Don’t Let An Undischarged Mortgage Ruin Your Closing
Real estate attorneys are often confronted with difficult and complex title defects which need to be cured. With the refinancing boom of the last 10 years, sloppy, high-volume closing attorneys occasionally failed to obtain discharges of mortgage they were paying off at closing. Likewise, home equity closings at local bank branches were also notorious for not tracking down and recording mortgage discharges.
These undischarged mortgages and “missing” discharges from years ago rear their ugly heads when the homeowner goes to sell his property and a full 50 year title examination is undertaken by a competent closing attorney. Some of these missing discharges are from old banks and financial institutions which have gone bankruptcy, are now in FDIC receivership, or were merged with other banks several times. Some are with private lenders who are no where to be found. Of course, title must be cleared prior to closing or there is no closing!
This is when even the most experienced real estate closing attorney has to call in the cavalry. And that person is someone like Kurt Stuckel, Esq.
I like to call Kurt the Jedi Master Discharge Tracker. Operating out of a small office in little Pepperell, Mass., Attorney Stuckel handles and solves thousands of title requests every year for real estate attorneys and title companies throughout the Commonwealth. He’s handled several thorny issues for me in recent months – even one where I thought “there’s no way he can get this one” from the FDIC–and low and behold, he did. His fees are reasonable, and he makes the closing attorney look good in front of their clients.
If you are in need of excellent title curative services, please contact Kurt Stuckel, Esq. at 978.443.5241 or email at [email protected]. And tell him I sent you!
L to R, bottom: Clarence Thomas, Antonin Scalia, John Roberts, Anthony Kennedy, Ruth Ginsberg; top: Sonya Sotomayor, Steven Breyer, Samuel Alito, Elana Kagan
U.S. Supreme Court To Hear Edwards v. First American Title
In a case closely watched by the title insurance and real estate settlement services industry, the United States Supreme Court has agreed to hear a class action which will decide whether consumers can sue under the Real Estate Settlement Practices Act (RESPA) over a title insurance referral arrangement that allegedly violated RESPA’s anti-kickback provisions. The case’s outcome could shield title insurers, banks and other lenders from litigation under RESPA and a wide range of federal and state laws. If First American wins this case, we could see title insurance companies in Mass. taking a much more active role in the operations of their favorite and most profitable agents.
The case is Edwards v. First American Title Co. For more coverage of the case, read the SCOTUS Blog summary here.
No Kickbacks
Class action attorneys file hundreds of cases each year on behalf of borrowers alleging violations of RESPA, which prohibits “any fee, kickback or thing of value,” in exchange for a business referral. RESPA also forbids that a “portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service” be paid for services that are not actually rendered to the customer. If a violation of the statute is proven, a court can award a plaintiff treble damages, or triple the amount, for any charge paid.
In a lawsuit filed in 2007, Denise Edwards claimed her title insurer, Tower City Title Agency LLC of Highland Heights, Ohio, entered into a “captive insurance agreement” with First American Title that was illegal under RESPA. The lawsuit said that because First American paid $2 million for a 17.5% minority interest in Tower City in 1998, it received the majority of the local agent’s referral business which violated RESPA. The suit sought class action status on behalf of all consumers who purchased title insurance through a title agency that was subject to an exclusive referral agreement with First American, and damages of up to $150 million.
The case went up to the 8th Circuit Court of Appeals which sided with Edwards that “the damages provision in RESPA gives rise to a statutory cause of action whether or not an overcharge occurred.”
Supreme Court Review
The Supreme Court will review the constitutional issue of whether consumers must prove they were actually injured under RESPA and other truth in lending laws. A favorable ruling for First American could mean a significant dent in costly class action suits under RESPA and TILA. Oral argument is expected in the Fall term, in October.
Massachusetts Impact: Cozier Agent Relationships?
Beyond curtailing or expanding consumers’ ability to bring all sorts of claims under RESPA and Truth in Lending (TILA), a favorable result for First American could enable title companies to get into much cozier relationships with attorney agents in Massachusetts.
Massachusetts is a so-called attorney agency state, where attorneys issue title insurance policies. Title insurance companies in Massachusetts cannot (yet) legally invest in or own law firms (although this rule is being challenged nationally). So we don’t have a “captive insurance agreements” or the like. Certainly, some attorney agents prefer to give their business to one or two particular title insurance companies, but to my knowledge, there’s no formal agreement among insurers and agents here in Mass.
If First American wins this case, we could see title insurance companies in Mass. considering captive insurance agreements and taking a much more active role in the operations of their favorite and most profitable agents. We will see….
When you find out you have a major title problem that prevents you from selling or refinancing your home, have fun explaining to your spouse that for a fraction of the cost of your home you could’ve prevented it by buying title insurance.
Enhanced Owner’s Title Insurance Coverage
Available for a few years now, enhanced coverage policies offer vastly improved protection for common title problems at about a 10% cost over a standard coverage policy. (These policies run about $4 per thousand of purchase price). Enhanced coverage policies now cover some of the most common title problems facing Massachusetts residents. Realtors and mortgage professionals should be aware of the benefits of an enhanced coverage policy, and should recommend that their clients opt for the increased coverage. It’s well worth the small cost in premium.
Additional Coverages:
Appreciation in property value. Standard policies do not increase their coverage amount in a rising market as a home increases in value. The enhanced policy will increase coverage by 10% per year for 5 years up to 150% of the original policy limit.
Encroachments/adverse possession. Standard policies, to most homeowner’s chagrin, do not cover encroachments like a neighbor’s fence, wall or structure over a property line. Enhanced policies provide coverage for such encroachments, and also cover adverse possession–which occurs when an encroachment exists for 20 or more uninterrupted years. For more info on Massachusetts adverse possession, please read our post “Good Fences May Make For Upset Neighbors”.
Zoning/Subdivision/Building permit violations. Enhanced coverage policies now provide coverage if the property is not zoned for residential 1-4 family use, in violation of subdivision regulations, or if there is a defect or lack of a building permit. This is a tremendous benefit for commonly arising situations.
Easements. Enhanced policies offer coverage for easement encroachment situations such as deeded driveways, drainage easements, utility easements, beach paths, walking paths, etc.
Expanded Insured. Enhanced policies will now transfer to a spouse who gets property in a divorce, inheriting heirs, related family trusts and their beneficiaries.
Expanded Access Coverage. Enhanced policies now guarantee that your home as adequate vehicular and foot access over adequate streets or roads if there’s a title defect rendering your lot “land-locked.”
Do I Really Need Title Insurance?
The decision to get an owner’s title insurance policy is one of the most important choices you make in connection with your real estate transaction.
As part of every real estate transaction, the borrower/buyer is offered the opportunity to get an owner’s title insurance policy. (For refinances and purchases, your lender will require you to purchase a “lender’s” title insurance policy.) An owner’s title insurance provides the most comprehensive protection available for most every known type of title problem which could affect your property rights. I’m proud to say that every single one of my buyer clients have benefited from an owner’s title insurance policy at their closings, at my strong recommendation.
One needs only to look at the recent controversies over “robo-signing” and the U.S. Bank v. Ibanez defective foreclosure sales, which has stripped thousands of Massachusetts property owners of their property ownership rights, to see why an owner’s title insurance policy could be the best decision a home buyer ever makes. The unfortunate souls who declined owner’s title insurance are now left without legal title to their homes and looking at the prospect of spending thousands of dollars in legal fees to resolve their title issues with no guarantee of success. With a title insurance policy, the title insurance company will hire expert title attorneys to solve title issues at no cost to you, defend against any adverse claims, reimburse you for covered damages, and most valuable, issue affirmative coverage to enable a pending closing to move forward.
