CONVEYANCERS FACE CHALLENGES IN THE NEW DECADE
By
Martin Loria and Joel Stein
IBAÑEZ
As previously reported, the case of U.S. Bank National Association, Trustee v. Ibañez invalidated a foreclosure where the foreclosing entity did not hold the mortgage of record at the time of the first publication pursuant to M.G.L. c. 244 § 14. The decision calls into question REBA Title Standard No. 58 entitled “Concerning Out of Order Assignments.” The impact of the decision on mortgage discharges based on out of order assignments is uncertain.
To date, there have been no decisions on how to proceed when a title is based on a foreclosure that fails to comply with the Ibañez decision. It is clear that if the current owner has an owner’s title insurance policy, the company that issued the policy would allow an agent to issue title policies to proposed owners and lenders. Otherwise, it is important to understand that taking title from a foreclosure which violates the Ibañez decision would, at best, result in your purchaser being a holder of the mortgage rather than a holder of the fee interest.
One suggestion which I have heard from a title insurance company employee would be to have an owner, who purchased from a foreclosure that is invalid pursuant to Ibañez, record a Certificate of Entry which would allow their interest as mortgagee to ripen after three years of uninterrupted possession. Although it doesn’t provide immediate relief, and still leaves open the question of the validity of junior liens, it is the only pro-active suggestion that I have heard to date. JS
FOUR UNITIES
A concerned call from a fellow conveyancer resulted in my revisiting the issue of the “four unities.” In this instance, the conveyancer has previously prepared a deed from A and B, as tenants in common, to A and B, as joint tenants. A had subsequently died and when B went to sell the property, the bank attorney required a probate for A. Despite the fact that this scenario is frequently utilized to transfer title from two people as tenants in common to themselves as joint tenants or tenants by the entirety, at least one title insurance company insists that this grant violates the “Four unities” of a joint tenancy. The essence of joint tenancy is that two or more persons take and hold the title as if together they constitute one fictitious person. The Company argues that this violates the principle that you cannot convey title to yourself and further violates M.G.L. c. 4 § 6 clause 4th. Although their view is in the minority, this is an issue which should be considered when preparing a deed between related parties. JS
SHORT SALE LETTERS
The recent economic downturn and consequent foreclosure crises have created new issues affecting the closing process, some of which are potentially title related. We have seen the proliferation of “short sales” throughout Massachusetts. This form of loan payoff occurs when the outstanding loan balance of the seller’s first (and possibly second) mortgage exceeds the proposed sales price. After protracted negotiations with the lender, the seller may come to terms with the mortgagee/servicer who, as a condition of releasing the lien and allowing the transaction to proceed, agrees to take less than the full outstanding loan balance, subject to various underwriting conditions. These transactions may take a few months to finalize and the potential buyer may or may not be able to wait out the process, including payment of additional fees to extend his loan commitment. When the seller’s lender does agree to terms, a payoff letter is issued containing numerous conditions.
The conveyancer representing the buyer’s lender, or buyer, if a cash transaction, must exercise all due diligence and caution in reviewing the terms of the payoff letter. Unlike the standard loan payoff letter in a normal transaction, a short sale payoff letter has conditions allowing the lender to revoke its payoff. Most common among these provisions is what is known as a “lookback” provision. The terms are essentially that the lender has received the payoff tendered by the conveyancing attorney and may subsequently refuse to issue a discharge if the property is re-conveyed within thirty (30) days of the closing or another arbitrary date. In addition, this provision will also allow the lender to withdraw if it suspects fraud by any of the parties.
The issue the conveyancer has, of course, is that he has no control over the transaction once the loan closes. In the event that the new buyer/borrower transfers the property to a third party for additional consideration, or even the same consideration, the original seller’s mortgagee may determine that the entire transaction was fraudulent. This leaves the conveyancer in the unenviable position of having closed, recorded, released finds, written a title insurance policy and subsequently having no recourse against anyone. The seller is long gone, the borrower/perpetrator is gone and the title insurer is exposed.
The issue that we are faced with is whether or not the conveyancing attorney will have any control over the situation or simply refuse to close the loan. Certainly, one can attempt to verify the trustworthiness and veracity of his/her buyer/ borrower, but, as we all know, this may not amount to very much. An attempt can also be made with the seller’s lender to delete the offensive language from the payoff letter. This may also be met with limited success depending the identify the lender. These transactions should not be closed unless the title insurer has agreed to the terms of the short sale letter so that they can fully evaluate the risk. One remedial provision is to insert a restriction in the deed from the seller to the buyer prohibiting any transfers within the period of time for which the seller’s lender has a review period. At least this should insure that there are no legitimate lender financed record transfers within the period of time when the lender may look at the title on their own. With the simplicity of on-line access, the seller’s lender certainly may look at title prior to issuing the discharge.
