William McDaniel | Commercial Managing Broker
Thursday, August 23, 2007
Lawyers learn from lender's demise
Closing attorneys vow to accept only wire transfers after dealing with HomeBanc's bounced checks
By Andy Peters, Staff Reporter
EVEN THOUGH A BANKRUPTCY judge in Delaware this week saved them from financial ruin, real estate closing attorneys said they learned a powerful lesson from the collapse of HomeBanc Corp.-never accept anything but a wire transfer at closing.
At least a dozen Atlanta-area law firms received bounced checks from HomeBanc last month, before the company filed for Chapter 11 bankruptcy protection Aug. 9. By HomeBanc's count, it bounced 134 checks worth at least $18 million, but the Georgia Real Estate Closing Attorneys Association estimates the figure was $28 million.
Assuming HomeBanc's checks were backed by sufficient funds, lawyers had disbursed the money at closings-not only to the home's seller and the previous mortgage holder, but also to agents for their commissions and to surveyors, court clerks and others whose payments occur at closing.
When the checks bounced, lawyers had to scramble to find ways to cover their positions. Some took out home equity loans, others filed claims on their Errors & Omissions insurance policies.
On Tuesday, the bankruptcy judge handling HomeBanc transferred ownership of the loans to the closing attorneys. This move lets the lawyers recover their money by selling the loans to banks or other mortgage lenders.
The bounced checks occurred as a result of HomeBanc getting squeezed by broad turmoil in the U.S. housing market and the global credit market. As the market tanked, HomeBanc's primary source of funds, JPMorgan Chase, on Aug. 6 cut off money for the mortgages HomeBanc sold, according to HomeBanc's court filings.
Regardless of the problems in the market, attorneys said the rubber check problem could have been prevented simply by requiring HomeBanc to fund its loans with wire transfers.
As a result, "some law firms are requiring 100 percent wired funds from everybody-lenders, buyers, even other attorneys," said closing attorney Jennifer L. Dickenson of Dickenson Gilroy. "There is a really high sensitivity right now to how we get the money into our accounts."
Why HomeBanc was allowed to fund mortgages with company checks, when the large majority of other mortgage lenders paid only by wire transfer, speaks to the clout HomeBanc carried in metro Atlanta-if not its level of intimidation.
"They were big enough they could frankly bully everybody," said Jeffrey P. Ganek, managing partner of Ganek, Wright & Dobkin's Midtown office. "You had to follow their rules."
HomeBanc, or any mortgage lender, benefits by funding loans with checks as opposed to wire transfers, Ganek said. While wire transfers represent an immediate shift in money, checks take days to clear a bank, allowing HomeBanc to earn more interest on the money as it sat in escrow, Ganek said.
"Even if it's only a day or two extra it's sitting in an interest-bearing account, if you're doing enough loans, it's a lot of money," he said.
As of Dec. 30, 2006, HomeBanc serviced about 39,355 loans with a total value of about $8 billion, according to a court filing. About 44 percent of HomeBanc's mortgages originated in Georgia, according to the company's federal regulatory filings.
Alston & Bird partner Dennis J. Connolly, who is representing HomeBanc in bankruptcy court, did not return calls seeking comment.
HomeBanc was hit hard by the turmoil that has roiled the U.S. stock market in recent weeks, primarily fallout from the subprime mortgage market. In recent years, too many adjustable rate mortgage loans were made to borrowers who couldn't afford them. When the terms of those mortgages changed, the rate went up, and many borrowers couldn't afford the new, higher monthly payment. That caused defaults on mortgages to spike.
HomeBanc floated very few subprime mortgages, local real estate lawyers said. Most of HomeBanc's loans were to people with solid credit scores who were able to document their income.
But HomeBanc was known to real estate agents, mortgage brokers and closing attorneys as a lender that would always close on a loan-even if an underwriter later balked on a pending mortgage.
If an underwriter changed its mind about backing a mortgage HomeBanc would close it anyway, and sit on the bad loan, said Paul L. Martin, vice president of mortgage broker Premier Atlanta Mortgage Co. In contrast, other lenders would back out of a mortgage before closing if problems turned up with the underwriter.
"HomeBanc knew they could charge more, because the peace of mind that they always closed the loan was worth it to the Realtors," Martin said.
Ganek said that many of the closing attorneys who received bounced checks from HomeBanc had no reason to imagine a HomeBanc check wouldn't be good. After all, the closing attorneys who were among HomeBanc's preferred group of law firms had probably never encountered trouble with HomeBanc, Ganek said.
