Buyer's question at signing

A recent buyer asked us at signing (a day or two prior to closing):

“I’ve noticed that the fees charged by my loan officer are about $1,600 more than my Good Faith Estimate. I recall only being charged 1% loan origination. Is there any explanation for this?”

What are the re-disclosure laws (both state and/or Federal)? Obviously, this buyer was a bit under pressure and did not want to create waves to delay the purchase.

Does it matter who you list with, who you close with or who your loan officer is?

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Being in the escrow business is really fascinating. You see lots of things. You hear lots of things. You get to observe what is efficient and what slows down transactions.

Escrow can be confusing too. We really serve two masters: those that are our clients (the principals such as the seller or buyer or borrower) and those that are our customers: agents and loan officers who suggest and refer work to us or any other service provider. It’s also something to experience such a large transaction “quality control” chasm between different agents working for different brokerages even within a major brokerage franchise network.

But this post really is about how agents and consumers decide what you decide.

1) For example, an interesting thing occured. In the mail, I received a post card from Greg Perry of John L Scott marketing a home not far from my place. It’s not strange that I receive things in the mail from Realtors, but that the owner of the home is a broker from another company—why did they hire another agent to list the house? I know this owner because our kids play together and we’ve closed transactions for him. It is a fascinating move.

2) We have had several transactions with repeat clients who have used a different service provider (agent or loan officer) the second or third time around. Why are they doing this?

3) In escrow we work in high collaboration with just about every title company. Obviously, we do not have primary contact with the sales staff (title reps) but rather the attorneys, title officers and back office staff that are largely the engine under the title insurance hood.

One of the things that I have always wondered and one question that my wife actually raised while we discussed business matters is the following: how do agents choose one title company over another since the perception of agents in the market is that title insurance companies (heck, even escrow firms) all do the same thing and the end result of issuing a title policy or a closed transaction is the same result? In other words, agents have a tendency to say they receive good service, but what is that service they receive? Agents have very little if no contact with the title company other than the with the title rep. How are the title companies differentiating themselves especially when many are using just another name plate but are in fact a subsidiary of a large national title company.

Consumers have no idea how to differentiate Pacific Northwest Title (First American) from First American Title. Or, comparing Land America Title from Commonwealth or Rainier Title (Land America companies). It is kind of like comparing the Nissan Quest with the Mercury Villager. Both are virtually the same vehicle. Consumers rely upon their agent to differentiate for them. How do the agents differentiate between service providers for their customer?

4) Along those same lines, competition is cut-throat between service providers such as escrow and title, especially in a market where sales volumes are significantly lower than over the past four years. Agents are very fierce in fighting for their respetive loan officer or title or escrow company if involved in a sale. Tradition has it’s place, but what is the compelling proposition of one service provider or closing agent over another?

5) What is more important to an agent when suggesting a loan officer: closing the transaction, lowest rates and fees for their customer or client, or a combination? For example, one of the loan officers we work with does average volume but gives phenominal service to the client, loan docs are usually ready days in advance and nothing has ever not closed due to a problem created by this LO. On the other hand, we work with LO’s that due boat loads of loans and there are the occasional problems with service to their clients or other issues.

What I love about this business: the people

Escrow is one of the toughest jobs in real estate, for a lot of different reasons. But, it is by far the most interesting from our experiences in that both Lynlee and I have sold (circa 1990) as licensee’s, bought and sold homes as homeowner’s and today as owners of an escrow company.

For example, in a recent day at the office we have had people curse at us, a customer who threatens to sue everyone in the deal including the clerk at the corner 7-11, an angry client yelling at their loan officer so loud that other tennants in our building start calling to see if everything is ok, then, before we have a chance to catch our breath, my wife comes smiling out of the signing room after meeting with a client. Looking at her, I say, “what are you grinning about?” To which she wryly remarks, “that customer just told me, ‘please don’t take me the wrong way, but you are a very pretty lady.”

You can be the scum of the earth to someone at 10am in the morning and then a hero just twenty minutes later.

