Have you ever wondered about the integrity, or competency, of a title company after leaving the table? To say that an enormous amount of money is blindly entrusted for proper dispersement is a serious understatement. On a monthly basis, we could be talking about tens of millions of dollars gushing through the escrow accounts of average sized title companies. Who's keeping track of all the money? You'd be surprised to know the answer.
A question recently asked on Mortgage101.com, click here to read, describes the consequences of a title company screwup. A week after closing, a buyer was informed that his loan hadn't funded even though his title company had transmitted good funds to the seller. Oooops! While I disagree with the answer and explanation given by the industry expert on the site, I will say this: there's no possibility of a happy ending in such a case.
Even worse than instances highlighting stupidity are those involving outright theft. Title company executives have been known to dip into escrow funds to cover corporate loses. Defalcation, as it's commonly referred to, is more likely to happen when times are rough and business hard to come by.
Defalcation is a simple concept to understand. It occurs when money held in escrow accounts is spent inappropriately. Escrow accounts exist only to temporarily hold funds belonging to others. The money is intended to payoff mortgages and other liens. It’s used for seller’s proceeds and to pay taxes or fees when recording documents. Escrow money should never be used to benefit a title company or anyone working for a title company. Defalcation takes place when escrow funds are diverted for any unintended use.
There are a staggering number of cases involving mortgages remaining open after closing as someone within the title company continues to make payments ... and helps themselves to the payoff funds. The crime is typically called layering because the funds from new closings are used to cover the missing funds from earlier closings like a quilt used to hide stains on a bed sheet. You can guess the outcome when incoming orders slow down.
Many in the title industry established lavish life styles over the past decade due to the lure of an explosive real estate market. Everyone knew that it had to end, but few would admit it to themselves or others. There’s always someone with a need to maintain, at any cost, the payments on expensive homes, sport cars, vacation homes, plush office space, country clubs, and the other prestigious appendages of the not so distant past.
I personally know a title guy from Baltimore who helped himself to millions from an escrow account to flip a multi-site Dunkin' Donuts' franchise. He was caught, prosecuted, and incarcerated, but the infinitely wise state of Maryland opted to restore his title insurance license a few short years after his release.
These fools are always caught and the money almost always replaced by underwriters, but innocent consumers often suffer in the interim.
Some states regulate title company escrow accounts more stringently than others, but audit responsibility most often falls upon the shoulders of title underwriters. Long story short: title underwriters haven't done all that great a job policing their agents, particularly those remitting sizable premium checks. It's a patent case of "who's watching the watchers." Title companies typically police their own trust accounts with an occasional review by an outsider. It's a dysfunctional system in need of study and reformation
I hate to suggest expanded duties to your already prolific workloads, but I think it prudent for real estate agents to check up on title companies after closing.
As a seller's agent, I would request proof of payoff from the title company two or three days after closing. You could ask sellers to confirm mortgage payoffs on-line. As is often said: it's better to be safe than sorry.
As a buyer's agent, I would calender a phone call to the title company about six weeks after closing to make sure that mortgage releases have been recorded. The key word is "recorded." Your buyers could find themselves unable to refinance or sell their home should a reconveyance document not make it to the local courthouse.
Uncooperative title companies should be reported to state insurance commissioners.
A special thanks to Dave Wirsching for sharing the Mortgage101.com article referred to herein on his blog, Clearing Title.