When you find out you have a major title problem that prevents you from selling or refinancing your home, have fun explaining to your spouse that for a fraction of the cost of your home you could’ve prevented it by buying title insurance.
One of the most important jobs of the closing attorney during a Massachusetts refinance or purchase transaction is to fully explain the numerous closing costs that a borrower (and seller) must pay at closing. The best way to explain Massachusetts real estate closing costs in a blog post is the same way we would explain it at the closing–by reviewing the HUD-1 Settlement Statement line by line.
Prior to the closing, you should have received a Good Faith Estimate of closing costs from your lender. A good mortgage professional will always explain closing costs before you arrive at the closing table. The Good Faith Estimate or GFE will be a precursor of what you’ll be charged at closing, and certain closing costs cannot vary by more than 10% from the GFE. Bring your GFE to the closing to compare it with the HUD Settlement Statement.
HUD First Page, Borrower’s Column
We’ll use an actual HUD from a recent transaction, deleting the parties and property of course. This is a purchase for $250,000, reflected in line 101. The buyer is taking out a loan of $243,662.00 (line 202) to finance the sale. This is a FHA low down payment loan where the borrower must pay FHA mortgage insurance.
The total settlement charges, which are fully broken down on page 2 of the HUD (get to that down below), paid for by the borrower are $7,758.09, line 103. Because the closing took place on Jan. 31, in the middle of the tax fiscal quarter, real estate taxes on line 106 must be adjusted and paid for by the borrower through the end of the quarter, 3/31. As is customary in Mass., the borrower is also paying for home heating oil paid for by the seller and left in the tank (line 109–$241.20).
Line 120 tallies up the total amount due from the borrower at closing. Deducted from that number is the buyer’s deposit of $2,500 (line 201), and the buyer’s new loan of $243,662.00 (line 202). This borrower also fortunately received a seller closing cost credit of $5,708.93 (line 204) and a lender closing cost credit of $609.16 (line 205). Those credits really helped this borrower defray the closing costs.
In this transaction, there is a difference of $6,250.00 between the gross amount due from the borrower less the amounts paid by or for the borrower, which must be paid at at the closing (line 303). The borrower must bring a certified or bank check payable to himself (for fraud protection) for that amount to the closing.
Page 2 of the HUD
Page 2 of the HUD Settlement Statement itemizes all of the various closing costs, both from the borrower’s and seller sides.
Line 700 Series–Broker Commissions
In Massachusetts, the seller pays the real estate broker commission. Here, the seller is paying a total of 5% of the purchase price, or $12,500.
Line 800 Series–Lender Closing Costs
In this transaction, the lender is charging an “origination fee” of $1,735.00. This is the fee for procuring the loan. The lender has also charged the borrower for an appraisal for $425.00 but the initials “POCB” means it was paid for outside closing by the borrower. There are also small charges for a credit report and flood certification.
Line 900–Daily Interest and Mortgage insurance
The borrower is responsible for paying interest on the new mortgage loan from the closing date to the first day of the following month. That’s why most closings take place at the end of the month. The borrower is charged one day of interest of $32.54 (line 901). As this borrower is not putting 20% down, this particular loan requires mortgage insurance of $2,412.50 paid at closing by the borrower (line 902).
Line 1000–Escrow Reserves
The vast majority of mortgage lenders require borrowers to fund a real estate tax and homeowner’s insurance escrow account. Occasionally, a lender will waive the escrow for a fee or small interest rate increase. This is an aspect of closing costs that many borrowers have difficulty understanding.
The escrow account helps you and the lender anticipate and manage payment of property expenses by including these expenses as a portion of your monthly mortgage payment. Think of the escrow account as a small savings account for these expenses. An incremental amount of these expenses is added to your monthly mortgage payment, in order to cover these expenses when they are due. The lender will pay, on your behalf, the real estate taxes due on a quarterly basis, as well as the homeowner’s insurance for the following year.
Each year, your escrow account is reviewed to determine if the amount being escrowed each month is sufficient to pay for any change in your real estate taxes or homeowner’s insurance premiums. At closing, the closing attorney will collect sufficient funds to start your escrow account, typically 2-3 months worth of real estate taxes and up to a 12 months of homeowner’s insurance. In this case, the borrower must fund the escrow account with $817.12 (line 1001), which consists of 3 months of homeowner’s insurance and 2 months of real estate taxes. Remember, when you sell your home (or refinance) you will recoup your escrow account monies.
Line 1100–Title Charges
The line 1100 series shows the fees associated with the title examination, closing attorney fees and title insurance. In all transactions the lender requires the borrower to pay for lender’s title insurance and the settlement or closing fee to the closing attorney. In this transaction, the borrower has opted to purchase his own owner’s title insurance policy which protects the owner’s property and is highly recommended for many reasons. Read our post on title insurance here. So the borrower is charged $1,799.00 plus $477.50 for all the title work, closing attorney and both lender’s and owner’s title insurance premiums. The fee for reviewing and drafting the purchase and sale agreement is also included in the settlement fee on line 1102.
Line 1200–Gov’t Fees
The county registry of deeds imposes fees for the recording of the deed ($125) and mortgage ($175) which the borrower pays. The borrower also paid recording fees for an “MLC” which is a municipal lien certificate and a declaration of homestead. The seller pays the fee for the release ($75). The seller also pays a state transfer tax of $2.28 per $500.00 of value.
In Closing…
That’s basically it. Remember that closing costs differ widely between lenders, loan products, loan amounts, and closing attorneys. Make sure you ask to review the HUD Settlement Statement prior to the closing. It should be ready the day before or that day. Again, you should always speak to your mortgage professional about closing costs before you arrive at the closing table.
If you would like to speak with our office about handling your purchase or refinance transaction, please contact us at [email protected] and check out our website at www.titlehub.com. Thanks!
“[W]hat is surprising about these cases is … the utter carelessness with which the plaintiff banks documented the titles to their assets.” –Justice Robert Cordy, Massachusetts Supreme Judicial Court
Today, the Massachusetts Supreme Judicial Court (SJC) ruled against foreclosing lenders and those who purchased foreclosed properties in Massachusetts in the controversial U.S. Bank v. Ibanez case. Here is the link for the decision. I’ve posted the decision below, and I’ve done a video blog embedded below.
Background
For those new to the case, the problem the Court dealt with in this case is the validity of foreclosures when the mortgages are part of securitized mortgage lending pools. When mortgages were bundled and packaged to Wall Street investors, the ownership of mortgage loans were divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lagged far behind.
In the Ibanez case, the mortgage assignment, which was executed in blank, was not recorded until over a year after the foreclosure process had started. This was a fairly common practice in Massachusetts, and I suspect across the U.S. Mr. Ibanez, the distressed homeowner, challenged the validity of the foreclosure, arguing that U.S. Bank had no standing to foreclose because it lacked any evidence of ownership ofthe mortgage and the loan at the time it started the foreclosure.
Mr. Ibanez won his case in the lower court in 2009, and due to the importance of the issue, the Massachusetts Supreme Judicial Court took the case on direct appeal.
The SJC Ruling: Lenders Must Prove Ownership When They Foreclose
The SJC’s ruling can be summed up by Justice Cordy’s concurring opinion:
“The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court’s opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.”
