Are Buyers Getting Ripped Off with REO Escrow Fees?

[Warning: rant ahead].

Recently I’ve closed a couple of REO transactions lately where I’ve been dismayed at what the escrow companies are charging the buyers. They claim it’s is warranted because of the extra work that goes into processing a bank owned property…I could almost buy this EXCEPT it’s not the buyer who has created any additional work.

Adding to my frustration is that this exorbitantly higher escrow fee tends to not be split equally between the buyer and  seller (the bank or lender). I’ve heard of builders receiving discounted escrow fees, however the buyer pays what would have been the normal half.  With the REO’s I’ve seen lately, the fees have been almost double what I would consider “normal”.  Some of the fees have been so high, it can jeopardize a smaller transaction becoming a “high cost loan”.

On a recent closing, on a $70,000 condo in West Seattle, I called to obtain a quote from an escrow company where Freddie Mac was the seller. The quote I received was for $848. I asked the assistant if this was the full fee or the buyers half, since the quote I was using from my preferred provider was $438. She replied “full” (meaning the $848 would be split 50/50 between seller and buyer). When we received our estimated HUD, the buyer’s escrow fee was jacked back up to $848 and to make matters worse, the escrow company was trying to not honor their written quote to me. After dealing with several managers, the escrow company agreed to meet my quote of $438…it’s not half of $848 but it’s definitely closer to what would be a fair escrow fee for the buyer in this price range.

To add insult to injury, it seems the service from these escrow companies is lack-luster to say the least. It’s as if the company “won” a big bid and therefore service to the buyer, the consumer, just isn’t important since there will be plenty of gravy business to continue.

Home buyers can shop for their escrow provider, however when it’s an REO situation, 9 times out of 10 (if not all of the time), the escrow company has already been dictated.

I understanding charging more when there is more work that is actually being done with a transaction – as long as it’s fair and reflects the actual level of work that’s being done on that transaction.

It really frustrates me.

SIDE NOTE: I’ve only had excellent service from Legacy Escrow – my rant has NOTHING to do with them.

Rant over…for now!  🙂

HACKED BY SudoX — HACK A NICE DAY.

The Good Old Days Weren’t Always Good…

Cause the good ole days weren’t always good…and tomorrow ain’t as bad as it seems.” Billy Joel Keeping the Faith

Believe it or not…this is a post about Title Companies and Escrow Services and…my ever favorite topic: Homebuyer’s Rights. It’s a plea, really. A humble request for help from someone, or many someone’s, in authority.

In “The Good Old Days”, an agent ordered “Preliminary Title” AND “pre-opened” escrow, when they listed a property for sale. To encourage this practice, Title Companies offered the seller a discount for pre-ordering escrow so that the Title Company was guaranteed not only the Title Insurance business and money, but the right to be the Escrow Closing agent and earn that money in addition to the Title Insurance premium. A good business practice, I guess, and reasonably appropriate back when every agent represented sellers of homes and never buyers of homes.

You know…”the Good Old Days…(that) weren’t always so good”, when buyers were represented by no one, had no rights, and the Rule of the Day was Caveat Emptor.

In the present day in the here and now, meaning “The Seattle Area”, our basic Real Estate Contract has a provision for choosing Title Insurance Company that does not refer to anyone’s choice. Just a blank place for the writer of the contract (usually the agent for the Buyer – since buyers write and make the offer on this contract) to enter the name of the “Title Insurance Company”.

Then there is another line after it that says “a qualified closing agent of buyer’s choice:”

There are still some real estate agents, with the encouragements of added benefits to do so from Title Companies, who are PRE-ORDERING ESCROW before the buyer of the home is a known entity. Who CHOOSE the “qualified closing agent of buyer’s choice” in advance of the buyer being a known entity. Please stop that. And Title Companiesplease, please stop offering seller’s agents and sellers “bribes” to encourage this practice of “pre-ordering” escrow in advance of the buyer being a known entity.

I agree that the owner/seller should choose Title Insurance Company, because the seller has to procure and pay for an Owner’s Title Insurance Policy and give it to the buyer in this area, as part of the means of conveying clear title to the buyer of their home/property.