In addition to the “lookback” provision frequently encountered, the conveyancer may also find requirements that the HUD must be pre-approved within a certain period of time and that additional loan documents may need to be executed by the seller for the amount of debt reduced at closing but to be paid later. The instructions of the lender must be followed exactly as non compliance with any of the terms will constitute grounds for their refusal to accept a payoff and issue a subsequent discharge. ML
HOMESTEADS
In light of the various U.S. Bankruptcy Court and Massachusetts Land Court decisions affecting foreclosures, an issue as to unreleased homesteads is becoming more frequent. The situation arises where the mortgagor, subsequent to acquiring title and prior to a refinance, declares a homestead. Frequently, the subsequent mortgage contains the automatic release. Various national lenders often add the marital status to the granting language on the first page. Consequently, there may be a homestead filed by the sole property owner followed by a mortgage which says “a married person”. If the conveyancer who closes the refinance does not obtain the signature of the non debtor spouse, this person may have a homestead right in the property. The issue arises when the mortgage is foreclosed and, of course, there is no release of the homestead. If there were a subsequent or a second or third transfer involved, the issue would not be apparent as the premises would presumably not be occupied by the original non debtor spouse. However, when title derives from the foreclosing lender, one has no knowledge as to whether the property is occupied or not, as often the bidder at the auction cannot enter. Consequently, the conveyancer should consider obtaining affidavits from the foreclosing attorney to the effect that at the time of the auction, the premises were vacant inasmuch as the abandonment of the property will terminate the homestead rights of the non debtor spouse. ML
NATICK MUNICIPAL LIEN CERTIFICATES
REBA has been contacted by several conveyancers who expressed concern that they were being charged $365.00 by the Town of Natick for a residential condominium municipal lien certificate. The condominiums in question, Nouvelle at Natick and 79 East Central Street were created through the combining of several previously separately assessed parcels. The Town Counsel has referenced M.G.L. c. 40 § 22F entitled “License Fees, Service Charges; Acceptance of Action” which, in part, reads as follows:
Any municipal board of officer empowered to issue a license, permit, certificate, or to render a service or perform work for a person or class of persons, may, from time to time, fix reasonable fees for all such licenses, permits, or certificates issued pursuant to statues or regulations wherein the entire proceeds of the fee remain with such issuing city or town, and may fix reasonable charges to be paid for any services rendered or work performed by the city or town or any department thereof, for any person or class of persons; provided, however, that in the case of a board or officer appointed by an elected board, the fixing of such fee shall be subject to the review and approval of such elected board.
The question remains as to whether a charge of $365.00 for a municipal lien certificate is “reasonable.” Certainly, a substantial amount of work is involved to create the first municipal lien certificate for a newly developed condominium, which condominium may be the result of combining several different parcels. In the case of Nouvelle at Natick, the condominium is a portion of the Natick Mall. However, in the case of Nouvelle at Natick there are 215 units in the residential condominium. A charge of $365.00 for the first municipal lien certificate to issue for each unit will result in a total charge of $78,475.00.
Conveyancers should also make their lenders aware of this situation. A $365.00 charge for a municipal lien certificate which is not disclosed on the GFE, will almost certainly result in a problem at the closing table. JS
RESPA
There exists a great deal of concern in the conveyancing community regarding cost reflected in Line 1101 of the new HUD-1. As I am writing this in December, there is some uncertainty as to how loan originators will treat the bundled fee amount that must be provided to them by attorneys. Some conveyancers have expressed concern that a typical charge for obtaining a mortgage discharge (in the case of a refinance), which is not included in the set bank fee will fall by the wayside. The fee that the attorney provides to the loan originator must include an estimate of typical fees the attorney incurs when doing a refinance or a sale. The plot plan is also a charge that will also be included in Line 1101 costs. Most lenders and title insurers no longer require plot plans. You will need to talk to their title insurance company to see what they require in the case of issuing an enhanced owner’s policy.
Concerning recording fees, a registered/recorded transaction will probably result in a violation in the tolerance; recording a deed and two mortgages on both the recorded and registered side will result in $475 in additional fees. Although tax stamps are typically not an issue, as they are seller paid, an interfamily transaction as part of a refinance might cause a problem if consideration is to be shown on the deed, or even if a recording fee for a new deed is incurred.
A new GFE can be issued if there has been a change of circumstance, although I am not certain if that phrase has been really defined. Also be aware that the new Truth-In-Lending Rules exist alongside the new RESPA Rules. Therefore, if there is a 1/8th point change in the APR, a new Truth-In-Lending Statement will be required. This is a totally different issue from whether a new GFE is required.
Finally, if there is a violation of the tolerance provisions, the lender has 30 days to make payment to the borrower. At that point, a new HUD-1 needs to be prepared and a credit to the borrower needs to be shown on the HUD-1. It is uncertain now as to whether a separate closing will need to take place, or whether the lender will simply have a new HUD-1 mailed to the borrower.
There is much that could be said about the new RESPA Rules; however, at this point it is best to see how everything plays out in the next few months. Look for REBA to have a seminar on the new Rules at our main meeting. JS
THE CONSUMER FINANCIAL PROTECTION AGENCY
The Consumer Financial Protection Agency Act of 2009 includes extensive new regulation of attorneys that would result from the definition of “financial activity” under the Bill. The expansive definition of “financial activity” includes providing real estate settlement services and would make lawyers and other settlement service providers subject to the proposed registration requirements as “financial activity” providers. As of writing, the exclusion for lawyers is limited to: “an attorney licensed to practice law in compliance with the applicable rules and standards of professional conduct, but only to the extent that the consumer financial product or service provided is within the attorney-client relationship with the consumer…” In the typical closing scenario, the attorney’s client is the lender rather than the borrower. As written, this would require registration as a “financial activity” provider. JS