The Court’s ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it’s become much more complicated with the proliferation of mortgage backed securities (MBS’s) –which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage “in blank” — meaning without specifying to whom the mortgage would be assigned until after the fact — does not constitute a proper assignment, at least in Massachusetts.
My Analysis
Winners: Distressed homeowners facing foreclosure
Losers: Foreclosing lenders, people who purchased foreclosed homes with this type of title defect, foreclosure attorneys, and title insurance companies.
Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.
If you own a foreclosed home with an “Ibanez” title issue, I’m afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.
The opinion is a scathing indictment of the securitized mortgage lending system and its non-compliance with Massachusetts foreclosure law. Justice Cordy, a former big firm corporate lawyer, chastised lenders and their Wall Street lawyers for “the utter carelessness with which the plaintiff banks documented the titles to their assets.”
If you purchased a foreclosure property with an “Ibanez” title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.
If you purchased a foreclosure property and you have an owner’s title insurance policy, contact the title company right away.
The decision carved out some room so that mortgages with compliant securitization documents may be able to survive the ruling. This will shake out in the months to come. A major problem with this case was that the lenders weren’t able to produce the schedules of the securitization documents showing that the two mortgages in question were part of the securitization pool. Why, I have no idea.
The decision opens the door for foreclosing lenders to prove ownership with proper securitized documents. There will be further litigation on this. Furthermore, since the Land Court’s decision in 2009, many lenders have already re-done foreclosures and title insurance companies have taken other steps to cure the title defects.
We don’t know how other state court’s will react to this ruling. The SJC is one of the most well respected state supreme courts in the country. This decision was well-reasoned and I believe correct given that the lenders couldn’t even produce any admissible evidence they held the mortgages. The ruling will certainly be followed in states (such as California) operating under a non-judicial foreclosure system such as Massachusetts.
Watch for class actions against foreclosing lenders, the attorneys who drafted the securitization loan documents and foreclosing attorneys. Investors of mortgage backed securities (MBS) will also be exploring their legal options against the trusts and servicers of the mortgage pools.
The banking sector has already dropped some 5% today (1.7.11), showing that this ruling has sufficiently spooked investors.
“Are title insurance companies still insuring foreclosure properties?”— James In Cambridge
Answer: Yes, they are. Initially, the press reported that some major title insurers had temporarily stopped insuring foreclosure titles from JP Morgan Chase, Ally Financial, and Bank of America. However, my understanding is that all title insurers have resumed insuring all foreclosure properties in the wake of several major agreements between national title insurance companies and lenders. These warranty and indemnification agreements would essentially shift the risk of loss from irregular/defective foreclosures back onto the foreclosing lenders.
From the conveyancing side, I can definitely tell you that title insurers have advised their attorney agents to go through foreclosure titles with a fine tooth comb and to be especially diligent in examining and certifying foreclosure titles. Buyers of foreclosure properties should be prepared for delays in getting their transactions closed.
“How is robo-signing different from the Ibanez case situation”?–Scott
Answer: “Robo-signing” and the Massachusetts Ibanez foreclosure case are two different situations, but the root of the problem — the complexity of the securitized mortgage industry and the sheer volume of foreclosure paperwork to be processed — remains a contributing cause of both problems.
“Robo-signing,” as one of the leading foreclosure defense attorneys has claimed to the Huffington Post, refers to how financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in “foreclosure expert” jobs with no formal training to sign sworn documents submitted to courts. According to depositions released in Florida and the Post, many of those workers testified that they barely knew what a mortgage was. Some couldn’t define the word “affidavit.” Others didn’t know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits, and that they agreed with the defense lawyers’ accusations about document fraud.
This is obviously a major problem in states such as Florida which require a judge’s approval of a foreclosure based on sworn documents. However, Massachusetts is not such a state. Other than verifying the borrower is not in the military, Massachusetts state law doesn’t require any sworn verification that the foreclosure is kosher (if you will). That may change after lawmakers and the Attorney General’s office react this foreclosure mess. In fact, the AG announced this week she is investigating on of the largest “foreclosure mills” in the state for alleged non-compliance with the new tenant foreclosure law.
The Ibanez problem occurs when mortgage loan documentation recorded with the Registry of Deeds lagged far behind the actual ownership of the loan, due to complex mortgage securitization agreements and sloppy follow up. Land Court Judge Keith Long’s ruling effectively invalidated thousands of foreclosures which suffered from this newly recognized “defect.” The Ibanez situation is not a product of fraud, like robo-signing, in my opinion. In fact, the practice of recording mortgage assignments “late” was long accepted by the title examination community prior to the Ibanez ruling. So it caught a lot of folks off-guard.Getting title insurance on an Ibanez-afflicted property is near impossible these days, and the robo-signing controversy certainly doesn’t help alleviate the risk tolerance of anxious title insurance underwriters.
To be sure, both Ibanez and the robo-signing controversy have reverberated through the real estate community, and have impacted foreclosure sales on a number of levels. If you are considering purchasing a foreclosed property, please contact us so we can guide you through the complicated process and protect your interests.
She said it’s really not my habit to intrude
Furthermore, I hope my meaning won’t be lost or misconstrued
But I’ll repeat myself, at the risk of being crude
There must be fifty ways to leave your lover
Fifty ways to leave your lover
“50 Ways To Leave Your Lover” (c) Paul Simon
50 Ways To Lose Your Home
As Massachusetts real estate closing attorneys, we are often asked by buyers-borrowers, “Why should we get an owner’s title insurance policy if you are already doing a title examination?” This is a really good question, and the perfect lead in to a conversation about of the coverages and cost of a Massachusetts owner’s title insurance policy. Do you know the Paul Simon tune, “50 Ways to Leave Your Lover”? Well, there are more than 50 ways to lose your home without an owner’s title policy. Simply put, don’t take the risk of foregoing title insurance. It’s not worth it.
Title Insurance Basics
Title insurance protects homeowners from financial loss in the event that certain covered problems develop regarding the rights to ownership of their property. While all borrowers of conventional mortgages will receive a certification of title by a Massachusetts real estate closing attorney that their title is “good, clear and marketable,” there can be a host of hidden, off-record title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.
50 Ways to Lose Your Home
Like the Paul Simon song, there are at least 50 ways you can lose title to your home if you don’t get an owner’s title insurance policy. The vast majority of these situations will not be ascertained in a typical title examination.