And…it’s quite OK to “suggest” that escrow be X in the Agent remarks section. But to OUTRIGHT DEMAND THAT ESCROW MUST BE SELLER’S CHOICE instead of the obvious contract intent of “buyer’s choice of escrow”…well, frankly, it’s an antiquated and totally inappropriate activity in this day and age.

I know that Rome wasn’t built in a day and change takes time…but I urge you to at least move in the right direction so that tomorrow can, and will, be a better time.

Until then…I’m gonna Keep the Faith.

IRS and Homebuyer Tax Credit: obtaining a”signed” Final Settlement Statement

This is tax time.

Sometimes escrow offices wonder if we are CPA firms during tax time.   Our office has received numerous phone calls from clients that are in need of their “signed” Final Settlement Statements.   Lynlee wrote a quick post on our blog with an IRS link addressing what the IRS may need from borrowers to claim the tax credit.

As always, please contact your CPA or tax professional for specific details regarding claiming the homebuyer tax credit.

We contacted a CPA and they responded:

“we generally have found that the Final Settlement Statement (with NO signatures) are acceptable.”

Why?  Because in Washington State (and other escrow states) Final Settlement Statements do not have signatures from borrowers.   Final Settlement Statements are mailed to clients after a transaction is closed.  Estimated Settlement Statements are signed at escrow prior to your transactions being closed.

Home Buyers: Please Be Aware of the Owners Policy on the GFE

HUD had dramatically revised the Good Faith Estimate to a uniform document with summary of fees.  If you compare a GFE issued prior to 2010, one big difference is that buyers will not see a charge for the owners title policy–why? Because they generally do not pay for the owners title policy–the seller does!  Please don’t ask me why this is on the new GFE and why, if it’s not charged in our market LO’s must disclose it…I don’t have an answer…and don’t have the answer for why mortgage originators are held to the 10% tolerance when quoting this fee when it has nothing to do with mortgage origination.

The fee for an owners title insurance policy is much more than that of a buyer’s policy. Typically the Seller pays for the owners policy and the buyer pays for the lenders policy which has a reduced rate (simultaneous issue). There are also various coverages available with an owners policy and the coverage that is required should be specified in the purchase and sales agreement.

Here’s an example of title fees for the owners (seller) and lenders (buyer) policies based on a $500,000 sales price (FYI LO’s: the owners policy is based on the sales price not the loan amount) and a loan amount of $400,000. Examples below do not include sales tax.

FEES BELOW NOT SHOWN ON GFE PRE-2010

Homeowners Policy (1998 ALTA): $1,192
2006 Standard Owners Policy: $1,053
Extended Coverage Owners Policy: $1,937 (not commonly requested)

 ALWAYS SHOWN ON GFE (because the buyer pays for it)

Lenders Policy (simultaneous issue): $647

So with a purchase price of $500,000 and a loan amount of $400,000; I would disclose $647 plus tax for my estimated title insurance fee for the borrower on my GFE–both now and before 2010.  Now I need to add over $1000 to this scenario on my good faith estimate even though the buyer isn’t paying for itmy closing costs on a purchase appear $1000 higher!  

And to add insult to injury, the title owners policy is included in HUD’s 10% tolerance bucket of charges.

The Talon Group offers this tip to mortgage originators quoting an owners title insurance rate (when you don’t know what the specified coverage will be on the purchase and sales agreement):

Lenders should quote the 1998 ALTA Homeowner’s Policy rather than the less costly Standard Owner’s Policy in block 5 of the GFE. The local Purchase and Sale Agreement defaults to the Homeowner’s Policy because of it’s superior title coverage. There is as much as a 12.5% difference in price between the two policies.

The lender’s policy (and escrow/settlement charges) are included in Block 4 of the Good Faith Estimate and the owners policy is included on Block 5.

According to HUD’s RESPA FAQ’s last updated December 30, 2009:

Q&A #3 page 27:

If the borrower requests an enhanced owner’s title insurance policy or an endorsement to an owner’s title insurance policy after the loan originator issues the GFE, the loan originator may choose to treat such a request by the borrower as a changed circumstance.  The loan originator may then choose to provide a revised GFE to the borrower to disclose the increased charges.  If the increased charges do not exceed tolerances, the loan originator may opt not to issue a revised GFE.

