As borrowers struggle with increased prices for almost everything, it’s no surprise that making monthly mortgage payments has also been an issue. In the last few years, it has been reported that foreclosures have steadily increased.[1] Thus, lenders have sought to exercise their rights granted under either a mortgage, security deed, or deed of trust to force a sale of the collateral due to the non-payment of the debt.
In many cases, whether it is a purchase money loan or a refinance, the lender may purchase and obtain a loan policy of title insurance to protect the lender’s interest from a variety of covered risks.
As a lender prepares to initiate a foreclosure either by a judicial foreclosure or a non-judicial foreclosure, it may run a title search on the property to determine ownership along with other liens, judgments, encumbrances, and easements involving the property and the borrower. Title matters that present themselves involving the validity, enforceability or priority of the insured mortgage lien that were not excepted or excluded from coverage, and occurred prior to the date of the title policy, may lead the lender to submit a notice of claim to the title insurer seeking a coverage determination under the title policy.
The top seven title issues submitted by lenders to the Alliant National claims team include:
Unreleased prior lien or mortgage;
Spousal marital status is missing or is incorrect on mortgage;
Spouse does not execute the mortgage;
A notary acknowledgment issue;
Error in the legal description or the legal description is missing;
The mortgage was not timely recorded; and
A complete copy of the mortgage was not recorded (i.e., missing a page).
Happily, strong post-closing procedures and attention to detail can easily prevent each of these issues. Let’s look at a scenario and use it to analyze a few different situations.
Scenario
An unmarried couple – we’ll call them the “buyers” – enter into a purchase contract with John Doe (the “seller”). The sale is scheduled to occur in 30 days. The buyers let you know that they are so excited as they are getting married in two weeks and that this is going to be their first home. The seller has two mortgages or deeds of trust on the property, as well as a recorded monetary judgment. All are properly indexed in the county land records. The parties are ready to close on schedule.
First situation: Thirty days later, the buyers are now married; however, the prepared deed to vest title to the buyers, and the new mortgage or deed of trust shows them as unmarried. What do you do?
Of course, one should not proceed with having the documents executed until they are corrected to reflect the proper marital status as of the date of closing. It is also important to mention here that one should also verify the proper names of the parties (including business names, trust, etc.), and that the names are correctly spelled.
Second situation: The closing occurs. The documents are executed but the notary misses acknowledging one of the pages in the mortgage or deed of trust for one of the buyers. The instrument is then recorded.
In this case, it’s important to have the mortgage or deed of trust re-executed, re-acknowledged and then recorded in the county land records. However, in some states, there may be an option to have the notary execute a Notary Affidavit. Check with your state to see if the latter is available and the cases for which it is appropriate.
Third situation: The closing occurs. The instruments are not sent to the county land records for recording until 60 days later.
Because of the delay in recording, it’s possible for another interest holder or lienholder to record an instrument in the “gap period,” the time between the closing date and the recording date. Keeping the gap period small lowers the risk that someone else will record an instrument that could challenge the lender’s priority.
Fourth situation: The closing occurs. The lender prepared the mortgage, and it identifies that an Exhibit A will be attached to show the property’s legal description. The mortgage is recorded without Exhibit A being attached.
In this case, it’s important to promptly have the mortgage or deed of trust re-executed, re-acknowledged and attach Exhibit A with the legal description; and then record in the county land records. In a few states, there may be an option to remedy the matter with a correction affidavit. Check with your state to see if the latter is available.
Fifth situation: The closing occurs, and the funds are disbursed. No additional review or follow up with the prior lenders or judgment creditor is conducted for the recorded release or satisfaction of the lien. One year later, these have not been released in the county land records. The current lender is now foreclosing, and the new foreclosure title search shows the items as unreleased in the county land records.
We understand that there may be challenges in getting the respective party (lender or creditor) to record a release or satisfaction if it is on that party to do so; however, this is part of the post-closing process. Being persistent and diligent will help ensure that the county land records accurately reflect the status of the mortgage or lien. There are several states that have enacted statutes that impose on lenders and creditors a prescribed time limit to record a release after payment. Also, in a few other states, a title company or a title insurer may have the ability to execute a release if certain requirements are met and if the lender or creditor fails to do so. Check with your state to see what options are available.