Deeds executed by a mentally incompetent or insane person
Deed from a minor subject to avoidance
Unauthorized deed from partnership or trustee
Deed by foreign person vulnerable to challenge
Deed from a corporation unauthorized by by-laws or resolution
Undisclosed divorce of person who conveys as sole heir of a deceased former spouse
Deed signed by mistake or under financial duress
Deed signed under defective power of attorney
Foreclosure deed where underlying foreclosure was defective
Ineffective release/discharge of prior mortgage
Deed of deceased not joining all heirs
Missing heirs claiming interest in property
Transfer void under contract law
Deed includes protected public trust wetlands
Ineffective release of mortgage subject to bankruptcy avoidance powers
Ineffective mortgage subordination
Mistakenly indexed deed/release
Undisclosed federal/state tax lien
Undisclosed spousal/child support lien
Undisclosed lawsuit affecting property
Undisclosed restrictions/covenants
Incorrect legal description
Errors in tax records
Erroneous tax release
Misinterpretation of wills
Deed without right of access to public way
Access eliminated by foreclosure
Defective notarization
Forged notarization
Improperly recorded or indexed deed/mortgage
Deed acquired through creditor fraud
Mechanic’s lien claims
Incorrect property boundaries
Encroachments of buildings
Federal or state estate tax liens
Preexisting violation of subdivision laws
Preexisting violation of zoning laws
Deed from joint owner without joint tenant joining
Undisclosed right of first refusal
Undisclosed easement affecting property
Undisclosed party wall agreement
Special assessment liens
Adverse claim of vendor’s lien
Discovery of un-probated will
Claims for prescriptive rights, not of record
Easement does not conform to recorded instrument
Incorrect survey
Deed following lawsuit where all parties of interest not joined
Deed executed under falsified power of attorney
Getting an owner’s title insurance policy is simply a “no brainer.” I did the title to my own home in Sudbury, and I got an owner’s policy. It’s a one time premium paid at closing, and stays in effect as long as you own your home, through refinances and even the death of a spouse. Please contact us about carriers, rates and coverages.
A lis pendens is Latin for “a suit pending.” Under the Massachusetts lis pendens law, a lis pendens is a notice endorsed by a judge certifying that there is litigation pending involving the title or occupancy rights to a property. Where real estate deals go sour, a court will often issue a lis pendens where a buyer seeks “specific performance” of a real estate contract in order to force a seller to go through with a transaction. Lis pendens are also common in other real estate cases such as boundary, title, zoning, and ownership disputes. The lis pendens is recorded at the registry of deeds against the property and its owner(s), creating a serious cloud on the title to the affected property. A lis pendens will, in many cases, effectively prevent the owner from selling the property until the claim is resolved–thus, earning its well-deserved reputation as dangerous arrow in a real estate litigator’s quiver.
Heavy Ammunition For Buyers
Since the Massachusetts Supreme Judicial Court held in 1998 that the standard Greater Boston Real Estate form Offer To Purchase is a binding contract, buyers have used the lis pendens with great success against sellers who unjustifiably try to back out of Offers to Purchase and Purchase and Sale Agreements. Aggressive buyer attorneys would often obtain a lis pendens without prior notice to the seller (called ex parte relief), and this would give buyers a huge advantage and effectively derail any pending sale of the property until the judge resolved the claim.
Recent Changes To The Law
In response to complaints that litigants were abusing the law with frivolous claims for lis pendens’, lawmakers amended the law in 2003. Now, claimants seeking ex parte relief must show there is a clear danger that the seller, if notified in advance, will convey, encumber, damage or destroy the property. Sellers also have a new remedy to stop frivolous claims: a “special motion to dismiss” which carries with it an award of attorneys’ fees and costs. The playing field is a bit more leveled now, yet the lis pendens remains a powerful tool for real estate attorneys.
Dealing With A Lis Pendens
Dealing with a meritorious lis pendens remains very difficult. Standard owner’s title insurance policies do not insure against them. Further, most title companies hesitate to affirmatively insure a lis pendens as they would effectively be underwriting the ultimate success of the lawsuit. Sometimes, however, coverage can be obtained for an additional premium and/or with some form of indemnification or security. In the absence of insurance, a lis pendens will remain a cloud on title until the claim is ultimately resolved in the courts, which these days can take many years. Given the high cost of litigation, a financial settlement is often the only way to resolve the matter in a cost-effective manner.
As an experienced real estate litigator who has obtained and defended scores of lis pendens’, please contact me with any questions about a Massachusetts lis pendens.
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Richard D. Vetstein, Esq. is an experienced and creative Massachusetts real estate litigator who loves to help property owners defend their contract or property rights in court. Please contact him at [email protected] or 508-620-5352 for a no-obligation consultation.
Update (3/24/10): SJC Accepts Ibanez Case
For those of you following the controversial U.S. Bank v. Ibanez case, which invalidated potentially thousands of foreclosures across the state, both sides last week asked the Massachusetts Supreme Judicial Court to take the case — as I originally predicted. The SJC’s acceptance of the case would cut months to years off the normal appellate process. This would be great news for everyone eagerly awaiting a final decision.
Click here for Ibanez’s petition to the SJC. Click here for my post on the first ruling and here for my post on the second ruling in the Ibanez case.
The SJC should decide whether to take the case within 30 days or so, and I predict they will take it on. However, I still think the SJC will ultimately affirm Judge Long’s ruling against foreclosing lenders, a bad decision from a title and conveyancing standpoint in my view.
Meanwhile, in the aftermath of Ibanez, some lenders are re-doing foreclosures and some are just waiting it out. Most title insurance companies are unwilling to touch an Ibanez afflicted property with a ten foot pole.
I recently assisted a buyer of a foreclosed property who was initially rejected by two title insurers. We fortunately convinced one title company to insure over an Ibanez issue, so the client could close. But I have another client who is stuck, and we’re trying to track down the original owner of the property to obtain a deed. It’s a tough situation all around.
I’m pleased to welcome another guest blogger, David M. Gaffin, a licensed Loan Officer with Greenpark Mortgage Corp. of Needham MA. Dave is licensed to originate in MA, NH and FL. You can visit him at Greenpark Mortgage or through his LinkedIn profile.
The new 2010 RESPA rules are all the rage right now. So I’m especially pleased to have a mortgage industry veteran like Dave to offer his views on the new rules, especially the new Good Faith Estimate (GFE).
So, you thought getting a home loan for purchase or refinance before was confusing? Well, I’ve got GREAT NEWS for you. Your government has heard you and has come to help! (Insert Sarcastic Mental Voice.) The federal Housing and Urban Development agency (HUD) has dismantled the previous 1 page Good Faith Estimate that itemized most of the settlement charges for your loan and created a new 3 page “simplified” GFE to “help borrowers understand and compare the costs associated with obtaining a mortgage.”
In my opinion, HUD is trying to do at least 2 things for consumers:
1. Protect the consumer from dealing with shady mortgage companies that will disclose certain fees on the GFE, and then charge higher or additional fees at the closing table and
2. Encourage consumers to use the GFE as a shopping tool to ensure a fair deal.
An informed consumer will typically make better choices than an ill-informed one, so the premise behind the changes to the new GFE is a worthwhile one. However, there are several areas where a consumer may not be able to compare the costs of loan programs on an equal basis and thus make the most appropriate loan choice.
Page 1 of the new GFE groups together all of the “Adjusted Origination Charges” (e.g. processing and underwriting fees, points, doc prep, etc.) as one figure and the Charges for All Other Settlement Services (e.g. closing attorney fees, title insurance, recording fees, etc.) associated with closing your loan as another figure and adds them together to come up with the Total Estimate Settlement Charges.
The new GFE also spells out your loan amount, loan term, interest rate and the initial monthly payment for principal interest and any mortgage insurance.
However the new GFE does not include expected expenses for monthly real estate taxes, homeowners insurance, or home owner’s association dues. Nor does it inform the borrower about expected funds needed to close the loan. Because all the origination charges are lumped together, the new GFE is not specific in disclosing the number of points required to close the loan. It also does not include the Annual Percentage Rate, or APR.
Escrow funding for reserves of real estate taxes, home owner’s insurance and mortgage insurance are included on page 1.
