Unit 11 Escrows

"Difficult to locate" Servicers or Lenders (Delay)

"Difficult to locate" servicers or lenders are rarely a problem today because originating lenders use the services of Mortgage Electronic Registration System, Inc. (MERS), a service that offers the consumer, escrow holder, and title company the help they need. MERS holds title and beneficiaries in its system, and as transfers occur, they are recorded in MERS's computer book-entry system

Risks

"Taking title subject to" the existing note and deed of trust carries risk to both the buyer and seller. In the usual transaction, the seller's lender is not contacted to approve the transaction as it would if the buyer was "formally" assuming the loan. The major risk to the parties is the lender discovering the title has transferred and thus enforcing the note's due on sale clause. The escrow holder must prepare the note and the title company usually serves as the trustee. The agent must prepare the CAR Seller Financing Addendum.

Examples of Third Party Instructions

1. Instructions for an interspousal transfer grant deed from one spouse to the other without paying consideration (no money) 2. Lender's instruction relating to the payoff of the existing loan or trust deed 3. Other special instructions relating to the release of mechanics' liens, judgments, tax liens, and other such matters

Reasons for Changes and Amendments to Instructions

1. Newly discovered or disclosed facts, such as a recently recorded lien against the property, which must be resolved 2. Continuing negotiations that may cause a change in the meeting of the minds 3. The results of third-party requirements, such as an appraisal that reflects a value less than the agreed-upon sales price

The following list includes typical documents to review or actions required during auditing:

1. legal description of the property and current ownership data 2. Exact names of buyers and method of taking title (vesting) 3. Special considerations of the transfer, such as a contingency sale of the buyer's property 4. Status of buyer's loan approval 5. Outstanding conditions of lender 6. Hazard insurance requirements 7. Commission instructions 8. Pest control report, including completion of work report 9. Prorations 10. Invoices paid for services (pest control, appraisal, inspections) 11. Trust deeds to be created by escrow (seller carryback).

REO Real Estate Owned Tenant Occupied Properties

A bank-owned foreclosed property, called an REO (real estate owned), may be occupied by a tenant with a lease.

Buyer's Matters

A buyer may have special considerations to resolve before escrow can close. Some of the buyer's issues may be the same as the seller's.

What is an exception to the abstract of judgement?

A homeowner's declaration of homestead exemption.

Transfer of Rights in Property Clause

A major provision of the deed of trust is the Transfer of Rights in the Property clause. Here, the borrower grants to the trustee on behalf of the beneficiary, the power of sale and legal title to the property. The borrower, by signing the deed of trust, agrees the beneficiary has the right to foreclose and sell the property as allowed by the process: "Nonuniform Covenants" and "acceleration."

Materialman

A materialman is one who provides goods, materials, or equipment to the jobsite.

Installment Note/Promissory Note

A promissory note, or installment note, is prepared by a borrower's lender and shows the exact terms of the loan. The note is the evidence of debt, signed and dated but not notarized. If the note has been prepared by escrow, in seller carryback loans, using the Seller Financing Addendum as a guide (required if seller financing is part of the transaction), both buyer and seller must agree that it is correct as to the amount, interest rate, and any other conditions, such as a late charge, prepay penalty, or due-on-sale provision.

Junior Lien

A second lien to take out

Judgment Liens

After obtaining a judgment lien, the claimant must obtain an abstract of judgment to enforce it through the court. Once recorded, the abstract of judgment becomes a lien against all real property of the debtor in that county. A judgment is valid for 10 years, though the creditor can renew it for another 10 years. The judgment lien must be paid and released for escrow to close.

Paying the Lien

After paying the claim, the property owner must obtain a release of lien protected by record.

After such recordation, the subcontractor, materialman, or laborer must file a claim of lien within __ days, not __. The contractor has __ days to file.

After such recordation, the subcontractor, materialman, or laborer must file a claim of lien within 30 days, not 90. The contractor has 60 days to file.

