the CCDOD mortgage.  It searched the title and issued coverage to protect ABM from a loss due to its mortgage not having the first and best lien on the property.  Should the doctrine reward the party who was negligent in performing its duties?

Second, CCDOD had bargained for a second mortgage position.  If Kangah had not refinanced, CCDOD would have still been in second place.  Is it fair to reward it by allowing its mortgage to assume the first priority because of a mistake made by the title agent?

In this case, the court found in favor of ABN and applied the doctrine of equitable subrogation. 

In the case at hand, we find that the doctrine of equitable subrogation applies because ABN intended to hold the first and best lien on the property, CCDOD agreed to its subordinate security interest, ABN’s title company’s failure to discover CCDOD’s mortgage lien was a mere mistake, and CCDOD was not prejudiced by its inferior position.”

There are two relevant issues conspicuously missing from the court’s analysis, however.  First, there is no mention of the amount of the First Ohio payoff.  At best, if the doctrine does apply, it would only protect ABN up to the amount that was owed on that mortgage – ABN could receive no better rights than First Ohio had at that time.  Of course, depending on the amount the property sold for at the sheriff’s sale, this might be a moot point.  However, the court should have indicated that ABN’s priority lien was limited by this amount.

Second, the court really didn’t discuss the issue of whether CCDOD was prejudiced by the application of the doctrine.  It merely assumed that since it bargained for a second position, it was not prejudiced by the subrogation.  This may not be entirely correct.  If the CCDOD mortgage had been found, the refinance could not have taken place unless CCDOD was paid off or it agreed to voluntarily subordinate its lien.  This would have given CCDOD the opportunity to evaluate its position and insist that it be paid off in 2001. 

Furthermore, Kangah borrowed about $8,000 more with ABN than it had with First Ohio.  Depending on the terms of the loans, this could have created more of a hardship for Kangah than he had under the First Ohio mortgage, making it less likely that CCDOD would be paid.  For example, if the terms of the ABN mortgage were such that the rate and payment increased more than it would have under the First Ohio mortgage, it could have been a contributing factor to Kangah’s default and eventual foreclosure.  (Was the ABN loan a variable rate sub-prime loan?)

Equitable subrogation is, as the name implies, an equitable remedy.  Its application should be determined on a case by case basis and applied with caution.  It is difficult to say in this case whether the court got it right – it very well may have.  However, courts should be cautious to make specific holdings in such cases and thoroughly evaluate the equities at issue. 

Robert A. Franco
SOURCE OF TITLE 

To Fix the Housing Crisis: Get Rid of Title Insurance?!!

Reuters has an interesting, albeit confusing, article referring to a Fix for the Housing Crisis by reinventing  or getting rid of the title insurance industry. It is a great example of just how misunderstood the title industry is. (Thankfully, Reuter’s says the views expressed are the author’s own.)

The author, Elena Panartis, an institutional economist states:

The United States has a broken registry system, and instead of ever fixing it allowed a title insurance industry to arise as a substitute. Title insurance is non-transparent and (at best) inconsistently regulated, yet it is the main system through which information about property valuation flows. Plus, you have to pay for the information. This leads to all sorts of problems, and fuels speculation.

Some examples of the author’s confusion:

·         She confuses the Australian and Canadian Torrens Systems with the U.S. recording system. Only a few counties in the U.S. have the state sponsored Torrens indemnity program

·         She does not recognize there are 50 separate state recording systems for both land title and liens against people that affect title, and  that title companies simplify these into a single, understandable title product for the secondary market

·         She suggests that title companies set values for property rather than insuring market values established by willing buyers and sellers or an appraiser. Not true.

·         She seems to think information obtained from public offices is free. Not only not free, often difficult to obtain from the myriad of places to search.

It seems we need to do a lot more education with economists to explain what title insurance does and how it makes the housing market safer for the public and better for the economy. The author is a teacher at the university level. She should be more careful in what she says. She does not know the product , nor does she how the systems work.

What does Mortgage Modification mean to the Title Industry?

The Title Insurance industry has slowed to a crawl. Most of the business at the closing table is either a foreclosure or a short sales. And with Congress’ plan to modify existing mortgages, even that pittance will be drying up. 