However, despite the fact that this total sum should be uniform across lenders, the new GFE allows the lender to quote whatever number of months of reserves they choose, resulting in a variance of hundreds or thousands of dollars when comparing GFEs. This is not a borrower savings from lender to lender. At settlement these charges will be the same for all lenders. This could result in the borrower unexpectedly bringing additional funds to the closing. Some mortgage companies will try to gain a competitive advantage by initially disclosing lower escrow totals. This would be an unfair and deceptive trade practice to the consumer.
Page 2 breaks into sections the charges for All Other Settlement Services which will include such newly disclosed charges as Owner’s Title Insurance, (which is an optional, but recommended purchase) and Transfer Taxes. In many states, the Transfer Taxes are disclosed as a borrower–related cost, even though the borrower may not be responsible for this cost, thereby inflating the Total Charge Estimate.
Page 3 gives the consumer information about which expense items on the GFE cannot increase at settlement, which one’s can have a total increase of a 10% increase and which ones can change without limit. The origination charges cannot change at settlement.
Lenders who allow borrowers to choose settlement service providers will receive a Page 4 to the new GFE which will list those providers.
Analysis: Does the new GFE Help Consumers Or Is It Just Another Complicated Form?
I have been in the mortgage industry for many years and have advanced educational degrees. I have passed my required national and state licensing exams and even I find this form to be confusing and not very helpful when comparing loans. My job as a loan consultant is to inform and educate my clients so that we arrive at the best loan program for them with the least costs based on their needs. I use different tools to compare programs, including cost/benefit analysis, total interest paid comparisons, length of loan term reviews, etc., but, with the new GFE rules, I must disclose 1 loan program within 3 business days of collecting 6 points of entry for an application. If I fail to do so, even if the borrower and I have not determined the best program for them yet, I am in violation of the law. I do not see how this helps the borrower determine the best loan program.
I will give HUD credit for trying, and as this is now the law of the land it is what we must all work with, however, given the vast departure from the look and feel of the previous form, it is going to take a lot of education on the part of loan officers, realtors and attorneys to establish a comfort level with the borrower’s understanding of the form.
When a borrower chooses a lender, they should be referred by someone they trust, should check out the lender’s and loan officer’s reputation by reviewing its website or other public information and feel comfortable that the loan officer is knowledgeable, understands their needs and has the borrower’s best interests in mind. Then a GFE received from that company can be viewed as a Good Faith Accurate, and not just a Good Faith Estimate.
Dave, thanks so much for your insightful analysis! This is a great post and a boon for our readers. This underscores why borrowers must have an experienced and knowledgeable loan officer such as David Gaffin on their team.
I have certainly spend a fair amount of time digesting the new changes, but perhaps that is because I am so used to the old forms. The irony may well be that many consumers will be seeing the new GFE for the first time and may not be as confused as some of us industry veterans. Adjusting to major changes to long standing practices is always difficult.
In this post, I’ll discuss a very important issue to lenders, closing attorneys and borrowers alike: how the new RESPA rules handle the disclosure of closing attorney fees/costs and title insurance.
The new RESPA rules significantly change the way lenders must disclose settlement services, in particular closing attorneys’ fees, and title insurance. Generally, under the new rules, closing costs are divided into one of three “buckets”:
(2) those subject to a 10% tolerance–that is, those which cannot increase by more than 10% from the GFE to the closing, and
(3) those that can change, i.e., increase without limitation.
Here is how the GFE (page 3) shows the 3 buckets:
For closing attorney fees (which HUD now calls “title services”) and title insurance, bucket #1 does not apply, and whether the cost belongs in bucket #2 or #3 will depend on whether the lender recommended the service provider on a written list of preferred providers. If the borrower selects a provider from the list, such as a closing attorney, their charges cannot increase by more than 10% from the GFE to the closing.
Thus, lenders have an incentive to recommend trusted providers whose charges are standard and predictable. If the borrower wants a particular attorney or title insurance provider not on the preferred list, he/she is free to select one, but their charges are not subject to the 10% tolerance and can go up (or down) by any amount.
Also remember that lender’s title insurance is universally required by every public mortgage lender, and in Massachusetts the borrower pays that premium at closing (except for no closing cost loans). A lender’s title insurance policy, however, does not protect the homeowner. As HUD and I always advise, borrowers should always get their own owner’s title insurance policy. (See HUD’s Shopping For Your Home Loan Booklet and my post, Title Insurance Demystified for some horror stories about what happens when you don’t purchase an owner’s title insurance policy).
Here is how the new GFE (page 2) discloses closing attorney fees/title services and title insurance:
Note that lines 3 and 4 represent a huge change from prior practice for closing attorneys. Now closing attorney fees must be disclosed as a single, lump sum charge, plus the cost of the required lender’s title insurance policy. The old GFE itemized such closing costs as courier fees, discharge tracking fees, and the like, but the new GFE is intended to simplify the disclosure of attorney closing costs in favor of one standard charge that consumers can compare across the board.
From the GFE, these fees and costs are ultimately carried over on the new HUD-1 Settlement Statement, with reference to the new GFE lines:
At the closing, the borrower can now simply compare the GFE with the new HUD to ensure that the quoted charges have carried over to the closing table. Remember though that selected costs from a “preferred provider” may deviate up to 10% under the tolerance rules. Also, for the first time the new HUD mandates disclosure of the closing attorney’s share, or split, of the title insurance premium.
I’ve been asked several times recently for an update on the status of Land Court judge Keith Long’s controversial ruling in U.S. Bank v. Ibanez, which invalidated thousands of foreclosures across Massachusetts. Click here for my prior post on the case.
Unfortunately for those affected by the decision, not much is going on. Lenders have reportedly appealed the decision. Word has it that the lenders have hired mega-firm K&L Gates to handle the appeal. (Interestingly, K&L Gates is the same firm which secured a major ruling against the Massachusetts Real Estate Bar Association over non-attorneys handling real estate closings in Massachusetts).
The record in the Land Court is currently being assembled. The Massachusetts Appellate Court database doesn’t even list the case as yet up on appeal. Accordingly, this appeal is many, many months away from being decided.
Also, watch for the lenders to ask the Massachusetts Supreme Judicial Court to take the case on direct appeal. While this will delay the appeal some in the short term, the SJC is the final stop on the appellate railway, and its decision is the final word on the matter. Given the pro-consumer decisions recently issued by the high court and its current makeup of somewhat liberal justices, my money is still on an unfavorable decision for lenders in this case.
In the meantime, I’m hearing that lenders are simply re-doing their foreclosures with the correct loan paperwork (i.e., the mortgage assignments) brought up to date. For buyers who had an agreement to purchase a foreclosed home, this most likely means you will have to wait in line again and re-bid on the second foreclosure.
With 11 days and counting until all lenders and closing attorneys must be in compliance with the new RESPA requirements and the new Good Faith Estimate (GFE) and HUD-1 Settlement Statement, HUD has released two helpful documents:
The booklet encourages retaining a competent real estate attorney in the transaction:
Before you sign a sales agreement, you might consider asking an attorney to review it and tell you if it protects your interests. If you have already signed your sales agreement, you might still consider having an attorney review it. (Ed. You definitely want an attorney to review and mark up the purchase and sale agreement, or else you’ll wind up signing the standard form and getting burnt).
If choosing an attorney, you should shop around and ask what services will be performed and whether the attorney is experienced in representing homebuyers. You may also wish to ask the attorney whether the attorney will represent anyone other than you in the transaction. (Ed.: You definitely want to choose an attorney who specializes in real estate, as opposed to an attorney who dabbles in it. Residential real estate practice, once considered fairly basic, has rapidly changed into a complex maze of regulations, disclosures and standards. You need someone who does this every day.)
