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from Local Attorney, Michael H. Wasserman

Friday, May 30, 2008

CONSUMER "CONFUSION" LEADS TO HIGHER LOAN CLOSING COSTS

Yesterday, the United States Department of Housing and Urban Development released a study conducted by the Urban Institute that suggests that "[m]any American consumers overpay by thousands of dollars in total closing costs when they purchase their homes. There are significant and unsupported variations in loan charges, title fees and other closing costs charged to unsuspecting (most typically minority) home buyers.

The study found significant disparities in closing costs even when it compared borrowers with identical credit scores, loan terms and mortgage amounts. Variations appeared to be based on education level, geography, race and ethnicity.


Of course, in an information-era, free market system this shouldn't happen. HUD mandates that all mortgage loan applicants receive two critical documents: a "Good Faith Estimate of Closing Costs" and a "Truth in Lending Disclosure Statement" (the "TIL") that should enable consumers to compare the costs of any given loan program to any other, by showing (a) projected closing costs and (b) the APR, which in turn can demonstrate the impact those closing costs have on a loans "effective" interest rate.

This information is critically important to a consumer trying to choose a given lender or loan program, but I fear that most people have no idea what the TIL means. At closings, I am prone to mis-identify it as the "Confusion in Lending Disclosure." Frankly and without only a few exceptions, the only clients who grasp its meaning before we review it are bankers, financial analysts, and the occasional accountant.

For what its worth, HUD recently proposed a revised format for the good faith estimate. At first blush, it looks pretty cool, but go on and take a look at it. Let me know if you think it makes things clearer or murkier. I just have my doubts that most people will read through to the end...

Some of the key / startling statistics (and my snide observations):
  • Total loan fees can vary by thousands of dollars from borrower to borrower even for the same loan amount. (Yes, unscrupulous loan officers will charge what they can get away with. High quality loan officers just do not do this, but the key is in finding an honest broker)
  • Loan charges and title fees vary considerably from state to state even for similar loans. Even in the same state, disparities in title costs among identical borrowers can be more than $1,000.(Strict office policy in my practice to guard against title company "mark ups" - another reason why I cannot conceive of going to closing without an attorney)
  • On average, borrowers see no reduction in out-of-pocket fees when they agree to higher interest rates. Ideally, consumers ought to receive a dollar-for-dollar credit for paying a so-called "yield spread premium" that results from agreeing to a higher interest rate loan. In fact, many borrowers see no reduction at all and even pay more in total loan fees. (Yikes!)
  • African-American families pay an average of $415 more in total loan origination fees than non-minorities.
  • Hispanic borrowers pay an average of $365 more in total loan origination fees than non-minorities.
  • Consumers obtaining loans for which comparison shopping is easiest, so called "no-cost loans," enjoyed an average cost savings of $1,200 (it just does not really matter to most people what any closing cost is called - its easier to compare competing loans by "bottom lining" those lender-charged closing costs, anyway.
  • On average, borrowers who completed college are charged $1100 less than borrowers who did not go to college at all, other things equal. (thanks for pushing me, mom & dad)

Thursday, May 15, 2008

FBI: ILLINOIS IN THE TOP TEN STATES FOR MORTGAGE FRAUD (again)

The FBI has released its "2007 Mortgage Fraud Report." Its a fascinating study and quick read. It covers all the basic types of mortgage scams and cites statistics from several different sources. An excellent overview of the scope and magnitude of the problem, including a particularly fascinating description of "short sale" and "mortgage rescue" scams that are particularly popular in the current market climate.

Illinois (again), makes it into the national top ten for states most effected by such criminal activity.

Friday, May 9, 2008

CHICAGO TRANSFER TAX takes ANOTHER BITE OUT OF BUYERS

Nothing should be simpler than a real estate closing. The buyer shows up with money. The Seller has a deed and some keys. They shake hands and trade. Nice.

Turns out (over and over) that in the Venn Diagram of life, "simple" and "closing" seldom intersect. We learned of yet closing-related complication this week, courtesy of our friends at the City of Chicago, Department of Revenue. The Department is charged with "maximizing revenue collections to support the City's "vital" infrastructure.

One way they are doing this is by scrutinizing tax declarations filed with the County Recorder, every time a deed or other document is recorded of record. The Department is, apparently, checking the transfer tax declarations to see when they are dated and then comparing them to the dates when the transfer tax stamps are actually purchased.... and they going after purchaser's who may not being paying the tax in a "timely" fashion.

For better or for worse, Investigations have long focused attention on certain FHA related foreclosures that buyers (erroneously) thought were exempt from the City real property transfer taxes, and divorced couples, where one spouse "got the house." In the later scenario, the City asserts that the home "winner" must pay tax on the value of the share transferred). Lovely letters from the City. They demand the tax and, of course, late fees and penalties. Threats of lawsuits, that sort of thing.

The timing issues is a new aspect of the heightened scrutiny (at least new to me). Transfer taxes are due is due upon the earlier of (a) the delivery of a deed or (b) its recording, (see section 3-
33-030) and is payable through the purchase of stamps. (Never-mind the logical incongruity of a deed being recorded before it is delivered to the buyer).

In NEARLY EVERY transaction I work on, a title company acts as the closing escrow agent, they receive and disburse all the funds and the deed for recording, once it is delivered by seller to buyer. If the City does not get paid at the time of the closing, the tax is (they say) has been paid late.

