As we
reported Wednesday, lenders are including dangerous language into their instructions for closing a short sale. The instructions arrive with these addendums hours before a closing; you look them over and notice wording that you don’t like. What do you do?
The safest option, unfortunately, might be to just not sign it and lose out on the transaction. Bill Burding, executive vice president and general counsel for Orange Coast Title, said he hasn’t done that too much, but there have been closings he’s passed on because of these addendums.
“It has cost us transactions,” he said. “I can’t allow an escrow officer that works with us to put themselves personally in harm’s way over something they can’t control.”
Asking your underwriter for advice might lead you to the same conclusion. Marjorie Bardwell, senior staff underwriting counsel for Fidelity National Title Group, said they will not accept those conditions as escrow instructions.
“We will be happy to collect any affidavit the lender would like us to collect, or other objective documentation they require, if the parties are willing to give it, but we cannot be responsible for the veracity of the documentation or the activities of the parties once the transaction has closed,” Bardwell said. “That is not an appropriate burden to assume as an independent escrow or settlement agent. Agents should check with their respective underwriters for specific tips and directions.”
There’s always the option of going back to the lender for a modification. Burding said this is hit or miss. Some lenders are more amenable than others, and sometimes it’s different from loan officer to loan officer within the same bank.
“We can have a modification with Bank A, and then we do the exact same modification on a different transaction, and it will not be accepted,” Burding said. “I wish I could even say I have a great solution for Bank A, but I don’t. It comes down to each individual transaction.”
One modification that has worked for him is to change “constructive knowledge” to “actual knowledge.”
“It should be an issue to be dealt with by the seller, since they have the obligation to get the closer acceptable payoffs,” Bardwell said in regards to modifying the document. “By that I mean the seller should deal with his or her lender, not that the closer should accept instructions from the seller. We have seen a number of deals that appear to have forged short sale instructions from the lender.”
She warned agents to be diligent in determining that they are, in fact, dealing with the short sale lender directly and not relying on information given to them by the seller. Any change to the transaction should be approved by the short sale lender, which includes the identity of the parties, amounts shown on the HUD-1 and recipients of any funds.
Joseph Powell, Alabama state and area counsel for Chicago Title Insurance Co., Commonwealth Land Title Insurance and Fidelity, introduced a slightly different approach. He said he doesn’t have agents sign an affidavit until the buyer and seller confirm everything and sign it, and then the agent introduces a separate piece of paper with additional language to include in the closing packet.
“It says the buyer and seller understand and are signing off about the liability the title company is incurring because of what we’ve been told — that this is not some kind of sham operation — and we put that in there,” he said. “It’s all subject to the conditions being true and correct, and if we find out that there is anything that’s contradictory to the statements that the buyer and seller have affirmed, we have the right and will disclose that to the lender before, during or after the closing.”
Powell believes this document would cover the title agent and act as an indemnity if there are any lies or deception on the part of the buyer or seller.
“But the agent has to use their own public knowledge or common sense when getting to that point. You can’t just ignore something if you do know it,” he said.
This might not be a cure-all solution, however, as Burding said indemnities didn’t go over well when his company tried it.
“When we asked for an indemnity from buyer and seller, we were told another title company wouldn’t ask for it [and we would have lost the deal]. So that might not be a great solution,” he said.
Insuring into the future?
Perhaps the most unreasonable of these addendums are those that put the agent on the hook for a transaction that might occur into the future, which is way beyond the scope of title insurance.
You can try to modify the document so that this language is excluded or amended. For instance, you could guarantee that the agency or that escrow officer will not participate in the sale of the property for one year’s time, and then keep track of such promises within a database.
“It creates a complete mess, but we have a database to keep track of that,” Burding said.
The other option, which is admittedly not a good idea, is to place a deed of restriction on the property for a year, which creates a cloud on title and would likely get you sued for slander of title. A lender could go that route and place a deed of restriction on the property, but it’s not a popular idea.
“They’re leaving us very little choice because we can’t be in a position where we’re going to insure something that we do not have control over,” Burding said. “Title insurance isn’t something into the future, and if we start insuring things out of our control going forward, we’re going to get ourselves in trouble. And yet we’re signing these things as an industry every single day because people want to get the transactions closed. They have five pages of lender instructions, six people in the waiting room, they look at it, sign it and move on, and it has created some real headaches.”