Mechanic's Liens

An individual, vendor, contractor, or provider of materials who has performed work and was unpaid might have filed a mechanic's lien. Such a lien exists under the law to ensure they will be paid.

Buyer Not Intending to Occupy the Property

An investor-buyer who will not occupy the property and intends to rent it to another party must allow a current tenant stay until the lease's termination date. The existing terms and conditions of the lease will remain. An existing tenant with a month-to-month rental agreement must be given 90 days' notice under the federal and California laws.

Truth-in-Lending Criteria

Any 0.125% or greater increase or decrease over the originally disclosed interest rate equires a new TIL document and an additional three-business-day waiting period. Escrow may not close until at least seven days after the buyer receives the new truth-in-lending statement.

Arm's-Length Transactions

Any transaction in which the buyer acts independently of the seller is not covered by this act or by California law.

Loan Information Sheet vs Preliminary Title Report

As soon as the escrow officer reviews the preliminary title report, if loans are recorded against the title (other than those the seller has indicated on the form), the escrow officer must alert the seller to determine whether they are valid. If they are not, the escrow officer must contact the beneficiary and have the trustee reconvey the lien, a time-consuming process.

Transfer and Financing Documents

At this point in the escrow, the grant deed (plus the note and trust deed if financing is part of the transaction) are prepared for signing by the parties.

Preclosing and Bilaterial Instructions

Because bilateral instructions include the parties' promises in one instruction at the start of the escrow process, it is possible that information is yet to be provided. The instruction consists of the buyer's purchase offer, but may only indicate the seller's acceptance, with much of the seller's information yet to be provided.

The Audit Process

Because events during escrow may have changed the terms and conditions, Southern California escrow, which require, amendments to escrow, is especially critical.

Buyer Who Will Be an Owner-Occupant

Buyers who intend to occupy the property are not subject to the survival of lease regulation, but must still comply with the 90-day notice provision.

Seller's Matters in Sale and Refinance

During the escrow process in sale and refinance, the escrow officer should pay close attention to outstanding demands for the seller's loans, which will be paid and the liens released.

If the scheduled closing is not within a few days of the end or the beginning of the month

Even if the scheduled closing is not within a few days of the end or the beginning of the month, it would still be wise for the seller to deliver the monthly payment to escrow for handling. Providing that escrow will close before the 15th day of the month, the escrow holder will have the title company ensure that the payoff amount is adjusted accordingly.

General Instructions

General instructions vary among escrow companies regarding the protective clauses inserted in the instructions. If escrow is not in a position to close on the closing date, escrow will continue unless objected to by either party. The escrow holder must retain general instructions for five years from the date of closing under California law.

Homeowner's Declaration of aHomestead Exemption

Here, the judgment lien only attaches if the value of the homestead property is greater than the amount of all liens plus the amount of the homestead.

How many days does the taxpayer have to file the COS?

If a written request was made, the taxpayer has 45 days to file the COS or incurs penalties. The penalty for failing to timely file a COS after a request is 10% of the taxes applicable to the new base year value reflecting the change in ownership.

Form and content

If the form and content are incorrect, the recorder will reject the grant deed for recording. Common errors include inadequate notary seal, expired notary commission, missing or questionable parties' signatures, property location in another county, and other items.

What Happens if the Lender Calls the Loan Due and Payable

If the lender calls the note due and payable, it sends a letter to the trustor of record (the former seller) demanding payment in full within 30 days. The seller then informs the homeowner (the former buyer) of the lender's demand, expecting to arrange payment of the loan.

What happens if the property owner does not pay?

If the property owner does not pay, the contractor must file suit in the county's superior court within 90 days after recording the claim of lien, otherwise the lien has no effect.

Ratification

In Northern California, unilateral escrow instructions are a ratification of the escrow holder instructions of the principals but do not necessarily create a contract between the parties. The ratification process is based on completing items promised to be performed, such as receipt of payoff demands, delivery of title reports, pest control work, and approval of new loans. The main part of the unilateral instruction process is that because closing is near, should be the same as what is delivered on the closing date.