Here's the example given to me today: The buyer and seller transact the sale of a Chicago property from New York. The deed and related closing documents are sent to the title company, who then records the deed 4 days later. Too late Mr. Buyer, sir. You did not pay the tax at the time of the transfer. Penalty, please too. Too bad Mr. Title Company who assured the buyer that the tax obligation had been satisfied: a $125,000 claim on the title policy!

This shouldn't be a problem for most of my clients; we close Chicago properties at reputable title companies that have facility to purchase tax stamps on the actual date of closing. On the other hand, this all came to my attention today when an underwriter from one of those reputable institutions asked my buyer to acknowledge potential liability for late fees that could result from a delayed (dry) closing today.

Wonder what is going to happen for Chicago closings at smaller title companies or in the outlying offices. There are either going to be a lot of disgruntled buyers or title claims.... or both.

Thoughts anyone?

Tuesday, May 6, 2008

NEW CAR CONTRACT FORMS now online!

Our good friends at the Chicago Association of Realtors have published new stock contracts for local real estate transactions. It had been about five years since the last set of revisions. At first blush, it seems like some good work.

Then again, one of the occupational hazards of being a lawyer is the compulsive need to read all the fine print and I'm still reviewing mine to decide how happy (disgruntled) There is at least one silly gaffe on the condo contract -> sellers are supposed to purchase surveys for their buyers? Fat chance that. But until my colleagues pick up on that one or the board revises the revision, I am looking forward to poking some seller lawyers in the sides when they show up at closing without....

Thursday, May 1, 2008

MORTGAGE FRAUD & MONEY LAUNDERING


I help a lot of buyers slog through stacks and stacks of mortgage loan documents at closings. Anyone who has sat through a closing with me has heard "the routine" my explanation of the various disclosures and certifications that lenders subject their customers to.

Buyers produce photo ID to the closer. A whole lot of trees give there lives to help the lenders and title companies verify borrower identities and to warn borrowers of the penalties for mortgage fraud. Multiple promises that the borrowers have told the truth. Affidavits attesting that the Buyer is using his/her true signature. Stern warnings that the lender is going to comply with the Patriot Act. Even the scary FBI notice over on the margin here. Cynical me. I tend to poke fun at a lot of these documents, and all the redundancies, and the silliness attendant to them.

Turns out, I may be wrong for making light of these issues. Inman news reports today that:

About one in five suspicious activity reports banks file with federal regulators over concerns about a residential real estate transaction show signs of money laundering or tax evasion, according to a new Treasury Department report.

The report found evidence of money laundering or "structuring" -- transactions involving incomplete or falsified records -- in 20 percent of suspicious activity reports involving residential real estate transactions between 1996 and 2006.

The Treasury Department's Financial Crimes Enforcement Network also detected a steep increase in the incidence of filings that might involve money laundering after 2004, to more than 50 percent.

The most interesting point in the article? Speculation that money laundering in residential real estate is probably an even bigger problem than as reported; Banks don't file complaints when the loans are being repaid - and most laundering operations use the laundered money to pay the loans.

The complete Financial Crimes Enforcement Network report, dated April, 2008 is available here


No closings for me until tomorrow morning. I'll still probably crack wise about the anti-terrorist and anti-fraud disclosures, but I'll probably have an eye on buyer too - just in case.

PLM Title Shuttered

Title insurance is a critically important part of any real estate transaction; or at least it should be. The title company guaranties the "quality" of an owners interest in the property - that there aren't any (unknown) liens or defects. No buyer that I work for will purchase a property without it.

Title insurance is only as good as the insurer. We want to know that the insurance company, like the Rock of Gibraltar, will always be there. We want to sleep easy at night, knowing that the client is protected.

That said, it was a bit distressing to see that PLM Title Company shut its doors, without any forewarning last week. Worse still, this morning's news is that there is a criminal investigation underway - and that we do not yet know why. Old timers like me shudder with memories of the great Intercounty Title debacle five years ago. Here's to hoping that this one is nothing like that one.

Set aside the problems involved trying to make a claim against a defunct title company. What about the banks and buyers (and sellers) that had money being held in escrow by that title company? Or had deeds and mortgages waiting to be recorded with local county recorders offices? Or who had escrow closings scheduled there to consummate their transactions? Big mess

Any good news in this for my clients? I suppose the "good news" is that, (a) I have had only two buyers in the last five years purchase title insurance from PLM; (b) their insurance was underwritten by Guaranty Title & Trust Company, still a viable and presumably well capitalized company, and (c) three years ago, I instituted an office policy that we will only accept title insurance from a short list of the strongest title companies, in order to problems of the sort presented when "the Rock" crumbles.

UPDATED: Nov. 20, 2008: I erroneously identified PLM's underwriter as Guaranty National when this message as originally posted. The correct entity, Guaranty Title & Trust Company was liquidated on October 27, 2008 by Ohio state regulators. All insurance policies, commitments and certificates of insurance issued by GTT, are cancelled, effective November 26, 2008. Inquiries regarding the GTT liquidation and requests for Proofs of Claim forms should be directed to: The Office of the Ohio Insurance Liquidator, Attn: GTT, 50 W. Town Street, Third Floor, Suite 350, Columbus, OH 43215. The telephone for that office is (614) 487-9200.

PLM's other underwriter Pacific Northwest Title Insurance, remains a viable entity.