As you can see, title companies can impact the lender’s foreclosure process in a big way. By taking the time to catch the “little” things, you can help reduce the likelihood of claims submitted by lenders under loan policies.
If you have any questions, we’re here to help! Please feel free to reach out to me at: mhawkins@alliantnational.com.
This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.
[1] Bates, M. (2024, April 11). ATTOM: Foreclosure Filings Increased 3 Percent in Q1
Dealing with mortgages and deeds of trusts in a transaction seems fairly easy to address at a closing, you would think. On occasion, we see a security instrument known as the Home Equity Line of Credit (HELOC) Mortgage or Deed of Trust – a revolving credit line secured by the home’s equity – that is not treated the same way as a traditional mortgage. HELOC instruments may require additional steps to shut down and release the lien from the property.
Let’s consider a scenario:
Mr. and Mrs. Smith are the previous owners of property located at 123 Main Street, Anywhere, USA. The owner has two loans secured by the property: a $150,000 traditional mortgage and a $300,000 HELOC mortgage. Mr. and Mrs. Smith sell the property to the buyer, Tim Jones, for $475,000. As part of the closing process, the title company sends the payments to the lenders by wire transfer.
Two years later, Tim Jones receives a notice of foreclosure from the home equity line of credit lender. The lender asserts that Mr. and Mrs. Smith’s HELOC loan has a balance and was never closed. The HELOC loan once again has a balance of $300,000, and the loan is now in default. Tim Jones submits a claim.
The Lesson:
A HELOC loan typically includes a clause that gives the borrower the ability to “borrow, repay, and reborrow” from time to time, up to a maximum credit available, through a maturity date.
In our scenario, the lender may have applied the payment on the HELOC loan as a “pay down” on the loan and did not close down the account and cancel the loan two years earlier.
For a HELOC loan, the lender may require additional steps be taken to close out the loan and have the lien released from the property. In certain cases, the lender requires that the borrower execute a “Close out / Close Down” letter. Not only does the borrower(s) have to sign the letter authorizing the account to be closed, but the signed letter has to be delivered to the lender instructing the lender to do so. In some cases, a lender may even have a specific form to be used to effectuate the closing of the account.
Practice Points:
If you are planning to mail or wire payoff funds to a HELOC lender, as a best practice, if you see that the loan is a HELOC –
carefully review the lender’s instructions to close out the account;
ask questions to ensure all requirements are met;
deliver the borrower’s signed close down the account letter concurrently with the payment; and
keep a copy of the letter along with evidence on how and when you sent the “close out / close down” letter to the lender.
Even if there is a zero-dollar ($0) balance on the borrower’s account on the day of closing, you still want to ensure that the account is properly closed, and the lien released.
When you come across a HELOC mortgage, be aware that only requesting a loan payoff statement from a lender may not be enough to obtain a cancellation and release of the HELOC mortgage. By recognizing that there is a difference between a traditional mortgage versus a HELOC mortgage when it is time to pay off the loan, you will be well on your way to having the lien properly cancelled from the property.
Progress is never easy or fast, but the rewards are well-worth the effort (and patience)! With the advent of new inventions, innovations and technology, we are continuously improving the quality of our lives and the freedoms we enjoy – both in our personal and business lives, which are inextricably intertwined.
Did you know that the audio-visual technology that makes it possible for families and friends to stay in touch across the globe, as well as the video-conferencing platforms that enable employees to work at home while remotely collaborating, took root from an idea to transmit images and audio over wire that was conceived by Bell Labs in the 1870s? Step by step, that idea became a reality over time, eventually giving rise to the smartphones and smartphone apps with video conferencing in the 2000’s, and then given a catalytic push in 2020 by the Coronavirus pandemic and the need for videoconferencing to allow workers to safely isolate while still conducting business remotely.