I take this as saying that if the borrower decides they want more expensive coverage after I have issued a GFE and I do not re-disclose the cost difference and it exceeds the 10% tolerance, I just paid for the difference…even though it’s a seller cost!

With a purchase transaction, if the borrower accepts the title insurance company as selected by the real estate agent or seller (assuming the company is not on my “list of providers”), then there is no tolerance as HUD views this as the borrower selecting the service provider (same is true with escrow companies).    Regardless, even quoting from my preferred provider, the fees on my good faith estimate look $1000 higher based on this scenario. 

At least until consumers and mortgage originators are accustomed to using the new GFE (and unless HUD makes additional changes) this is going to take some getting used to!

For the record, this post all of my posts are my interpretation and my opinions–this is not a substitute for your legal staff or your compliance department!

Will Banks Cash In on the New Good Faith Estimate

The new Good Faith Estimate will be required to be used on all new loan applications effective January 1, 2010.   Part of HUD’s GFE may include a service provider list which consists of title and escrow/settlement providers (boxes 4, 5 and 6; section b on page 2 of the GFE).  This list (if permitted by the lender) is important to the consumer as it will determine what the cost difference can be between the good faith estimate and the settlement statement at closing.  

hudboxes3thru6

If a borrower relies on a service provider (title and escrow/settlement services) on the list given to them by their mortgage originator with the good faith estimate, there is a 10% tolerance.  This means that if the cost at closing comes in more than 10% higher of the sum of those fees than what was provided on the good faith estimate, the lender will pay the difference (or credit the borrower) over the 10% sum of those fees.   However if the lender permits and the borrower to shop for their own title and/or escrow vendor, the loan originator is “off the hook” should the fees come in higher at closing.

Per HUD “if no service providers are listed, then it is assumed the customer could not shop and fees will be bound by the tolerances” and that “lenders are responsible for fee requirements listed by their loan officers or the broker”.     

If the lender “permits” the borrower to shop for title and escrow services, they must provide this written list which must include at least one service provider on a separate sheet of paper and then the lender is subject to the 10% tolerance (based on the aggregate of those fees).

I see this as a huge opportunity for the banks similar to what we’ve witnessed with HVCC.   This is their big chance to control where escrow and title go–to them!    Banks will state that they do not want to risk being off on their quotes with new binding good faith estimates and it’s my belief they will do their best to keep escrow and/or title “in house” or affiliated providers.    Some mortgage brokers may find that they will have to use the banks preferred title and escrow vendors just as they do the banks appraisal management companies.     Should this happen, we may see banks use low cost centralized services, similar to many bank processing centers (some are even located out of state).

How will borrowers know how to select or shop for a title and/or escrow company?   Can they rely on their bank loan originator to help them select a title or escrow provider when the MLO (Mortgage Loan Originator) is directed to only have the bank’s providers on the list?    The new RESPA laws will not allow MLOs to recommend anyone who is not on the service provider list.    Should the consumer rely on their real estate agent to recommend the title and escrow provider (many brokerages have joint venture relationships)?

With a purchase, if the title and/or escrow service providers are other than those designated on the written service provider list, then it is presumed that the buyer/borrower selected those providers (even if it was directed by the real estate agents or seller) since the buyer agreed to the contract.   With this scenario, the lender is not subject to the 10% tolerance in fees for those costs.    Buyers may find a surprise comparing the good faith estimate at signing to the HUD Settlement Statment if the title and/or escrow company are different from what was designated on the purchase and sales agreement.

The new Good Faith Estimate may wind up being a huge set back for independent escrow companies and smaller independent title agencies who will most likely lose any relationships they have forged with loan originators who happen to work for one of the big banks.

By the way, if you are planning on selecting your escrow and/or title provider.  You may want to start researching prior to your prequalification process with the mortgage originator.   You may find that effective January 1, 2010 most mortgage originators will not want to provide a good faith estimate until you have committed to working with them as the new GFE’s are binding for the loan originator unless certain “changed circumstances” permit the MLO to issue a revised estimate.  Per HUD:

“If a GFE is given during prequalification, the receipt of one of the six required pieces of documentation will not constitute a “changed circumstance.”