In escrow you meet the most interesting people: From rock stars, to brain surgeons, shakers ‘n movers, CEO’s, farmers, war hero’s, teachers, politicians, pro-athletes and more. And, the occasional world famous writer to boot.

Major Proposed Changes for Residential Closings in 2008

Alternative sexier titles to this post are: “Your Escrow Officer is a NARC” or “No More Quicky Closings” or how about “The Escrow Hills have [photopress:detctive_1.jpg,thumb,alignright]Eyes”. There are some major changes brewing with how escrow will be practicing their business in 2008. Escrow companies may become “undercover

Common myths & misconceptions of Escrow.

Please do not construe this as legal advice, it is not. The sampling below is general in nature and is referencing common escrow misconceptions we see in the course of conducting business.

Here are a few to get started.

1) Escrow firms produce and verify the validity of Legal Descriptions.

  • Incorrect. In a sale it is the Seller’s responsibility to correctly identify the property that is being sold. The Buyer should verify that the legal description matches the property that they intend to purchase.

2) Escrow firms are bound by Northwest Multiple Listing Rules.

  • No. Escrow is bound by the Escrow Agent Registration Act of Washington. Some managing real estate brokers erroneously believe otherwise. The Legislature also has determined that escrow officers are subject to the Consumer Protection Act.

3) Escrow firms never have conflicts of interest or problematic transactional issues.

  • Untrue. Escrow firms commonly run into potential conflicts of interest, and problematic issues. The idea is to reduce the exposure of potential conflicts and issues as much as possible via a variety of means. For example, escrow commonly discloses those problems to the principals in the transaction so they can consult appropriate professionals and give escrow additional instructions on how to proceed.

4) Independent Escrow firms are sued more often than attorney-owned escrow firms.

  • No. Ironically, Attorneys who own escrow firms have earned that privilege. (Source: Fred Phillips- Attorney, LPO Seminars).

5) Limited Practice Officers at escrow firms are tested & licensed by the Washington State Dept. of Licensing.

  • No. The LPO exam is administered by the Washington State Bar Association twice a year. The pass rate has been under 30 % for quite a while, but has recently improved. LPOs are regulated by the Washington State Bar Association and Washington State Supreme Court. Independent Escrow Companies are regulated by the Washington State Dept. of Financial Institutions.

6) Escrow staff work at all hours of the day and evening.

  • Traditionally, no. Most are open from 9-5pm. From a practical standpoint, ownership does work at all times (speaking only for our company). Escrow firms have banking hours for a reason. Escrow firms are closed when the there are Federal holidays and when the Federal Reserve is closed. The receipt of lender wires occurs up to specific times in a business day, typically until about 2 pm. This may depend upon the trust account banking policy the escrow firm has with its own bank.

7) Loan officers and real estate agents are principals in the escrow transaction.

  • Incorrect. The buyer(s) and seller(s) are the principals and escrow can only be instructed by these parties. Loan officers and agents cannot instruct escrow or influence the escrow transaction in any manner.
    • Example: a loan officer who calls escrow to request proceeds check mailed to their customer instead of being wired to the customer’s bank as the client previously instructed escrow in writing.
    • Example: a real estate agent/Broker instructing escrow to refund an earnest money check to a borrower (buyer) without a rescission agreement.

8) Escrow staff can produce, prepare and/or instruct their clients (buyer or seller) on drafting purchase & sale addenda for common things such as extending a closing date.

  • No. This is tantamount to practicing law and may be a conflict of interest. Only a licensed real estate agent, attorney or principal parties can draft addenda.

9) Loan documents are almost always perfect when submitted to escrow.

  • No. Loan documents frequently and frustratingly have errors, such as incorrect fees, incorrect name spellings, incorrect vesting, among other errors.
  • Loan documents take time to prepare after receiving them from the lender, particularly if docs are re-drawn several times. This is a reason many escrow firms refuse to set up signing appointments with clients (who sometimes have to take off work early or are inconvenienced in other ways) until the docs are at escrow, prepared and confirmed correct with the borrower, mortgage broker and real estate agent.