In some areas, an attorney will act as a settlement agent to handle your settlement. (Ed.: In Massachusetts, it is fairly common that the same attorney will represent a buyer and close the loan for the lender. This is called a dual representation and often saves the home buyer money on closing costs. The buyer’s and lender’s interests are aligned as both parties must have clear and marketable (and insurable) title to the property).
The booklet also provides very helpful encouragement for buyer’s to purchase title insurance, which I always recommend:
Title Services and Settlement Agent
When you purchase your home, you receive “title” to the home. Certain title services will be required by your lender to protect against liens or claims on the property. Title services include the title search, examination of the title, preparation of a commitment to insure, conducting the settlement, and all administration and processing services that are involved within these services. Many lenders require a lender‟s title insurance policy to protect against loss resulting from claims by others against your new home. A lender‟s title insurance policy does not protect you.
If a title claim occurs, it can be financially devastating to an owner who is uninsured. If you want to protect yourself from claims by others against your new home, you will need an owner’s policy.
Kudos to HUD for finally advocating the benefits of title insurance!
New, sweeping changes regulating how lenders, closing attorneys and title companies disclose loan and closing costs are set to go into effect January 1, 2010. The new regulations are part of a long awaited reform to the 30 year old Real Estate Settlement Practices Act known as RESPA aimed at providing greater transparency and fostering better consumer choice in loan and closing costs. The changes are so significant that HUD recently took the unusual step of giving lenders a 120 day reprieve in enforcing the new regulations.
The major components of the new RESPA reform are the new and substantially revised Good Faith Estimate (GFE), in which lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement, which is a detailed financial breakdown of the entire real estate transaction signed at closing.
Highlights of the new changes include:
Borrowers must receive a standard GFE disclosing key loan terms, including the loan’s terms; whether the interest rate is fixed or otherwise; any prepayment penalties and/or balloon payments; and total closing costs.
Lenders must provide borrowers with a standard origination charge for the loan which must include all points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees
Lenders have the option of providing borrowers with a list of approved service providers such as closing attorneys and title insurance companies.
A tolerance range has been specified for various categories of loan/closing costs to prevent unnecessary escalation of promised vs. actual charges.
Fees quoted for lender origination charge cannot change.
Fees for title and closing costs where the lender selects the provider or where the borrower selects the provider from the lender’s approved list cannot change by more than 10%.
Fees that borrowers can shop for themselves can increase (or decrease) by any amount.
The final page of the GFE contains worksheet-like charges to compare different loans and terms that the borrower can use to shop pricing.
Controversial lender payments to mortgage brokers, known as yield-spread premiums, must be disclosed in a standard manner.
The charges quoted on the GFE are then carried over to the HUD-1 Settlement Statement to ensure that the prescribed tolerances are met.
I think that overall the changes will provide consumers with greater disclosure and transparency of the myriad loan closing fees and costs in a typical real estate purchase. It also creates an incentive for lenders to assemble a competitively priced team of preferred settlement service providers, so it can guarantee to its customers that the price of the preferred vendors’ settlement services will never increase by more than 10% at closing. If borrowers aren’t happy with that, they are free to shop and find a better deal themselves.
I plan to do a series of upcoming posts on this important RESPA reform, highlighting the salient sections of the new GFE and HUD-1. As always, contact Richard Vetstein with any questions.
For my entire series on the new 2010 RESPA rules, look to the right under “Spotlight On: RESPA Reform” or click here.
The U.S. Department of Housing and Urban Development (HUD) announced on Friday that it will not enforce for a 120 day period new, sweeping regulatory changes to the Real Estate Settlement Procedures Act (RESPA) set to go into effect January 1, 2010. The new regulations will still go into effect on January 1, 2010, but the board overseeing enforcement of these new rules will “exercise restraint in enforcing” them. HUD wants all lenders to make a good faith effort to comply with the new regulations beginning on January 1.
The major components of the new RESPA reform are the new and substantially revised HUD-1 Settlement Statement and Good Faith Estimate (GFE) of closing costs issued by lenders, settlement agents, and closing attorneys. HUD will require that lenders and mortgage brokers provide consumers with a newly revised Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. Closing agents will also be required to provide borrowers a new HUD-1 Settlement Statement that clearly compares consumers’ final and estimated costs.
The new RESPA rule became effective on January 16, 2009, but provided a one-year transition period for the mortgage industry to incorporate these changes. HUD will continue to work with the mortgage industry during this period, including providing a comprehensive set of frequently asked questions (FAQs) on its website.
This is very good news for lenders and closing attorneys so they can take advantage of some well needed additional time to digest the new forms and procedures. I recently attended a seminar on the new RESPA changes, and they are quite a substantial change to the current GFE and HUD-1. Lenders must provide borrowers with a firm “origination charge” which must include all the various loan origination fees now separately itemized on the HUD-1 Settlement Statement, including points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees. This origination fee cannot increase. Lenders also have to provide borrowers with a “firm” quote for typical closings costs, including attorneys’ fees, title insurance and recording fees, and select up to 1 preferred provider for such services. The firm quote cannot increase by more than 10% at closing. If the lender allows, borrowers can use their own providers who will not be subject at all to the firm quote requirement. The new changes will require quite a bit of coordination between lenders and closing attorneys.
Most lenders who I have spoken to are not ready for these changes. The likely impact is that for the first 4 months of 2010, borrowers could see either the current or the revised GFE and HUD-1 form, depending on whether the lender/closing attorney has implemented the changes.
Banker and Tradesman is reporting that Wells Fargo and U.S. Bank will appeal the controversial U.S. Bank v. Ibanez Massachusetts Land Court decision that stung the lenders earlier this year by invalidating two foreclosures in Springfield because of improperly recorded mortgage assignments.
Lenders filed the appeal on Oct. 29, according to Lawrence Scofield, a senior real estate attorney at Ablitt Law Offices of Woburn, who represented the lenders in the Land Court case. Scofield said Ablitt Law Office would not handle the appeal, but would work with an unnamed “downtown law office” that will be retained to argue in Appeals Court. Scofield said the lenders, lawyers, and parties that filed amicus briefs in the Land Court will meet this week to discuss the more substantive details of the appeal. The disputed decision has raised questions in the mortgage industry regarding potentially thousands of clouded titles, as the practice of back-dating mortgage assignments had been widely used in recent years. “This is a big deal,” Scofield said. “I hope in the worst case situation, the court will recognize the public policy impact this would have, and make this prospective decision and not a retroactive decision, which could really mitigate some of the collateral damage.”
My prior posts on this very important and far-reaching decision can be found here.
If the appeal takes the typical course in the Appeals Court, a decision may not come for up to one year. Given the importance of the decision, I had originally predicted that the lenders would file a direct appeal to the Massachusetts Supreme Judicial Court, the highest appellate court in the state. There’s no indication that the case is going up to the Supreme Judicial Court.
Today, Massachusetts Land Court Judge Keith Long reaffirmed his controversial ruling made back in March 2009 that invalidated foreclosure proceedings involving two Springfield homes because the lenders did not hold clear titles to the properties at the time of sale. A copy of the decision can be found here.
As I outlined in my prior post on this case, the problem the Land Court dealt with in this case is what happens when modern securitized mortgage lending practices meets outdated foreclosure laws. When mortgages are packaged to Wall Street investors, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lags far behind.