Existing Loans Remaining in Refinancing

In a refinancing, it is possible that an existing loan will remain. The escrow officer compares the demand for payoff from the lender against the loan information sheet provided by the seller at escrow opening. Other issues that require attention include property taxes and the possibility of other liens

What occurs in AITD Transactions?

In an AITD transaction, the buyer (borrower) "takes title subject to" the seller's existing note or trust deed. Neither the seller nor the buyer informs the note holder of the transaction unless no due-on-sale clause exists. The impact and liability to the buyer and the seller is the same. Grant deeds transferring title to buyers is executed and escrow closes.

An escrow is scheduled to close on November 29, and the next payment is due on December 1

In this case, the sellers should not make the payment because escrow will have closed before the sellers' check has even cleared. Additionally, the payoff demand amount from the servicer will include the amount of that payment, so if the seller sends the payment to the lender, it will have been paid twice. The seller would eventually receive a refund from the lender for overpayment, though it may take some time to process it.

Discrepancies in Demand Amount

It is not unusual for the demand to reflect an amount higher than what the seller believed. Any payments made by the seller after the date of the demand will not be reflected in the demand. The escrow holder will contact the lender to determine whether the payment has been credited and update the demand sent to escrow. The demand will stand if the payment is not processed or reflected on the lender's books. The seller will eventually receive a refund from the lender, but the sellerunderstands that the proceeds will be less than the outstanding payment amount.

Delinquent Taxes

It is possible that the seller owes delinquent taxes but cannot pay them in full. The seller must therefore negotiate with the taxing entity, whether it's the IRS, FTB, or EDD.

Taxes Paid but Not Yet Released

Liens are typically released by the IRS within 30 days of being paid. If the seller paid delinquent federal taxes less than 30 days before the preliminary title report was prepared, the lien may still be recorded on the report.

Listing Real Estate Agent's Research

Listing agents should obtain a preliminary title report when first listing a property to review the status of the title, including liens of record. If an unreconveyed lien that has been paid off is discovered, the seller has ample time to accomplish its release.

Delays in Processing the Demand

Occasionally a lender's demand processing takes longer than expected for several reasons.

Loans Paid but still on Record

Occasionally, a homeowner has paid off a loan, but the lien remains, having not been reconveyed. It doesn't happen automatically. It is not uncommon for a paid tax lien to appear on a preliminary title report. It is possible that the State of California or the IRS has not reported the payoff to the country recorder. It may be necessary for the seller to provide evidence of the lien's release to the county recorder to have it recorded.

Partial Payments

Occasionally, the seller's escrow or title officer can assist by negotiating with the taxing agency to accept less than the full amount due. If the negotiation is successful, the lien against the property is released, and escrow may close. The taxing agency does not relieve the taxpayer of the taxes due; only the lien against the property is removed. If the seller is buying another property, occasionally the taxing agency, especially the IRS, will allow the purchase to proceed but will attach a lien against the new property.

Prepaid Property Taxes

Part of the property taxes paid by the seller may be the buyer's responsibility. The escrow holder will credit the seller with the prorated amount of the buyer's responsibility and charge the buyer accordingly.

Property taxes are based on a fiscal year beginning _____ of each year and ending ____ the following year.

Property taxes are based on a fiscal year beginning July 1 of each year and ending June 30 the following year.

Seller's Current Monthly Payment

Questions may arise regarding the sellers' loan payment for the current month if closing will occur just before or after the payment is due.

Senior Lien

Refers to security interests in an investment that get repaid before other liens. Typically, senior liens are the first liens issued with debt on an investment.

Income Tax Liens

Reviewing the preliminary title report will occasionally reveal a lien for delinquent income taxes. The escrow officer will alert the homeowner of the lien when delivering the report and note that the lien must be resolved before escrow can close.

