Title Company

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 

Are You Ready for the New RESPA HUD-1

Title Companies – All those line items for: Settlement or closing fee, Abstract or title search, Title examination, Title insurance binder, Document preparation, Notary fees, Title Insurance premiums, courier fees, Admin fees, fax fees, email fees, processing fees,  are going away… Fees will be either elimninated, or at the very least, reduced to cost under the new RESPA. No longer will the common mark-ups be acceptable, nor can they be hidden from the customer in a myriad of confusing fees.

Under the new RESPA law, courier fees, admin fees, closing fees and dozens of other charges cannot be hidden in those miscellaneous line items 1102-1199 on the HUD-1.  Title companies will now have to PRINT new all-inclusive rates. These will be filled in as a single item on ONE LINE – line1101. And title companies will have to hold to that number for the lender, because the lender is responsible for overages if settlement charges do not match the HUD-1. Title Companies will also have to legitimately back-up the numbers with specific reports as to their validity, and maintain those reports, so that HUD can audit their authenticity.

While this will make comparison shopping much easier for the consumer, and will force title companies to sharpen their pencils, it will be difficult for an industry that for a long time has used marked up fees for additional revenue. It would seem that no one is anxious to go to the new HUD-1 before he has to – it will cost title companies some serious revenue!

Are you ready for the change? This is NOT simply a matter of updating your software, it means a lot of planning and preparing detailed numbers for all those items on the closing statement. Actual out of pocket costs must be averaged and lumped into a single number for line 1101. (Other lines are intended for third party providers, for example, Line 1102 is only to be used when using a non-title company third party vendor for closing.) When the new numbers are available, schedules must be printed and distributed for your lenders to use on the new GFE, and for savvy consumers to see as well.

Watch for the complete gory details in my soon to be released online course: The new GFE Based HUD-1

RESPA – On Again, Off Again… Another Lawsuit Filed

According to Builder Online, HUD has delayed the implementation of RESPA that was to go into effect on Jan. 16th by 90 days. HUD agreed to the delay to assemble info it needs to defend against another lawsuit , this one brought  on by he National Association of Home Builders (NAHB) and other plaintiffs, including 13 large builders and their affiliated lenders and title companies.

HUD’s published final rule eliminates builders from offering home buyers incentives if the buyers are linked into using an affiliated title company, mortgage company, or other affiliated service provider. The NAHB suggests that dismantling these affiliations will not help the consumer and will additionally lead to job losses.  

HUD is also dealing with a lawsuit filed by the Mortgage Brokers Association (MBA) in December that is trying to block a rule requiring lenders and mortgage brokers to provide buyers with a “good faith estimate” that discloses loan terms and yield-spread premiums on the HUD-1 settlement statement.

Surprisingly, at this time, there seems to be no interest by the American Land Title Association (ALTA) to commence a lawsuit against the very unpopular required disclosure on the HUD-1 of the premium split between title agencies (that receive the vast majority of the premium) and title underwriters (who receive very little.) HUD has required the disclosure based on recommendations from the Government Accountability Office that has been critical of the industry practice.

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

Secret Service Investigates Misappropriation of Closing Funds

“The mission and of the United States Secret Service is to safeguard the nation’s financial infrastructure and payment systems to preserve the integrity of the economy, … “ And that statement is being put to use in another instance where a Title Company appears to have absconded with funds from the public. This time, Pennsylvania’s Priority Search, Inc. is being investigated by the Secret Service for allegedly not appropriately disbursing settlement funds. After Priority Search, Inc was recommended by a local real estate agent, the transactions moved forward, and at first seemed normal, but according to Pennsylvania’s Times Leader newspaper: (see full article)

Michael Bogdon borrowed more than $170,000 to buy a house in Rice Township, and the cash was given to Priority Search around the time of the Aug. 22 property closing.

Bogdon gutted and remodeled the home since then and was in a state of disbelief when the seller showed up at his doorstep about two weeks ago to inform him that Priority Search had never turned over the money.

Some of the funds were supposed to pay off the sellers’ old mortgage, and now the sellers – who are retirees – have outstanding mortgages on both their former and new houses, Bogdon said.

After the secret service investigation announcement was made public, the number of others stepped forward with similar missing funds problems having to do with Priority Search, Inc.  This was clearly not an isolated incident.  But misuse of closing funds happens not only in Pennsylvania, misuse of closing funds seems to have become a weekly occurrence across the country.  Many title insurance and land title professionals are now concerned with this state of affairs.  Specifically, a number of professionals are currently working on, or have recently completed, state legislation to licensed settlement agents.  All seem to agree it would be a good idea to know who is handling the settlement funds, and what their background is.  It is unfortunate that the industry hasn’t such problems, that kudos to those were working toward a solution.  I believe licensing is in the best interest of the public, and of the title industry. 

Whats Good about the Good Faith Estimate?

I’m sure that much will be much written about the new good faith estimate. Personally, I think the RESPA folks did an excellent job. It’s not easy to reform in 1974 law, especially one has been abused so significantly in the last few years. But for those of us in the Title Insurance and Closing Industries who have dealt with a HUD-1 for many years, a mandatory,uniform GFE makes sense. Its outline matches nicely with the RESPA HUD-1 closing statement. I  especially like the “Summary of your loan” section, where it outlines the terms of the deal giving the initial loan amount, long-term, initial interest rate, if the rate can rise, prepayment penalties and whether or not the loan has a balloon. This is the gist of the deal. And I like the fact that it covers escrow accounts.