Here is a diagram of the securitized mortgage process (click to enlarge):
The Ruling
Judge Long ruled that foreclosures were invalid when the lender failed to bring the ownership documentation (known as an assignment) up-to-date until after the foreclosure sale had already taken place. An assignment is a legal document confirming that a mortgage loan has been transferred from one lender to another. Assignments must be recorded with a registry of deeds so anyone researching a property’s title can track the loan’s origin and ownership. Oftentimes, as in the Ibanez case, lenders will sell bundles of loan and record backdated assignments with an effective date before the first foreclosure notice. Judge Long effectively prohibited this practice.
Despite the lender’s attempt to convince him otherwise, Judge Long came out (again) in favor of consumers:
The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.
Judge Long also had some choice words for lenders:
[T]he problem the [lenders] face (the present title defect) is entirely of their own making as a result of their failure to comply with the statute and the directives in their own securitization documents… What the plaintiffs truly seek is a change in the foreclosure sale statute (G.L. c. 244, § 14), which can only come from the legislature.
What Now?
That’s a good question and one not readily answerable. To be sure, the current state of flux and confusion surrounding foreclosure titles affected by an Ibanez issue will remain intact until an appellate court considers the case or some action by the Legislature (which may be unlikely). Given the importance of the decision, I predict that the Massachusetts Supreme Judicial Court will take the unusual step of taking the case directly from the Land Court.
As for what happens in the year or so the case may be in appellate limbo, I asked an in house counsel for a leading title insurance company, and his response was essentially that it’s going to take a fair amount of time and research to figure this one out. If there’s an existing title insurance policy on the property, some but not all of the title companies may be willing to insure over the problem. If there’s no title policy in place, affected parties are going to have to ride this one out for awhile.
Once title insurance companies offer some further guidance, I will post it here.
My Two Cents
While I see both sides of the argument, the decision is troubling to me because Judge Long gave short shrift to the fundamental legal principle that the mortgage follows the note. A valid mortgage is security for some type of underlying obligation, whether it’s a loan or the promise to do something in the future. There’s no question that the millions (or billions) of dollars in loans secured by all these mortgages were validly transferred from one bank/lender to securitized lenders. The money was lent and it didn’t just evaporate into the ether. If the lenders can ultimately demonstrate ownership of the underlying loan which follows the mortgage and produce a valid assignment (albeit late), why isn’t this enough? The borrowers owe the money, and now after this ruling they are immunized from foreclosure by what many folks in the real estate industry view as elevating form over substance.
“For many years, real estate attorneys in Massachusetts have understood that the assignment of a mortgage can be recorded at any time and be effective,” Christopher S. Pitt, chairman of the Title Standards Committee of the Real Estate Bar Association tells Massachusetts Lawyers Weekly.
Now that doesn’t mean lenders don’t need to get their act together. They do. The net effect of this decision will be that lenders must get loan documentation up to date and recorded promptly. Indeed, the Ibanez loan changed ownership at least four times prior to foreclosure — without any of this appearing on the public record. Two of those entities (Lehman Brothers and its subsidiary) are currently in bankruptcy and a third (Option One) has ceased operations. This is a huge wake up call to the securitized lending industry.
But the question remains, what about all the foreclosures that have already been conducted? And the new homeowners who own these properties and are now saddled with unresolvable title defects? What about these “innocent victims” and the neighborhoods blighted by foreclosed properties which cannot be sold? I guess we can all blame Wall Street once again…
This case has the potential to do a lot of damage (or rather reveal the damage that foreclosing lenders did over the past few years), but I think Judge Long was completely right about the law. Both the statute and all of the securitization documents were clear, and these foreclosures violated both of them. These banks had sophisticated lawyers who knew real estate law when they planned to securitize these loans, but they never bothered to consult their own agreements when the time came to actually securitize, or foreclose, on the loans. As a result, mortgages were never properly transferred, and the foreclosing lenders never had the right to foreclose.
As with any controversial legal decision, there’s always compelling arguments for both points of view.
An excited young couple about to close on their first home walk into into the closing attorney’s office. The day before they received via secure email all of the loan documents to review and approve with their personal attorney. The closing attorney arrives without any paper, armed only with a laptop attached to a digital signature pad. The sellers are not present as they have already signed the deed and other documents electronically the day before over the secure electronic closing system. The couple quickly review the closing documents on the attorneys’ laptop, clicking an “I Agree” button acknowledging receipt and review of each document. The couple sign the digital signature pad, and the captured signatures are automatically applied to all of the signature blocks of the documents. The closing attorney electronically notarizes all documents requiring witnessing or notarization. The closing is over in 15 minutes, and the couple walks out with a CD-ROM containing all the signed closing documents and the keys to their new home. The closing attorney then electronically records the deed and mortgage with the registry of deeds, funds the loan, and makes all of the disbursements. The executed loan documents are then electronically transmitted to the lender and digitally archived.
This is not an imaginary scenario. Electronic closings (e-closings) are happening now, and they are the future of real estate conveyancing. I believe that electronic closings will change the way lenders, title companies and closing attorneys do business.
The advantages of an e-closing system are numerous and include:
More convenient and efficient closing process for home buyers and sellers.
Automated delivery of electronically signed loan documents directly to post closing – eliminating costs and time. Fund the loans faster, in as little as 48 hours.
Drastically improve the efficiency of real estate transactions with reduced contract-to-closing times.
The Green Factor: Eliminates thousands of paper documents. Buyers receive the entire signed closing package on CD.
Reduce shipping and closing costs.
Electronic closings are very slowly moving into Massachusetts. (Attorneys, who must conduct most real estate closings in Massachusetts, are notorious late adopters of new technology). Since July, without much fanfare, the Middlesex Registry of Deeds in Cambridge, Hampden County Registry in Springfield, and Plymouth Registry of Deeds have adopted electronic recording capabilities. Hopefully, the other registries follow suit.
Electronic closings are a great selling point to customers mortgage lenders, banks and credit unions. Here is a recent article about a credit union in Michigan successfully offering electronic closings.
In late March of this year in the case of U.S. Bank v. Ibanez, Massachusetts Land Court Judge Keith C. Long issued one of the most controversial rulings in recent years which has called into question hundreds if not thousands of foreclosure titles across Massachusetts. The Ibanez decision is what happens when you mix equal parts of a deteriorating real estate market with Wall Street’s insatiable demand for mortgage back securities with sloppy lending practices and outdated state foreclosure statutes.
The Facts
In the Ibanez case, the Land Court invalidated two foreclosure sales because the lenders failed to show proof they held titles to the properties through valid assignments. In modern securitized mortgage lending practices, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books, but the documentation (i.e., the assignments) actually on file at the Registry of Deeds often lags far behind. The Land Court ruled that foreclosures were invalid when the lender failed to bring the ownership documentation (the assignments) up-to-date until after the foreclosure sale had already taken place. This was true even if the lender possessed an assignment with an effective date (i.e., backdated) before the first foreclosure notice.
The net effect of the Ibanez decision is to call into serious question the validity of any foreclosure where the lender did not physically hold the proper paperwork at the time it conducted its auction. This has already caused significant uncertainty in the ownership of many properties that have already been foreclosed and are awaiting foreclosure.
In deciding the case, Judge Long took a very pro-consumer approach to the foreclosure law, persuaded that the apparent title defect would chill a foreclosure sale and harm debtors:
None of this is the fault of the [debtor], yet the [debtor] suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents any time it chooses. And who can say that problems won’t be encountered during this process?
