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.
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54 Comments on Is Your Title Company Misbehaving?
Ed. Do you believe that the difficulty with oversight in Maryland could be related the unique MD history with respect to corruption?
Whenever I read a case of significant malfeasance, I instantly recall that this is the state with a history of pay offs in Annapolis. MD did groom two governors who were discredited and it wasn't unique to them. I believe it was business as usual for Mandel and Askew.
I know that, up until very recently, some counties in MD were very protective of MD builders who were cozy with Code Inspectors, especially in rural counties.
Goodness. I could go on and on. But, I'll spare your readers.
That is why I am very choosy about who my clients use for the settlement. If the purchaser selects a company I don't know, then we have a split settlement and I take my client to the place I trust.
Very interesting stuff, I had no idea it could be this bad.
I read all the comments and tried not to feel picked on. ;o) I don't, I understand everyone's concern and I share it. Ed makes some excellent points about the times we live in. I have a few thoughts to share and they may only pertain to California where the Dept. of Insurance has been pretty diligent these last few years to keep all of us on the straight and narrow.
1) In California (possibly nationally) the Lender is responsible for recording the reconveyance document. So it may be worthwhile to have the borrower follow up with them. Most of the times the reconveyance not being recorded is because a private beneficiary is the lender. I'm sure your title company would be happy to check on it if you needed them to do that.
2) I think the buyer can rely on the title policy they are receiving showing that the loan has been paid off. That is what it is there for so make sure they keep that handy and have reviewed it.
3) If you are going to make calls to try and catch a title company that is operating as crooks, it may take a lot of calls before you ever do, because most of the ones I know of are responsible and ethical.
4) I have managed a company for 18 years now and we take very seriously our daily and monthly account reconciliations as well as our annual audits. You could question your escrow and title companies management about their practices in this area if you are concerned.
Ed, thanks for the insight regarding how title companies operate in other parts of the country.
Gary and Richard - I like that you parcel your business between several title companies. That's probably a wise move. Happy New Year!
Chelle - The title industry in Virginia, like Maryland, has a questionable track record. I don't blame you for remaining in control of the deal. I would do the same.
Josette - You're very welcome! Thanks for stopping by.
Lenn
I hate to speak in generalities, but Maryland does seem to have a history of political corruption. The person that I referred to in the post used to own Bay State Title along with his ex-father-in-law. I'm sure you remember Bay State as being one of the largest Maryland title companies during the 1980's. He now owns and manages Residential Title, which again is one of the state's largest title companies with strong builder ties.
The guy was convicted at the state level, so I'm assuming that he was quietly pardoned by a previous governor. Very disturbingly, Stewart Title, headquartered in Houston, TX, is Residential's underwriter. It's frightening to think that a guy who has plead guilty to steal money, millions of dollars, was able to sign an agency agreement with a national underwriter. It's perhaps a telltale fact that the state of Maryland would allow it to happen.
Agnew and Mandel were both convicted by the feds and pardoned by American presidents. Power apparently has its unique privileges. These days, Mandel is a successful lobbyist in Annapolis. What can I say?
Greg
Title companies, in every state, are ultimately responsible for recording reconveyance documents by virtue of the policies that they write. There's no way to technically subrogate the liability except through the use of letters of indemnity which are typically issued between underwriters. I'm finding that attorneys in many state are objecting to their use as a temporary fix to unrecorded releases. I happen to agree.
The fact that a homeowner holds a title policy is in no way a guarantee that they will be able to refinance or sell without delay. An unrecorded release is a serious problem that should be fully remedied prior to closing.
Title company malfeasance is an issue nationally, California included. I accept that your insurance commissioner has taken aim at the title industry, but it's only because real problems exist within the state. It was, after all, title industry practices in California that prompted Michael Oxley's call for the infamous GAO study.
In Westmoreland County, PA alone we've had several defalcations and most of those WERE attorney title agents. Some of these folks were in the business for a long time and had a good reputation and strong Realtor following. This is why it's no very important for title or escrow agents to only accept good funds. I won't take an attorney or title company check. You just never know who you can trust.
Ed,
Wow is what comes to mind. I have had nothing but the best of experiences with the title company that handles most of my clients transactions. I can't imagine anything like this ever happening there, but then there's a lot I can't imagine, and it happens.
Thanks for keeping us mindful,
Ed, I certainly am not wanting to get involved in some sort of legal back and forth about who is responsible for recording a reconveyance. I can tell you in California legislation was introduced in about 2001 placing the responsiblity on the lender and forcing them to send their reconveyances directly to the county recorder. They can be fined for not doing so. A title or escrow company in California is put in a position where periodically in order to close a transaction we have to clean up the mess the lender has left for the borrower. We can record a release of obligation if we made the payoff or we can request an indemnity from the company that did make the payoff. With respects to relying on the title policy and the borrower having clear title; If the borrower uses the same title company that issued the title policy I can't imagine that company refusing to hold up a transaction because of a reconveyance that wasn't recorded. In California an unrecorded release is a piece of cake to fix. With respects to the malfeasance in the title industry, especially in California, I just think it is a bad idea to suggest a Realtor call post closing to check up on a reconveyance. A Realtor should use a company that they know can be trusted. I think suggesting all agents call their title company and create all that extra research on every transaction sounds like over kill. That's all I've got and I really am replying with the intent to respectfully disagree with some of the issues you raised. It is a lively topic and that is what makes this fun. Thanks Ed!