10) Escrow staff have no deadlines.

  • Emphatically incorrect. Escrow staff are looking at the clock all day long. In our State, disbursing funds cannot take place until confirmation that the documents have been recorded.
  • Escrow staff must get loan payoffs to Fed Ex or UPS on time. This is a prime reason our company is located just blocks away from the major UPS terminal for Snohomish Co. It allows just that much more flexibility in TIME. Time is precious in the escrow business.
  • There are many other time-sensitive tasks as well.

11) Once escrow has been opened and is progressing towards closing, Escrow cannot refuse to close a transaction.

  • Incorrect, and it does happen.

Utilities: Avoid post-closing disputes

One of the functions of escrow is to pay lienable utilites. Lienable. There is a large segment of the real estate community that interprets that to mean all utilitites. It does not mean all utilities. In addition, escrow firms do not have access to seller’s account information. Sellers and/or their listing agents need to provide this information to escrow.

While Form 22K is clear in stating “lienable” utilities, there is much confusion by the real estate agents as to what constitutes a lienable utility. Escrow Instructions by any escrow firm or escrow department within a title company are very clear. All unpaid utilities not paid at closing by the escrow company are to be paid by the respective parties.

Which utilities are lienable (subject to property location)?

  • Water
  • Sewer
  • Seattle Public Utilities
  • Seattle City Light (power)

PUD and Puget Sound Energy (PSE) do not provide final utility bills to escrow and they are not lienable. PUD and PSE will send the final bill to the seller. Homeowners are responsible for paying all utilies, including phone, cable, garbage and so on.

To help your clients obtain a smooth and trouble-free closing, please have the Form 22K filled out properly with correct account information. Agents can avoid post closing phone calls from clients who are upset about utility bills that another party is responsible for by clarifying how the bills are handled during the escrow process. If you are uncertain or have questions, please contact your escrow office as they are eager to help you and the escrow staff avoid post-closing problems.

Are you leaving too much on the table?

I received a phone call from one of the agents I work with who is representing a seller requesting my opinion on another lender’s closing costs.    The seller had agreed [photopress:MPj04331500000_1_.jpg,thumb,alignright] to “pay up to $10,000 towards buyers closing costs.

A case for the ages. Perry Mason, where are you?

Here is a scenario bouncing around in my mind. Complicating this problem, imagine this scenario occuring two days prior to closing. What would an attorney think?[photopress:j0402451.jpg,thumb,alignright]

The facts:

A buyer who happens to be a real estate managing Broker-owner is purchasing new construction from a builder. The buyer (Broker) asks for a discounted escrow fee because buyer (Broker) has a history of referring business (sellers or buyers) to escrow company handling this closing. The escrow company refuses to discount buyer escrow fee. The seller (builder) receives an estimated HUD-1 Settlement Statement which shows an escrow fee based upon each party paying an equal 1/2 of the total escrow fee, in full compliance with the local Northwest Multiple Listing Service (NWMLS) Purchase and Sale Agreement (PSA). After reviewing the settlement statement, the builder-seller calls the escrow company and requires escrow company to reduce the escrow fee because it is “tradition” or the seller (builder) will refuse to close. Learning of this, the buyer wants the same fee as the seller. To comply with the law, the escrow company must comply with the terms of the purchase and sale agreement, in addition to complying with RESPA. Locally, the Northwest Multiple Listing Service Form 21 Section ‘H’, line 56, provides that:

Seller and buyer shall each pay one-half of the escrow fee unless the sale is FHA or VA financed, in which case it shall be paid according to FHA or VA regulations.

Escrow raises this issue and asks parties for clarification because the purchase and sale agreement in question has no other addenda indicating disclosure of builder-seller receiving a discounted escrow fee. Once again, the seller (builder) immediately requests escrow to discount escrow fee or they refuse to close and further escalates the issue by threatening to move the transaction.

This problem raises a few issues.