Also of significance was that Judge Long rejected a customary Massachusetts conveyancing standard which provides that recording out of order assignment documents does not create a title defect. I think Judge Long got it wrong as he elevated form over substance and didn’t give enough credence to the legal principle that the note follows the mortgage, but hey, I’m just a lowly attorney.
What now?
The Ibanez ruling is not final as the lenders have filed a motion to reconsider with the Land Court. And now the heavy hitters have gotten involved. The Real Estate Bar Association of Massachusetts has taken the unusual step of filing a friend of the court brief, urging the Land Court to reconsider its decision.
On the consumer side, the National Consumer Law Center and well known consumer class action attorney Gary Klein have joined the fray and filed a brief. Attorney Klein has also filed a class action in federal court to challenge completed foreclosures and future foreclosures on the same facts as the two foreclosures voided in Ibanez.
As of now, Judge Long of the Land Court has not made a final decision which should come in a matter of weeks. I will update you when the ruling comes down. Either way, in my opinion, given the widespread impact of this case, it is destined for the Massachusetts Supreme Judicial Court. It’s hard to say how the SJC will come down on this.
What can you if you are affected by the Ibanez ruling?
Well, if you are a homeowner facing foreclosure, consider Ibanez an early Christmas present. You now have a powerful tool to argue for the invalidation of the foreclosure sale. (I won’t comment on the fact that you still owe the lender money).
If you are contemplating purchasing a property out of foreclosure or are selling a previously foreclosed property, pray that there’s an existing title insurance policy on the property, and ask the title company to insure over the issue. Some are willing to do this. Others are not. The other option (albeit expensive) is to hire an attorney to file a Land Court “quiet title” action to validate the proper assignment of the mortgage loan, assuming you can track the documents down and they were not backdated. In Ibanez, the lender couldn’t produce the assignment until 14 months after the auction. The last option, and unfortunately probably the safest bet, is to sit, wait and see how the Land Court and appellate courts will rule ultimately. Not the answer you probably want to hear, but it’s reality.
The Massachusetts Purchase and Sale Agreement Is Anything But “Standard”
Home buyers sign a never ending pile of legal documents to purchase a home. But arguably the most important document in the entire transaction is the Massachusetts purchase and sale agreement. The purchase and sale agreement is signed after the Offer to Purchase is executed, and spells out the parties’ responsibilities during the interim period when the property is taken off the market and the closing.
In Massachusetts, the form most often used is the so-called standard form agreement supplied by the Greater Boston Real Estate Board or one modeled very closely to this form. (Due to copyright laws, we cannot embed the standard form agreement — contact my office if you need assistance with drafting a purchase and sale agreement). The “standard” form purchase and sale agreement is, however, far from standard, especially for buyers. In fact, the standard form is very much slanted in favor of the seller, and the playing field must be “leveled” to protect the buyer’s interests.
This is why it’s imperative that home buyers and sellers alike retain a Massachusetts real estate attorney to modify the “standard” form purchase and sale agreement in order to best protect all parties’ rights and remedies, and customize the agreement to the particular aspects of the transaction. This is typically done through a “rider” to the purchase and sales agreement. Often, the buyers’ attorney and the sellers’ attorney will attached two different riders to the agreement.
I’ll outline a few common issues not addressed adequately in the “standard” purchase and sale agreement. (Most of these are from the buyer’s perspective).
Mortgage Contingency
The “standard” purchase and sale agreement does provide a basic mortgage contingency which gives the buyer the option of terminating the agreement if mortgage financing falls through. However, for a buyer, the more specific you are in terms of interest rate, points, name of lending institution and definition of “diligent efforts,” the better. Buyers’ counsel should specify that the buyer will not be required to apply to more than one institutional lender currently making mortgage loans of the type sought by the buyer and that the buyer may terminate the purchase and sale agreement unless the buyer obtains a firm, written commitment for a mortgage loan. Here is a sample rider provision:
MODIFICATION TO PARAGRAPH 26: Application to one such bank or mortgage lender by such date shall constitute “diligent efforts.” If the written loan commitment contains terms and conditions that are beyond BUYER’S reasonable ability to control or achieve, or if the commitment requires BUYER to encumber property other than the subject property, BUYER may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto.
Home Inspection/Repairs
Typically, buyers complete the home inspection process prior to the signing of the purchase and sale agreement, and any inspection contingency provision is deleted from the purchase and sale agreement. What happens if the inspection results are not ready before the P&S signing deadline or if the seller has agreed to perform repairs prior to the closing or give a credit at closing? In this case, a home inspection contingency clause should be added back to the agreement, and any seller repairs or closing credits should be meticulously detailed in the rider.
Septic Systems/Title V
If the home is serviced by an on-site sewage disposal system otherwise known as a septic system, the Massachusetts Septic System Regulations known as Title V requires the inspection of the system within 2 years of the sale of the home. Failed septic systems can cost many thousands of dollars to repair or replace. Thus, buyers would look to be released from the agreement if the septic system fails inspection. Alternatively, buyers could be given the option to close if the seller can repair the septic system during an agreed upon time period, provided that the buyers do not lose their mortgage rate lock.
Radon Gas
Radon is a naturally occurring radioactive gas. The ground produces the gas through the normal decay of uranium and radium. As it decays, radon produces new radioactive elements called radon daughters or decay products which scientists have proven to cause lung cancer. Radon testing should be performed by buyers during the home inspection process. Elevated levels of radon (above 4.0 picoCuries per liter (pCi/l) can be treated through radon remediation systems. The purchase and sale agreement should provide for a radon testing contingency and the buyers’ ability to terminate the agreement if elevated radon levels are found, or the option of having the sellers pay for a radon remediation system.
Lead Paint
Under the Massachusetts Lead Paint Law, buyers of property are entitled to have the property inspected for the presence of lead paint. (Sellers are not required to remove lead paint in a sale situation). Because the abatement of lead paint can be costly, buyers typically look for a right to terminate the purchase and sale agreement if lead paint exists and the abatement/removal of it exceeds a certain dollar threshold. Here is an example of a provision added to the standard form:
LEAD PAINT. Seller acknowledges that the Buyers have a child under six (6) years of age who will live in the premises. In accordance with Massachusetts General Laws, Chapter 111, section 197A, as the premises was constructed prior to 1978, Buyer may have the premises inspected for the presence of lead paint which inspection shall be completed within ten (10) days after the execution of this Agreement, unless extended in writing by the parties. If the inspection reveals the presence of lead paint, the abatement and/or removal of which will cost $2,000 or more, then Buyer may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto. Any lead paint removal or abatement shall be Buyers’ responsibility.
Access
When my wife and I signed the Offer to Purchase on our house, she couldn’t wait to get in there with her tape measure, paint chips and fabric swatches. Oftentimes overlooked, but a cause of friction is buyers’ ability to access the house prior to the closing. To avoid such friction, an access clause should be added to the purchase and sale agreement giving the buyer reasonable access at reasonable time with advance notice to the sellers–it’s still their house after all.
These are just a few of the issues not adequately addressed by the “standard” form purchase and sale agreement. There are many more.
_________________________________________ Richard D. Vetstein, Esq. is a nationally recognized real estate attorney, and has handled thousands of Massachusetts real estate transactions. He can be reached via email at [email protected].
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
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