Similar to the evolution of videoconferencing, the development of the U.S. money rails has had a profound effect on the way we live and do business. I remember my mother saying how she thought the invention of the credit card was life-changing during her youth! In the U.S., the financial system has been relatively slow to evolve, but within the last 10 years it has picked up speed and there have been some amazing technological advances, such as Real Time Payments (RTP) and FedNow, the Federal Reserve’s version of RTP, which is on the cusp of being publicly rolled out. These newer payment rails, along with the convenience of modern payment methods – like PayPal, Venmo, Apple Pay and others – hold great promise for transforming the real estate and title insurance industries, and we want to share some special insights with you.
If you’d like to see where we’ve come from, and get a good idea of where we may be headed, then be sure to read the white paper, “Moving Money in a Real Estate Transaction.”
The relationship between an independent title agency and its title insurer is a unique one; we rely on each other for our mutual success. So when a claim occurs, it’s no fun for anyone. Claims are a fact of life for any insurer, but thankfully, some of the costliest claims are entirely preventable if time is taken to appropriately review and analyze information that is part of the transaction.
What are these costly and preventable claims? Based on our experience at Alliant National, the top five categories for claim files over the last three years have been in the following areas:
Missing or erroneous legal descriptions,
Lack of capacity or authority to convey title or release a lien,
Unreleased mortgages or deed of trust,
All other unreleased liens and judgments, and
Unpaid taxes and assessments.
To take this a step further, when we compared all of our closed claim files against closed claim files classified as “agent error,” we found that claims involving “agent error” tend to be more costly, particularly when it comes to the top five claims categories.
You ask, what can I do to reduce these preventable claims and thereby reduce the costs and other impacts of claims? Based on our experience, here are a few items to consider in every transaction:
Carefully read documents. Real estate transactions involve a lot of detail, and all those details are important. Take time to carefully read what the prepared instruments and documents say. This includes those that may have been delivered to you by a party to the transaction, a third-party or within a lender’s package. Do not assume anything. Here’s one example. Let’s say the lender does not include a spouse or a co-titleholder’s name on the mortgage or deed of trust. In several states, if the borrower is married, the spouse must join on the mortgage or deed of trust. Just because their name was not originally included, the lender may fall back on what the closing instructions required. In this case, it would be important to take a minute to contact the lender and make the necessary adjustments.
Do not be afraid to communicate. We’re all in a hurry, but it’s important to take the time to ask questions and be willing to ask for clarification when something is not clear. Then, of course, we need to listen to what is being said. In some cases, there may be disclosures of matters – not known until that moment – which can alter the transaction. Also, it’s helpful to consider whether everyone is using the same terminology to describe the same thing. We use a lot of jargon in this industry, so be careful not to think that “everyone uses this term” or that they understand things the same way you do.
Avoid being solely persuaded by the seller or borrower not to collect funds required at the closing. We oftentimes hear that the seller or borrower told the closer that the delinquent taxes, mortgage, or homeowner assessment was already paid outside of closing and to just disregard any payoff or estoppel letter that was previously collected. Experience tells us that you should not just take the person’s word but instead contact the creditor, lienor, or lender that is owed the funds, at a properly verified number, and confirm whether a payment has resolved or made current an amount owed. If appropriate, it may be good practice to hold back those collected funds until a certain time has passed, and it is confirmed that the account is current and/or the lien has been satisfied or released.
Spend time in understanding the subject of the closing. This includes the parties in the transaction and the property. Understanding the intricacies can help you spot types of fraud involving the conveyance of title or unpaid liens and taxes. With a critical eye, review the person’s ID and other documents that are presented since a number of fraudsters and imposters are impersonating others in transactions.
Promptly discuss concerns and matters with the underwriting and claim teams. We at Alliant National are always ready to review and discuss issues and matters of concern with our agents. Please don’t hesitate to call us. Waiting until the last minute or after closing to discuss a known issue may cause problems. In some cases, it may be too late to deal with an issue brought to the title underwriting team after the closing, as a claim may now exist.
Everyone is excited when a closing occurs and funds are disbursed, but this enthusiasm can quickly change to concern when a title matter is submitted involving that transaction. Thankfully, taking time to review, understand and analyze transaction information can reduce the possibility of errors and help avoid those top-five pesky and preventable title claims.