Congress plans to modify existing mortgages to lower rates so borrowers can afford their monthly payments.  How does this affect the title industry you ask? In the past, when mortgages were modified, title policies were still in the picture, because intervening liens were a concern. For example, let’s say Sam Smith wanted to modify the terms of his loan by increasing the loan amount. You were the first mortgage lender. If you modified the loan, you had to worry about what that would do to your 1st lien position. If there was a second mortgage or a tax lien on the property, changing the terms of your loan might bump you into second place or third place. The title industry therefore stepped forward with updates to the policies. we checked for intervening liens, we got subordination agreements from the secondary lien holders, we recorded lots of documentation, and endorsed the policy with matching fees for our work.

So, how is this different? Think about it. Titles on all of these troubled loans have already been insured. But this time, they likely won’t need to be insured again. The new loan modification law will generally decrease the interest rate and that will be an advantage to any secondary lien holders, putting them in a stronger position. Therefore, the modification should stand on its face, and no endorsements should be needed. So, there won’t be any need for that title review, or an endorsement to the policy, or new title insurance premium fees. Their might be a pittance for sitting down with the consumer to sign the modification agreement and record it (and with the new RESPA law, title companies won’t even be able to mark up the recording fee.)

Loan modifications are good for the consumer, and good for the economy. They help neighborhoods. They keep banks out of the painful REO business. But they provide little role for title companies. Ouch – another big ding for an already hurting industry.

County Anticipates New Public Notice on Foreclosures

A good article in a local newspaper  the Record-Bee reminds us that unfinished homes are a problem for communities and counties that want to collect unpaid fees. One county is working to create a public notice to make it easier for title companies, abstractors and buyers of the problems. It is difficult enough to search various locations for all the problems and unpaid fees in this time of heavy foreclosures, but especially on new construction. The recording of these problems and delinquencies in a prominent location is a wonderful idea that will help both the public and private sectors, and I hope it catches on.

LAKE COUNTY, CA The Lake County Community Development Department’s building division is proposing a measure that would address problems that arise when unfinished homes go into foreclosure…”What happens is that with the housing market the way it is, a lot of people just walk away from these homes. … this is something that will allow us to put notice on the public record …to make things more clear to the downstream person who gets the property,”

Are Abstractors to Blame for Offshoring?

by Robert Franco | 2008/11/26 | Source of Title, Used with Permission

A couple of recent (Source of Title) posts regarding offshoring have stirred up some controversy.  Sunil Ojha started a blog defending the practice of searching titles from India.  In Misunderstanding and Clearification (sic) of Same and Resolved Your Real Issue, OJha explains why offshoring makes good business sense and how it can be done effectively.  Whether you agree or disagree, the real question is why is anybody offshoring to begin with?  There is no doubt that offshoring cuts costs and that is attractive to companies looking for any advantage in today’s business environment.  But, abstracting was always a localized practice that required a particular knowledge of state and local real property laws to produce a reliable product.  Why would anyone trade quality for savings?  More importantly, have they? 

Source of Title Blog ::

Let’s start with a basic premise that it is possible to reliably search an online title plant.  I am the first to say that I have some doubts about online records, but it is possible.  The real problem that I have with online records is that not all of the information we search is available electronically; thus, the so called “thin-title” plants are incomplete.  However, title plants are the norm in some parts of the country, and even required in some places.  If they are complete, there should be no problem using them for abstracting purposes.

So the real difference between searching a title plant from India and searching a title plant locally, is the skill and knowledge of the abstractor.  As I have stated many times, there are vast differences between the states that have a huge impact on the status of title.  I believe that I have a strong understanding of the real property laws in Ohio, but I would never even consider tyring to do a search in another state. 

Some of the biggest differences between the states could be dower, community property laws, state Medicaid recovery laws, recording statutes, etc.  Anyone can find deeds, mortgages and liens, and report their volumes and pages, and recording dates.  That is the simple part.  But, understanding how those documents affect title is what makes the local examiner such a value to the industry.

I think it is a given that just as I would not be competent to abstract in any state other than Ohio, a searcher in India could not be competent to search multiple states.  It is conceivable that an Indian searcher could learn one or two states, and develop a sufficient level of competence.  Varun Sharma points out that this is exactly what they do in India (see comments).

There are different teams working on different states doing online title searches all at the same time and they are trained on state specific laws and nuances because they are experience in conducting searches in that particular State only.

Even then, it takes several months or even years of on-the-job training to really develop the necessary skills to become a competent, professional abstractor.  I would imagine it would require even more time for someone in another country, who is completely unfamiliar with our laws and culture, to grasp the concepts.  Based on a previous statement made by the head of an Indian outsourcing company, I have my doubts about the quality of training they receive.