 

 As a longtime closer, the standard GFE makes sense to me. The obvious omission, I know, is that the annual percentage rate (APR) is not shown. I know many think that is a huge problem, but I disagree. It is a very difficult task to explain to people in any sort of terms that are relevant to them, what an APR is. After all, in the real world, few people keep their house, let alone their loan for a full 30 years. So to them,  that enormous dollar amount that you have to explain, saying how much they could potentially spend for the home over a period of 30 years including the original price, 30 years worth of interest, and various and sundry closing costs, is totally irrelevant to them. In reality, even for those of us killed in the industry, the good faith estimate is not an easy form. And I’m not sure that the consumer, even a very savvy one, will make good use of the form by obtaining and comparing it among several lenders. Americans tend to be rather lazy in that matter. Even though getting the right mortgage is the most important purchase of your life, (certainly more important that the price of the house) the task feels somewhat less exciting than watching paint dry on a wall.

 

But overall, I like the form and I think they did a good job. Now all we have to do is re- program all of those computers and regroup to explain the changes.

 

Behemoth Title Insurance Merger Announced

No. 2 ranked Fidelity National announced an enormous, mother of all acquisitions  in the title insurance industry on Friday, saying it will acquire No. 3 ranked LandAmerica. The Jacksonville, Florida-based Fidelity plans to acquire Richmond, VA based LandAmerica Financial Group Inc. for about $128 million in Fidelity stock. The acquisition will put many locally known subsidiaries, branded under the names of Chicago Title, Fidelity National Title,Ticor, Security Union, Alamo Title Insurance, along with LandAmerica brands American Title Company of Livingston, Atlantic Title & Abstract Company, Channel Islands Escrow, Inc., Commonwealth Land Title Company, Gateway Title Company, Golden Escrow, Inc., Gulf Atlantic Title, Land Title Agency, Inc., LandAmerica Albuquerque Title Company, Lawyers Title of Nevada, Rainier Title Company, Southland Title Corporation, StoneRidge Escrow Corporation, USA Title Affiliates, Inc. and others under one company umbrella that will control somewhat under 50% of the total title insurance market for the entire US market, passing the currently No. 1 ranked company for volume, First American Title.

Virtually all title companies, including Fidelity National and LandAmerica have taken drastic steps over the last year cutting jobs, closing offices and slashing dividends to curb losses under the debacle of the subprime mortgage meltdown scenario that resulted in the current credit freeze and seriously depressed real estate market. In response, Fidelity halved its dividend and cut over 1,000 job along with an across-the-board 10 percent pay cut for employees in the last quarter. LandAmerica was looking for a company to acquire it.

The joint  announcement said that LandAmerica Chairman and CEO, Theodore Chandler will join Fidelity National’s Bill Foley as a vice chairman when the sale is complete. The headquarters of the company will remain in Jacksonville, FL. There will be some consolidation of back office activities, which probably will results in an increase in employment in the Jacksonville FL area. Fidelity employs about 500 people at its Riverside Avenue headquarters. Two other companies spun off from Fidelity employ about 2,500 in Jacksonville. Foley said there probably will be jobs lost in Richmond, VA as the merged company focuses on synergies and cost-cutting. Fidelity estimates the merger should bring at least $150 million in operational costs savings between the two firms, but did not specify how many jobs would be lost.
Fidelity investors liked the value of the acquisition and shares of other major title insurers also rose Friday after news of the proposed merger. Fidelity’s stock rose $2.88 to $11.23 Friday after the deal was announced. LandAmerica, which had fallen to a record low on Thursday, rose $3.95 to $8.70 on Friday. Shares of competitors First American were up 18% while Stewart Title also increased 7%.
The company expects the deal to close by March 31, 2009.

Find More information and detail at Reuters

Find More information and detail at Jacksonville

Find More information and detail at Housing Wire

 

 

 

 

 

 

Title Underwriters Sue Widow to Recoup Money from Fraudulent Mortgages

A Connecticut Judge has thrown out claims that Hayley Kissel assisted her deceased husband, Andrew Kissel, a wealthy real estate developer, in fraudulently obtaining mortgage money according to a new WTHN news and a Hartford Paper article. 

Mr. Kissel was murdered in 2006, leaving an estate that owed more than $20,000,000 to several banks, based on the fraudulent mortgages.  Kissel initially took out legitimate mortgages on properties, but then created and recorded fraudulent releases.  He would then go to another bank to borrow money, and repeat the process.  The lawsuit claims Mrs. Kissel was aware that her husband was forging and recording bogus releases to obtain more funds, but kept quiet to maintain her lifestyle. And, because she did not speak up, Kissel was able to repeat the scam, causing losses to the title companies.

Both Chicago Title and Fidelity National Title Insurance companies, which insured title for the lender’s, are suing Mrs. Kissel. They allege that because she was aware of her husband’s conduct, she was complicit in the activity by not reporting it.  The judge disagreed.  A jury will now have to decide if Mrs. Kissel, who has significant assets, has been unjustly enriched by her husband’s theft and is therefore responsible for some of the losses incurred by the title underwriters.

Author comment:  Granted, I have not seen the documentation, but this appears to have all the red flags signs of  perpetrated fraud.  Honestly, when is the last time the title person legitimately saw a large mortgage paid off  PRIOR to a mortgage closing, as it appears to have been in this case.  

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