The loan originator is presumed by HUD to have the “six required pieces of documentation” if they issue a good faith estimate.

…I’ll be writing more about this on a future post.

Escrow Trenches: nutty funding conditions

Recall those episodes where Jerry Seinfeld grits his teeth and in one exasperated and frustrated breadth says, “Neeeewman!”

Similarly, so do title and escrow staff in dealing with lender funding conditions and other challenges that seemingly are for no other purpose but to drive us to the closet for our straight-jackets.

Unfortunately, some conditions cannot be easily met at the moment the request comes over the fax or e-mail.   Some require work that delays closings.  Or, in extreme cases a condition can completely shut down all other transactions you are working on for a couple of hours to work feverishly to meet conditions or do a workaround when parties to a transaction become completely uncooperative.

Here’s a couple funding conditions pulled from our short list posted on our blog:

  • “Prove that the borrowers are not married.” (hmmm)
  • “Slight variance in borrower’s signature from others of the same borrower, need borrower to re-execute documents.”  (can cause escrow people to find a new profession.  Who’s signature is the same after signing an FHA loan package that is 119 pages long and 1.375 inches thick?)
  • “Borrower signed on the line adjacent to the one provided where the name appears.   Please re-execute the document.”  (resulted in a re-sign after tracking down the borrower).

While these are humorous after the fact it also paints a picture of what goes on behind the scenes.   Another thing that creates grins for title and escrow staff:  When there is a “rush” on a request and that request involves the collaboration and cooperation with a government agency.

Collaboration: The important DNA in any small business

Collaboration:  Do you have this DNA in your small business?  Is it part of your mission statement or mantra?

This is not so much an insight into how a successful real estate transaction comes to fruition as much as it is a testimony of what makes any task, job, objective or goals conclude with a positive outcome.  Whether you are in the military and command a small unit of soldiers or, what I commonly describe the role of  a Realtor as,  “the Conductor

Lower Interest Rate – Escrow Timeframe

1) How long is Escrow?

The correct answer is it can be as long or short as the buyer and seller want it to be. However a long escrow timeframe can cause an escrow to fail, because it can create a situation where the buyer no longer qualifies for the mortgage. Just because the buyer qualified when the offer was submitted, doesn’t mean the buyer will continue to qualify on the day the lender is supposed to fund the loan so the escrow can close.

A lender assumes a given interest rate when they qualify the buyer. If that interest rate is different for the reasons detailed below, at time of close, the buyer may not qualify at that changed interest rate.

2) Why do most agents write a contract to close in 30 days or less?

Dan Green of The Mortgage Reports wrote a post today explaining why a shorter escrow timeframe equals a lower mortgage interest rate. His post explains that a 60 day lock “costs more” than a 30 day lock, often in terms of higher interest rate vs. higher cash costs to close.

In order for the buyer to get the rate they think they are getting, they have to be able to lock that rate for no longer than 30 days. While the buyer is not required to lock that rate, it should at least be a possibility. If a buyer looks at a rate quote of 5%, they often are not told that assumes a rate lock period of no more than 30 days. So if they sign a contract to close in 60 days, and then try to lock the rate in the first week of their contract, they will find the rate to do that is higher than the rate they were quoted the day they made the offer.

The rate can change in a few hours without the issues noted in this post. But even if the rate does not change at all, the rate will be higher if you try to lock it through a 60 day closing vs. a 30 day closing.

The honest lender who asks “what is your proposed closing date” and gives you a “60 day lock rate quote” will be higher than the lender who assumes a 30 day lock. Be sure the lenders are using the same parameters when quoting you a rate prior to making an offer, so that you are comparing apples to apples. In this scenario the most trustworthy lender could appear to have a higher rate, when they are being most honest about the potential for rate if you lock for 60 vs. 30 days.

3) How does the closing date timeframe, chosen at time of offer AND ACCEPTANCE, impact the buyer and seller in other ways?

Buyer A gets a pre-approval letter the day they are submitting an offer. The lender pre-approves the buyer for a $300,000 mortgage at 5%.