Just when Mr Kanth was wondering about the next steps, he met the president of a title company based out of Baltimore in 2003-2004. He told Mr Kanth that there was a refinance boom in the US which resulted in a huge backlog in terms of production. Incidentally, his brother M Sujay Kanth, who is now the COO of ESS, happened to be in the US to explore business opportunities. They took up this opportunity. This was their first break. They met with the title official and looked at the process. “Initially, we had no clue of what was going on and it was very hard to grasp. We took it as a challenge and Sujay got trained in their office for about 40 days after which we started the transition to my India office from 2004,” the doc said.

 

Forty days of training is hardly suffient.  Regardless, to assume that searching titles from India is worse than using local abstractors, it must also be assumed that all local abstractors are well trained and educated in their state’s real property laws.  I believe that is a fallacy.  Basically, there is no difference between a search completed by an unqualified local abstractor and one completed by an unqualified Indian abstractor – except the latter is cheaper, of course. 

Before I continue, let me first acknowledge that there are still some very knowledgeable, local abstractors who provide very valuable services in this industry.  However, I believe that has become more the exception than the rule.  Many abstractors learned to abstract by trial and error, an online course, or from another searcher that doesn’t have the proper knowledge of abstracting.  I believe that this started with the “equity loan,” or “current owner,” searchers.  Once upon a time, they were used to provide very basic information for non-insured products.  Then, they slowly began to expand into “full searches” used for issuing title insurance.  I will never forget the first time I heard one of these searchers say “a full search is nothing more than a really good current owner with a chain of title.” 

Soon, the title industry began embracing current owner searches for title insurance purposes.  Current owners were much cheaper because these searchers, mostly out of ignorance, were taking shortcuts that a professional abstractor would never consider.  As the title industry began to lower the standards for its search requirements, the unskilled searchers flourished.  For better or worse, these over-simplified searches became the norm and everybody wanted them cheaper and faster.  The demand for skilled, professional abstractors dropped dramatically. 

Today the line between “searcher” and “abstractor” is blurred and the two terms have become interchangeable.  I wonder how many abstractors are really qualified to provide reliable title evidence. 

With the modern technological advance of electronic imaging, a title plant can be used to search titles from anywhere in the world.  If the local abstractors are really just finding documents and copying down pertinent information on a report, without a true understanding of the impact of those documents on the title, why not have that function done in India?  It is certainly cheaper… and since they can search around the clock, it is probably faster.

I do not agree with the practice of offshoring.  As Pat Scott said (see comments), “The title search is the foundation of the industry.  It is not a clerical task to be outsourced.” However, it would seem that the depth of knowledge of the local abstractors is not what it used to be.  If the industry were to suddenly stop offshoring and begin demanding quality abstracts, there would be a lot of local abstractors out of work, just the same.  The problem is that there is no way to know which ones are well qualified.  Because there are very few states with any sort of meaningful licensing, anyone can call themselves an abstractor. And, many who probably believe themselves to be professional abstractors just don’t know how much they don’t know.

My basic point is that the level of skill and knowledge between the average local abstractor and the Indian abstractor are probably not as far apart as you may think.  Title searching has been dumbed-down for so long that there are probably few left who care to educate themselves beyond what is necessary to copy recording information from filed documents.  There being little difference between the services provided here in the USA and overseas, it is not that hard to see why so many companies are offshoring title searches.  By failing to maintain a superior knowledge, the abstractors have probably made the offshoring decision much easier for those who chose to embrace it.  It basically turns on an issue of costs and profits.

Again, I am not saying that there aren’t still good, local abstractors out there.  I am merely pointing out that many of them have noticed that they are losing work to cheaper, untrained, incompetent competition; not just in India, but right there in there own counties.

Robert A. Franco
SOURCE OF TITLE

Thorny Issue In Deed

Monday, November 17, 2008

By CARL ROTENBERG

Times Herald Staff

 

NORRISTOWN — The “Uniform Municipal Deed Registration Act,” which takes effect on Dec. 8, basically pits the officials of 29 Pennsylvania townships and municipalities against the real estate title insurance industry, the lawyers who preside over residential “settlements” of sales and even county officials who are required to “record” a deed after the sale.  

 

This article demonstrates the ongoing battle between city, county and private sectors, all with the very best interests of the public, but each looking at issues from only their respective viewpoint. The same battle has been forged elsewhere, and undoubtedly will be again, but looking at the BIG picture, the documents must go of record immediately after closing, or lenders will not lend, and the lack of money available for sales will be a much bigger problem for the city than some  repairs. Read Times Herald full article by clicking here and post your thoughts.

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