  1. Is the Broker/buyer in clear violation of RESPA regarding potential kickbacks?
  2. In this case,there is no builder addendum indicating or disclosing to buyer/Broker that the builder will be receiving a discount. Builders routinely receive significant discounts on escrow fees, particularly if closing through a title company. Many builder generated addendums address the discounted escrow fee.
  3. Under the terms of the purchase and sale agreement, is the builder potentially in breach of contract by refusing to close? For example, if the buyer, who happens to be a real estate broker, (never mind asking for a discount equal to the builders perceived “traditional” escrow rate) stood firm by indicating each party shall pay an equal escrow fee as provided in the PSA, would the builder be in breach of contract?
  4. Does the buyer and seller understand the purchase and sale agreement terms?
  5. How does HUD treat the situation where builders receive discounts in title or escrow fees?
  6. Do you think this scenario is plausible?

All you Perry Mason’s, looking forward to your comments…..

Tightening Lending Standards: A market conundrum

What will lending standards look like 6 mos. or a year from now? Will lenders with more stringent qualifying standards be a drag on the market? At minimum, it will change the complexion of the pool of buyers. Some ramifications of tighter standards that come to mind:

  • reduces ability of consumers with credit blemishes to purchase a home as easily as before.
  • it may take longer for loans to be pushed through, because
  • borrowers may have to provide more verifiable documentation.
  • lenders may look more carefully at appraisals and implement other safeguards to reduce fraud.
  • reducing the probablity of those buying a home with questionable credit from getting into financial trouble (which leads to distressed properties which leads to downward pressure of prices)
  • a more stable and credit seasoned pool of borrowers, leads to stable and healthy markets.
  • housing affordability becomes much more tied to economic fundamentals vs speculation and artificial housing appreciation.

Over the last three years or so, qualifying for a mortage has been absurdly easy. There is no doubt about it. When my wife and I bought our first house (670 sq ft) in Ballard, I barely qualified for an FHA ARM. I think the underwriters were cringing and looking away when they stamped it “approved.” We had to provide bank statements, two yrs. of tax returns and more.

Today, borrowers with average to low credit scores could get a loan with virtually little oversight. What program buyers qualified for largely depended upon borrowers credit scores. In the end, it really came down to the interest rate you were going to pay. It was never a matter of “if” you could get a loan, rather, it came down to the interest rate and program you were placed in.

A conundrum

In hindsight, most first time homebuyers that closed their purchase transactions though our escrow office put little to nothing down over the last three years. It is still going on today, but not nearly at the tempo that our office experienced in all of 2005 through summer of 2006. First time home buyers drive the market, providing impetus for sellers to move up into a home that suits their current lifestyle. For many, that meant moving to new construction housing. If the first time buyer market slows, everything down stream slows as well.

Through my direct discussion with loan officers, some have indicated that lenders are scrutinizing transactions more carefully. One indicated that a recent appraisal was required to add more comparable homes and provide interior photos of the subject property being purchased.

WMC, a large national lender and a wholly owned subsidiary of GE Finance (my spouse has now informed me that WMC is no longer, but is now taking the GE name) is slated to eliminate all 100% financing with borrowers having FICO scores below 700. Further, they are financing first time home buyers (FTHB’s) at a 95% cap. I take this to mean that FTHB’s will need a 5% down payment. This is quite the turnaround from the loose lending standards we have seen.

If lending standards tighten with or without government intervention, certainly it will have an impact on the ability of buyers with marginal credit to become a homeowner. Those with existing mortgages may find it more difficult to refinance. I can’t help but think of all the 100% financed borrower transactions our office has closed—borrowers that may not have qualified (nor closed) if these guidelines were in place today. In 2005, that meant 71% of our purchase/sale business would have never existed as it did (hard swallow).

Generally, with sales trending slower than in months past, stricter qualifying standards may have enough impact to slow sales further. I hope it does not, but I don’t see the alternative as being realistic. The upside is that the pool of homebuyers may move towards more traditional mortgage products, such as fixed rates. More stringent qualifying standards is a good thing for the market long-term, even if the short-term prognosis is discomfort.