If you have questions, please contact the Alliant National claims team.
I’m sure at some point in life, each of us has thrown up our hands and said, “I’m not worrying about the details, this is good enough.” Of course, when you deal with real property transactions, you quickly learn that the small stuff matters.
The claims team has seen several areas that can be typically resolved in the transaction or post-closing without ever rising to the level of a claim. Let’s look at three of those areas – Release of Liens, Release of Revolving Line of Credit / Home Equity Line of Credit, and Property Taxes – which all require attention to detail.
Release of Liens
Let’s say you’ve obtained the payoff letter from the correctly identified and verified lienor, closed the transaction, sent the funds to the lienor, and now you are moving on to the transaction. But wait! The lien is recorded in the county land records, so how are others to know it has been paid? Several lienors will handle recording a release in the proper county land records, but there are few lienors who fail to do so. Either the lienor sends an unrecorded release to their borrower, to the title company, or does not prepare one at all. In a few states, there are statutes that provide a timeframe in which a lienor must record the release after receipt of payment. In other cases, the instrument may have a clause that discusses the obligation of the lienor when the debt is paid. In all cases, as part of a post-closing, best practice process, a release or satisfaction should be promptly filed in the property’s county land records before the file is classified as completed. This may require a few follow-up communications with the lienor to satisfy this requirement, but it will be worth it in the long run.
Release of Revolving Line of Credit / Home Equity Line of Credit
The Revolving Line of Credit or Home Equity Line of Credit loans allow a borrower to draw funds, when needed, and the borrower can use the line of credit over and over while being secured with the property. Many closers may take the same steps as a typical payoff of a mortgage or deed of trust, but there are a few additional steps required to properly close down and have the loan released from the property. Just sending the payoff funds is not enough.
To properly address these types of loans, a written request from the borrower to close the account upon receipt of the full payoff is typically required. Many lenders request a signed letter from the borrower requesting to close the account. So, if you are wiring the funds, the seller’s written request to close the account will still need to be delivered to the lender. To provide evidence that the borrower’s written request was sent to the lender, a best practice would be to track the delivery of the request to the lender, either by facsimile, mail or email. Once you receive confirmation that it has been delivered and received, keep a copy of this information in the file along with a copy of the written request. Similar to the Release of Lien section above, a release or satisfaction should be properly filed in the property’s county land records before the file is classified as completed.
Property Taxes
Whether you are using a tax company to provide a report on the outstanding property taxes or doing the research yourself, if not handled accurately, unpaid property taxes may result in a homeowner being subjected to additional taxes and penalties or losing the property. In a few states, just looking at the county’s tax collector site is not enough as there are other entities required to be paid that are situated outside of the tax collector’s office. If you are doing business in such a state, identify all the tax entities to which taxes are due and payable when a property is conveyed or refinanced.
Another tax example involves states that are reviewing prior owner exemptions. If an exemption was deemed to have expired in an earlier conveyance, the tax collector’s office is sending letters to the current homeowner seeking payment for the difference caused by the changed exemption for the prior years. As an example, if there is a homestead exemption reflected but a company has held title to the property for several years, this may require a discussion with the tax collector’s office as to the proper calculation of taxes owed if the exemption is no longer valid. With this information, the proper amount of taxes can be collected at closing.
Our final tax example involves prior year’s unpaid taxes or issued tax certificates. In these cases, make certain the proper payment amount is collected and timely delivered to stop a tax lien sale or, if sold, any certificate holder from obtaining a tax deed. Depending on the state, the expiration of the redemption period after a tax deed is issued may result in a loss. As a best practice, the title company should confirm with the tax collector’s office or its designated entity that it has received payment and that the payment is being applied to the correct account(s).
Conclusion
Attending to the details in these three areas will provide assurance to all those involved in the transaction. Having properly addressed these matters, a seller or buyer will not have to worry about being contacted in a few months, or possibly years from now, to address these issues. If you have questions, please contact the Alliant National claims team.