Property Taxes

Similar to a monthly loan payment due near escrow closing, the payment of property taxes may also be an issue. If the seller has not paid a property tax installment due but not yet delinquent, and if escrow will close before December 10 for the property tax first-half payment or April 10 for the second-half payment, the seller should have the escrow holder pay the taxes from the seller's proceeds at closing.

Third-Party Instructions: Parties other than Principals

Sometimes parties other than the principals become involved in the transaction, requiring additional instructions to accommodate these third parties. A typical third-party instruction is when the broker entitled to commission orders a separate instruction to pay the third party at the closing.

Claiming the Lien

Subcontractors and materialmen may record the lien after they finish their part to the project. The original contractor must wait until the project is completed before recording a claim. The lien rights are considered expired if recorded later than 90 days after the work was completed. The property owner can record a notice of cessation if work has stopped or record a notice of completion if work has been finished.

All-Inclusive Deed of Trust or Wraparound Deed of Trust

The all-inclusive deed of trust (AITD; or wraparound deed of trust) is the security instrument used when a seller is carrying back financing in which an underlying senior lien is included in a note with the seller's equity position

Maximum Amount for Change in Ownership Report?

The amount may not exceed $2,500, provided the failure to file the statement is not willful. At the basic 1% tax rate, the maximum penalty threshold of $2,500 applies to any property with a new base year value above $2.5 million.

Surplus Equity

The amount of the property's value greater than the homestead is called surplus equity, with the judgment creditor only entitled to that portion up to the amount of the judgment. If there is no surplus equity, the judgment cannot attach to the property.

Documents and Action Required for Closing

The balance of documents required to close includes documents required to release the seller's trust deed of record and statements of the amount to pay it off in full.

If the review cannot support the appraiser's value, three things are possible:

The buyer must pay more cash if the lender allows, the sales price must be renegotiated, or the sale is canceled.

Change of Ownership Report

The buyer will be required to complete the county's Preliminary Change of Ownership Report (PCOR). The escrow holder will conduct the PCOR process.

Third-Party Lender Requirements

The buyer's lender may only approve a loan in the amount the buyer had previously applied, or the buyer may be unprepared to pay a price that exceeds the appraised value. For the escrow to proceed, the buyer and seller must reach a mutual agreement also acceptable to the buyer's lender.

Dormant Title

The deed of trust conveys the "dormant title" to land to another person or company as a "trustee" to secure debts or obligations, evidenced by a promissory note.

Fictitious Deed of Trust

The deed of trust form used by lenders is called the fictitious deed of trust. A fictitious deed of trust is a legal term that refers to a deed of trust recordable in any county in California and contains the standard provisions typically used in actual transactions.

Deed of Trust

The deed of trust is the security instrument for securing the loan (the real estate). It is used almost exclusively by lenders in California, instead of a mortgage. It is signed, notarized, and recorded. The trust deed creates a lien on the property with recordation giving constructive notice.

California Employment Development Department (EDD)

The demand or inquiry might be sent to the California Employment Development Department (EDD) if the seller is an employer with delinquent employment taxes.

Due-on-Sale Clause

The due-on-sale clause is a provision in the installment note that gives the lender the ability to call the loan due and payable if the borrower transfers any part of the title, the loan is not paid off, and the lender has not expressed approval.

Delinquent Property Taxes

The escrow holder will determine early in the escrow process whether the seller has any outstanding delinquent property taxes. Any delinquent and current property taxes must be paid through closing.

Assessor's parcel number (APN)

The escrow officer should be certain the APN is correct. If it is incorrect, the grant deed cannot be recorded.

Lane Guide

The escrow officer should call before sending the request for demand or research the lender's information in the Lane Guide. This reference subscription service provides information on every bank and mortgage lender in the United States and information for REO property dispositions.

Demands

The escrow officer will order the payoff demands from the seller's lenders of record that are being paid off.

