The title insurance industry often has to explain itself to those unfamiliar with it because the commonly held perception of insurance is that it is something that guards against future risk. As we know, title insurance insures against the past. But what if you found out you just signed a document that has made you responsible for events in the future? If you recently worked a short sale transaction, and didn’t properly read the lender instructions, you might be in this position.
As has been said and written many times here in The Title Report, short sales are tricky, difficult transactions to close. They involve properties more likely to have title issues; they involve complicated negotiations with the lender; they are often at risk of falling through; and now they might be placing the agent in a precariously risky position.
Lenders across the country have added several addendums within their closing instructions for short sales that are meant to defend against short sale fraud. One states that parties to the transaction agree that the transaction is absolutely arm’s length, that the parties are unrelated and that they’ve never done business before. Another asks the parties to assure the property will not be flipped for a specific period of time — 30 days, 60 days or on up to one year. There are some that have the escrow officers sign on behalf of the company and themselves, forcing the escrow officers to take on personal liability in the event the transaction isn’t at arm’s length.
The fundamental reason for these addendums is the rise of short sale fraud. In a recent report, CoreLogic said it expects short sale fraud to rise 25 percent in 2011, with lenders and servicers incurring losses in excess of $375 million.
“In concept, that’s not unreasonable. A lender should want to know that the transaction is an arm’s length, legit short sale transaction,” said Bill Burding, executive vice president and general counsel at Orange Coast Title. “The problem is it requires the title company to investigate things it normally would not investigate. It goes beyond the breadth and scope of what title companies do. We can’t control what happens in the future, and they are asking us to guarantee something we don’t control.”
At the American Land Title Association’s (ALTA) Business Strategies Conference, Burding gave a presentation about this issue, saying that he was seeing these new addendums emerge from many lenders — primarily on the East and West coasts — and that agents should start paying attention because the concept would probably start to spread. Now, Burding said these addendums are everywhere — every state and coming from virtually every lender.
ALTA is now aware of the issue and is reaching out to Fannie Mae and Freddie Mac to figure out if this is a program that started with them, and to go over other solutions that could help protect the lender while not asking the agent to sign a document that puts them at risk.
“The fundamental question is, what are we trying to solve through these addendums?” said Justin Ailes, vice president of government affairs for ALTA. “Are the GSEs trying to solve these problems? Is the servicer trying to solve these problems? And how can we design a solution that is appropriate and reasonable as opposed to the addendums we’ve seen so far, which don’t appear to be reasonable. As a closing or escrow agent, there is simply no way to be able to know whether there was appraisal fraud, for example, in the short sale. It’s an attempt to manufacture liability where it’s not appropriate.”
Fannie Mae told The Title Report that it does not require these addendums from lending institutions, but it makes sense that the GSEs and servicers would want to try and stop short sale fraud before it gains more steam. So what is the solution? Whatever it is, Ailes said it’s important for that solution be uniform across the country.
“There should be a standard form that provides certainty to agents so they understand what is expected of them,” he said.
Until a better solution arrives, closing and escrow agents need to be careful, read what they are signing and go through their limited options. Check back later this week for part two of this feature, looking over the best courses of action to take.