Some of the law firms that received bounced checks from HomeBanc formed a committee in U.S. Bankruptcy Court to make claims that were granted yesterday. The committee is represented by Morris, Manning & Martin partner Frank W. DeBorde. Morris Manning is one of the law firms that received bounced checks from HomeBanc. DeBorde declined to comment on the case.
Other law firms that received rubber checks from HomeBanc include Neel & Robinson; O'Kelley & Sorohan; Weissman, Nowack, Curry & Wilco; and Ferguson McManamy.
On Tuesday, Judge Kevin J. Carey of U.S. Bankruptcy Court, District of Delaware, ruled the HomeBanc could transfer ownership of the loans to the closing attorneys.
Not all of the law firms that received bad checks from HomeBanc are filing claims. The firm James Sibold & Associates received a bounced check for $103 from HomeBanc for the reimbursement of recording costs, said senior associate Debbie W. Flesch. The firm won't be filing a claim for $103, Flesch said.
In addition to the large number of loans it sold, HomeBanc had other ways of leveraging its influence. HomeBanc had one of the most extensive networks of marketing agreements, also known as affiliated business arrangements, or AfBAs, with builders or real estate agents, Dickenson said. In these arrangements, HomeBanc would partner with either a builder or a real estate agent, for the purpose of sharing advertising expenses to drive more loan business.
These business arrangements are legal under the terms of the federal Real Estate Settlement Procedures Act (RESPA), Dickenson said. However, there are strict guidelines for protecting borrowers from being taken advantage of by lenders who are illegally colluding with agents or builders.
"You don't want the Realtor and the lender to be in cahoots," she said.
Agents are supposed to give independent advice to their buyer or seller clients. RESPA was passed in 1974 in response to agents, lenders and title insurance companies that were paying kickbacks to steer business to each other.
HomeBanc had one of the largest networks of retail stores for selling mortgages, with more than 160 free-standing stores and shared-store locations in Georgia, Florida, North Carolina and South Carolina, according to regulatory filings.
In its affiliated business arrangement, HomeBanc would be allowed to set up a desk inside the office of an agent. HomeBanc would pay fees to the agent for the desk, as well as to be marketed as the agent's exclusive lender.
However, RESPA forbids these business arrangements from mandating that an agent's client use a specific lender.
HomeBanc's creditors have not accused the lender of violating RESPA in filings made with the U.S. Bankruptcy Court for the District of Delaware.
But HomeBanc's bad checks could spawn other trouble-perhaps from agents or surveyors who got a check from a real estate closing attorney that bounced because the lawyer's HomeBanc check bounced.
Local or federal prosecutors, acting on a tip that HomeBanc knew its checks would bounce, could seek an arrest warrant for an agent of HomeBanc, said Atlanta criminal defense attorney Steven H. Sadow. However, Sadow said, that scenario will hinge on the concept of vicarious liability-whether the company's employees who sent the bad checks acted on their own or at the direction of their superiors.
HomeBanc executives could tell the bankruptcy court judge that they ordered their check-writing agents to not send out checks, because of insufficient funds, but the agents sent them anyway. Under the scenario, HomeBanc would ask the judge to throw out a prosecutor's criminal charges.
HomeBanc could also be subject to civil litigation, Sadow said. But civil litigation would have a difficult time getting past a federal bankruptcy judge, which has approval over any legal action taken against a company in bankruptcy protection.
Whatever the liabilities of HomeBanc and its executive officers, closing attorneys in Atlanta said this episode has rammed home the concept that their job is fraught with legal peril.
"People discredit real estate closing attorneys, but there is an enormous amount of liability in what we do," Dickenson said. "The reality is, we deal with hundreds of thousands, or millions of dollars."
The case is In re: HomeBanc Mortgage Corp., No. 07-11079.
Staff Reporter Andy Peters can be reached at firstname.lastname@example.org.
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I specialize in commercial transactions and representing professionals in the purchase and sale of homes. With more than 30 years of legal experience, and 17 years of Brokerage, I can get the job done. Emory University (1968), University of Georgia School of Law (1973). Member National Association of Realtors, Georgia Association of Realtors, Atlanta Board of Realtors, Atlanta Commercial Board of Realtors, FIABCI (International Association of Real Estate Professionals), AGREE ( Association of Georgia Real Estate Exchangers,) Georgia Association of Real Estate Investors, National Association of Property Managers.