Lender's Demand

The escrow officer will request a beneficiary or lender's demand statement from the seller's lender to obtain the amount to deduct from the seller's proceeds for paying off the loan. It differs from the information provided by the seller to the escrow officer. The escrow officer forwards a copy of the demand for the seller to review, sign, and return.

Preliminary Title Report

The escrow officer will review the title report to ensure nothing has been omitted or overlooked, comparing it to the escrow instructions as to action or disclosure requirements.

IRS or California Franchise Tax Board

The escrow officer will send a demand or help the seller send an inquiry disputing the lien to the IRS or California Franchise Tax Board (FTB).

The first installment of the tax bill, while due ______ and delinquent if not paid by ___ pm on _______, actually pays for taxes due from _______ through_______

The first installment of the tax bill, while due November 1 and delinquent if not paid by 5:00 pm December 10, actually pays for taxes due from July 1 through December 31.

Preparing the Grant Deed

The grant deed is a notarized document containing language that transfers title from the seller to the buyer (grantor to grantee) prepared based on the instruction of the parties.

Homeowner Unable to Pay-Off Funds

The homeowner may be unable to pay off funds in a timely manner. In this situation, the homeowner will attempt to refinance the property to accommodate the payoff as urgently as possible. To get the lender's cooperation, providing copies of the loan escrow instructions to the lender with a request for a payoff demand might work, even if the refinance will take longer than 30 days.

Servicer Does not Own the Loan (Delay)

The lender borrower makes the payment to may be the loan servicer rather than the actual owner of the note. The servicer may not own the note. Commonly, the loan is owned by an investor such as Fannie Mae, Freddie Mac, or another investment firm or lender. Once the servicer receives the demand, it may be sent to the investor for processing.

Out of area and Unfamiliar Lender (Delay)

The lender may be out of state and unfamiliar to the escrow holder, and the lender's information may not be in the escrow database of lenders. The address to which the seller sends the payment may not be the location that processes demands for payoff.

Buyer's Financing Contingency Removal Documents

The new financing contingency removal provision, which requires the buyer to remove the contingency to secure financing within a specified time frame (usually 17 days under the CAR Purchase Agreement and Joint Escrow Instructions), may delay escrow from closing on the agreed date.

New Note Drawn by Escrow Holder

The new note drawn by the escrow holder, while including the senior underlying note, is still junior to it.

Original Contractor

The original contractor is the person hired and directed to perform the work. If the homeowner is personally hiring individuals to do the work, such as plumbing, concrete, and electrical, each of those individuals is considered an original contractor.

Subcontractors

The original contractor may also hire others, called subcontractors, to do much or most of the work.

Content of the Documents

The primary difference between a buyer's and a seller's unilateral instruction is that: The seller's provides the necessary documents to transfer title in exchange for delivery of consideration (money). The buyer's instruction provides that the consideration (money) is to be given to the escrow holder when title is ready to be transferred

Short Form Deed of Trust

The primary reason for the use of the short-form deed of trust is to reduce the recording fees payable to the county by eliminating pages and information A prerecorded fictitious deed is included by its reference in the "short form" deed of trust. The recording information of the fictitious deed of trust is referred to on the front page of the short form, with the boilerplate language reprinted on the back page. Because the front page of the short form deed of trust refers to information from the fictitious deed of trust, it is not necessary to record the back page, which may include an instruction such as "Do Not Record."

Meeting of the Minds

The problem when using unilateral instructions is that a meeting of minds may not be present. A problem may arise if the amount of consideration changes or varies between the two instructions. At a point during escrow, the buyer and seller may agree the buyer should increase the amount of cash placed into escrow to reduce the amount of the buyer's loan. The seller's escrow may reflect the change but not the buyer's. Before escrow can close, a change must be made to one of the instructions to make them the same (a meeting of the minds).

Reconveyance

The process of removing a lender's lien from the title. The title company will facilitate reconveyance by sending the Request for Full Reconveyance to the trustee and recording the Full Reconveyance.