Greg
Don't think at all that I'm taking aim at you because I'm not. From your comments on Title-opoly, I've come to respect you as a knowledgeable professional. However, I happen to believe that transparent, spirited debate is desperately needed in the title industry. For the most part, the public has no idea of what you do and needs to know.
In the long run, your fees might even increase once all the good work that you do and risk that you take is publicly exposed. That's my primary motive on Title-opoly and I'll tell you that public officials are reading and taking notice. Just yesterday, I received an invitation, by a state government, to submit a consulting proposal. It's happening quite frequently.
I do want to "weigh in" on the primary "talking points" contained within your most recent comment:
Releases: I think we're on the same page on this one. While it's true in CA that lenders have a legal duty to record releases, the onus ultimately falls upon the title industry.
Indemnity over unrecorded releases: I can't agree with you on this one. Why not fix the problem and be done with it? The consumer has a right to a clear title at closing. In some states, the legal profession is fed up with the practice of lingering loose ends that are often neglected until statutes run. I predict that we're going to hear more in the future about the real hazards of using indemnity letters to conceal problems.
You wrote:
The whole premise of forcing a consumer to use the same title company that screwed up originally makes no sense to me. It's the one title company and insurer that I wouldn't use. Why didn't the underwriter audit it's agent more thoroughly? A knowledgeable consumer would never agree to close with a known title defect. A unrecorded release can result in a closing delay in virtually every state.
Post closing inquiries: People leave the table thinking that the deal is fully accomplished when in fact it's not. The title company has numerous tasks to complete before title is properly vested and free of possible blemishes. I have to argue that consumers have a right to know the status of their transaction and would ask questions post closing if they only knew of all the complexities. It is after all their house, their money, their financial future, their peace of mind, etc. The consumer should know everything about a real estate transaction. It's fair to bring the real estate agents into the mix because they almost always select, directly or indirectly, the settle service provider.
May I suggest that the title company of the future might send post closing updates to consumers and real estate agents.
The title industry needs to become fully accountable, but first, the public needs to fully understand the role of a title company in a transaction.
I look forward to your response and you're right: discussions such as this are fun.
Diane - There was a time when I happily accepted attorney or title company checks, but that ended about a decade ago. I personally know four (former) title company owners from Baltimore that have been implicated by state authorities because money was missing from escrow accounts. I actually worked with two of them many years ago. As you know, trust account management is an issue that needs to be addressed and soon.
Monika - I know of similar situations where a loan was paid off erroneously while the intended loan remained open. It's a good example of inadequate internal review. Title company personnel are too often improperly trained, underpaid, and horrifically rushed (and overworked) at certain times of the month. I'm thinking about writing a detailed series about title company practices for the benefit of AR members. People just don't know much about the things that take place behind closed doors at title companies.
Fran - It seems to me that your market is more honest than most. It's an enviable position to be in. Thanks for commenting. I always appreciate it.
Very good aricle, new agents like me do learn from people like you with experience.
thanks
Rich
www.arizonagreatliving.com
GREG - I'm not aware of how it is in CA but here in Florida, unrecorded Satisfactions are a big problem. That is a requirement here that we follow up on the Satisfactions after closing. As far as it being expensive to do so, I don't see that. When we run a search on a property, that file is open in the system for 6 months (we can even change it to longer). You're at any time able to do an update on the property to see what has been recorded, without charge. We can also search public records for free. Time consuming, I agree.
The lender is the one who is required to issue the Satisfaction but at the same time the Title Company is required to follow up.
I've had numerous occasions where the satisfactions weren't recorded and when I call the title company to find out if it was paid off and where the satisfaction is, they are quick to say, "Call our underwriter and get an Indem Letter". That is the easy and lazy way out. Talk about time consuming? It's title companies like mine who refuse to take the easy way out that it winds up being time consuming for.
Idem Letters aren't as easy as you make it seem to get. Again, we have to first call the prior title company. Again, I don't know about anywhere else but here in Florida, title companies don't like to help each other out. The first thing we hear is "I have to pull the file from storage, which will take about 3 days and the charge is $50". Now my file is being delayed for 3 unnecessary days. Once I get it, then I have to forward their policy, along with my title commitment and search showing the mortgage still open to the underwriter. They then have to verify the mortgage was indeed paid off. Once that is completed, they then issue the Idem Letter. Some underwriters are quick and some aren't. You're talking a day if the are quick and 2 to 3 days, if not. So we've delayed the closing for a minimum of 4 to 6 days.
Who looks bad in the end? My title company. The consumer for the most part doesn't understand, no matter how hard you try to explain, why this needs to be done or why it takes so long to get done.
Richard - Thank you, I plan on writing more title oriented posts in the near future.
Greg and Dawn - Thanks for the great comments. My own experiences with unreleased mortgages are very similar to Dawn's. I look forward to meeting you both the next time I'm traveling in your respective states.
Ed, this is Jonathan Yasko. You are my first comment and after reading this entry, I only felt obligated to respond.
There is not a day that goes by that I do not hear about, read or was told about misappropriations in a trust / escrow account. This is a HUGE concern for not only title insurance underwriters, but should be a great concern for Realtors as well.
All realtors should research and conduct their due diligence in the practice of the title company or law firm closing their client's real estate transaction. The last thing the Realtor wants is an angry client that drags their name through the mud.
A Title Company or Law Firm should at least reconcile their escrow / trust account on a monthly basis. The reconciliation is a great tool to stay on top of possible losses or possible fraudlent activities. Often we find the employees taking the money, not always the owner. I am truly glad that you brought this up.