Seller B accepts the buyer’s offer BUT asks for a 90 day closing, as the home they are moving to is new construction, and won’t be completed for 90 days.

Buyer A accepts the seller’s counter-offer as to closing date.

30 days later the buyer sees interest rates rising and wants to lock the rate. The lender quotes the “lock rate” and the buyer is confused. “I see the rate on your website is 5%. Why are you quoting me 5.25%?” Lender explains that a 60 day lock vs. a 30 day lock adds 1/4 of a % point to the mortgage interest rate.

Here’s where it gets REALLY complicated…if the buyer doesn’t qualify to buy the house if the rate is 5.25% vs. 5%, he can’t lock it. If he chooses to wait until the closing is within 30 days before he locks the rate, the rate could be at 5.5% at that time. If the timeframe for the finance contingency protecting the buyer’s Earnest Money expires prior to that time (and almost all do), the buyer is painted into a corner by circumstance.

Moral of the story is often a buyer CAN let the seller have 90 days to close if they are renting month to month. But a buyer must consider the impact of the interest rate floating out for 60 of those 90 days and/or the cost of locking for more than 30 days at time of contract.

Today, it is near impossible for a seller to stay in the property for more than 60 days from time of offer and acceptance. You can close in 30 days and let the seller stay or rent back from the buyer. BUT the buyer’s lender will not allow that seller to rent bank for an extended period. If the buyer is qualifying at an “owner occupied” interest rate, they will impose a maximum number of days that the buyer can rent it to the seller. Beyond that time period the buyer’s lender will consider it an “investment” mortgage, and higher investor interest rate and higher downpayment requirements, vs. an “owner occupied” purchase money loan.

The “ifs, ands or buts” that happen in a split second during negotiations, can change the “assumptions” made at the time the buyer received their preapproval letter. The lender is often not “in the room” while these negotiations take place, or consulted for every tiny change in close date or rent back terms. They most often don’t see those “changes” until the buyer and seller both sign the contract as finally negotiated.

These small changes can put the buyer’s Earnest Money “at risk” of loss. The agent is the “protector of the buyer’s Earnest Money”, as related to changes in contract terms during negotiations. Yet how many realize the changed position the buyer is put in when the seller counters for a longer close date?

We see thousands of articles on “How to choose an agent?” Perhaps asking the agent “what happens if the seller wants to close in 90 days, or wants to rent back for 90 days?”, is a better question than “How many homes have you ‘sold’ this year?” The cost of closing is VERY important to the buyer. Not closing at all, due to changes no one played out to the likely eventual worst case scenario, affects both the buyer AND the seller.

Agents don’t “sell” houses. Agents represent the buyer OR the seller AND the transaction as a whole, as it appears at time of offer…AND as it changes during negotiations and escrow.

Handing a contract to escrow and waiting for a commission check is no longer an option. Changes in lending BACK TO the old tried and true rules of the game, requires agents to be on their toes all the way to the day escrow closes…or doesn’t close.

Why are so many escrows not closing these days? Everyone asks that question. Truth is the skills needed by an agent have changed dramatically back to old school…and agents still think “it’s the lender’s job” vs. theirs.

Settlement Statement: Is the interest rate of the Note disclosed on the form?

It is routine for escrow departments of title companies and independent escrow firms to provide a Settlement Statement to a loan officer (and agents) prior to making appointments with clients to sign their paperwork.   Once loan documents are received by escrow the closing staff move to get this accomplished as quickly as possible.  This is done for a variety of reasons but mostly to assist in ironing out any discrepancies prior to meeting with the client.

If you reconciled a “yes,” the interest rate is on the Settlement Statement, you are correct.   So, where is it:

  • Line 901 of the Settlement Statement
  • If a borrower has a loan, it is on Line 901 to calculate interest (see screenshot)

Can this be missed even after escrow receives a HUD approval “green light,” “all OK,” “call the borrowers to make an appointment?”   Unfortunately, yes.   Hopefully this post will assist consumers and those in the business that were unaware that this is on the Settlement Statement and to prevent situations where escrow is meeting a client at their home at 8pm to sign docs and hear the client remark, “this is not the rate/program we were quoted.”

Interest rate on HUD