Review Procedure

The review procedure first involves a desk review, or computer search, to determine whether the appraiser's opinion can be supported. If the desk review cannot support the value found, a lender may allow a review in which the lender's appraiser visits the property and all comparable sales. If the review now supports the value, the loan will be approved.

The second-half payment due ______ delinquent if not paid by ____ on _______, pays taxes due for _____ through ______

The second-half payment due February 1, delinquent if not paid by 5:00 pm April 10, pays taxes due for January 1 through June 30.

Seller's Review of Demand

The seller is instructed to review the demand statement for accuracy. If believed to be incorrect, the seller must communicate with the lender to resolve disputes.

In the event that the seller did not receive sufficient funds at closing to pay the property taxes

The seller should deliver "good funds" to the escrow holder to pay the taxes. If the seller pays the property tax directly to the county tax collector, the escrow officer may withhold an amount equal to the property taxes paid, plus penalties, until the county confirms receipt of the payment.

If escrow is not scheduled to close before the delinquent date and the seller has not paid an installment that is due

The seller should deliver the amount of taxes to the escrow holder with "good funds" so the escrow holder can pay them on the seller's behalf before due.

Short Form - Why is it allowed?

The short form is allowed because it references the recorded master deed of trust (fictitious deed of trust).

State County Transfer Tax

The state/county transfer tax is $0.55 per $500 of cash value and new loans in the transaction. The escrow officer should check the grant deed to determine whether the total transfer tax is correct.

Federal Protecting Tenants at Foreclosure Act of 2009

The tenant must be allowed in the property until the end of the lease under certain conditions. Escrow closing can be affected when a buyer is unaware of the law and its tenant protections. If a contingency is not removed, the buyer may cancel the escrow. If the contingency removal date has passed, a buyer may still prefer to cancel and seek compensation for nondisclosure.

Bare Legal Title

The trustee is given the "bare legal title" and the power of sale in the land in the event of a default by the borrower.

Mechanic Lien Claimants

These claimants are categorized by law into four groups: contractors, subcontractors, laborers, and materialmen.

Substitution of Liability

This is important if the buyer and the seller are entering into a transaction in which the property is being "taken subject to." If so, the buyer is required to submit a loan application and documentation verifying the buyer's financial qualifications. Upon approval and closing of escrow, the buyer will have assumed the seller's loan and all responsibility for repaying it. The seller is relieved of all such responsibility. This process is referred to as substitution of liability.

Trust Deeds Assumed by Buyer

Trust deeds to be assumed by the buyer must be reviewed to determine whether an impound account is required for the future payment of property taxes and/or hazard insurance, and if the loan is current.

Truth-in-Lending Guidelines

Under federal law, new guidelines for the Truth-in-Lending (TIL) Disclosure Statement and annual percentage rate (APR) disclosures may delay loan processing and escrow closing if the buyers' interest rate expires before the closing date.

Appraisals

Under today's rigid loan guidelines, lender's have their own appraisal departments to review if they support the appraiser's opinion of value. Occasionally, it does not agree. A disagreement might cause a delay or even prevent escrow from closing and a canceled sale.

Request for Full Reconveyance

When the debt is paid in full, the beneficiary (lender) will request the lien be removed from the property by completing a Request for Full Reconveyance and submitting it to the trustee with the original note and deed of trust. The trustee will then deliver the reconveyance deed directly to the trustor (borrower), who records it to give constructive notice of the removal of the lien.

Homeowner Unable to Obtain Financing with No Access to Funds

When the homeowner is unable to obtain refinancing and has no other access to funds, unless the trustor (borrower in a deed of trust and former seller), is able to help, the lender will file foreclosure, an action impacting both the current homeowner and the trustor. The homeowner loses the property, the monies invested, is forced to vacate. The trustor gets a foreclosure on his credit report.

Change in Ownership Statements

Whenever there is a change in ownership of real property, the property owner must file a Change in Ownership Statement (COS) different from the PCOR. There is no penalty for failing to file the statement unless a written request was made.