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One of the many interesting things we do at the Florida Real Estate Commission (FREC) is decide escrow disputes from all over the state, and render escrow disbursement orders (EDOs) telling the parties how to distribute the funds. Many of these controversies arise from the execution and interpretation of the FAR/BAR contract’s tricky financing contingency.

The new FAR/BAR contract forms effective April, 2017 contain a variety of revisions, including an overhaul of the financing contingency.   Among other things, the old provision attempted to provide sellers with some certainty they wouldn’t be tripped up at the last minute by a buyer’s late-breaking credit denial.

Unfortunately, many buyers’ agents did not pay attention to the built-in timelines, and how those jibed with the deadlines they established for the commitment date, closing, etc. As a result, we often saw cases where these agents unwittingly gave an untimely notice of cancellation that resulted in the buyer’s funds being due and owing to the seller.

A source of general confusion was what happened on the financing commitment deadline – which was nothing. Under the old form, the commitment deadline was merely a stepping off point for other possibilities (i.e., cancellation by either party, provided the same happened prior to 7-days before the closing date, etc.).

The new contingency takes a more definitive approach, and makes it clear that if a buyer cannot obtain a “Loan Approval” within the “Loan Approval Period,” then they have to give written notice within the Loan Approval Period if they want to terminate the contract and get their money back. If timely notice of cancellation is not given, then the contingency is waived. It is a hard and fast deadline, with no exceptions as could be the case in the outgoing contract form. Period, end of story.

The seller likewise still has their cancellation option, this time within three days after the expiration of the Loan Approval Period if they’ve not received notice from the buyer that (i) they received their Loan Approval, or if they have not (ii) tendered a notice of cancellation or (iii) a waiver of the financing contingency. For the queasy seller who has little faith in their buyer’s ability to close, this is a nice, albeit quick, bit of built-in flexibility.

What this contract re-draft did not do is remove the carve-out for a buyer’s last-minute, no consequence cancellation if the property doesn’t appraise, or if “Property related conditions of the Loan Approval have not been met…” From the listing agent’s perspective, this remains a detail to manage and potentially mitigate depending on how far in the future the closing date is, and how it lines up with the Loan Approval Period deadline.

The savvy Realtor will utilize an appraisal contingency rider to manage timing of the issue, or perhaps even strike the carve-out language so it is clear the appraisal is not an excuse upon which the buyer can rely for termination of the contract beyond the deadline for the Loan Approval.

How to manage the property-related conditions exception is less clear, since the buyer is still not required to divulge a copy of their loan commitment (but rather just provide notice of its receipt). In one recent case, a credit denial a day or two before closing based on a lack of reserves held by the condominium association resulted in the FREC voting to return the buyer’s deposit. While to most this was an obvious outcome, it does nothing to provide a seller, who may have already packed up and moved, with any peace of mind.

Faced with this reality, a listing agent may attempt to strike the property-related conditions language of the contingency. Should the buyer refuse, the agent’s remaining choice is to keep abreast of the Loan Approval process, and try to discern any conditions of particular concern. The agent may also request a copy of the Buyer’s Loan Approval, although there’s no guaranty it will be divulged. The end goal is to keep the seller as informed as possible about what, if any, potential pitfalls may exist in the period between Loan Approval and closing.

As I have said so many times before, contract forms are a Realtor’s stock and trade. If an agent has not made it a point to learn and thoroughly understand each these documents, then one cannot help but question their overall commitment to professional practice.

Knowledge of a contract’s inner-workings breeds nothing but a better intuition about how to deal with the practical situations the agent will encounter every day out in the field. This most recent form overhaul presents Realtors with yet another opportunity to become even more familiar with what this paperwork says and means.

As always, we wish you safe travels along on the road to closing, and please do not hesitate to reach out should you have questions regarding this, or any other, subject with which we might be able to assist.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

 All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

 

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Life On The Other Side

IMG_6124Being an allied professional in the real estate industry means spending your days guiding clients through the pitfalls and travails of the process with an observer’s cool detachment and level head, all in the name of helping them realize their goals and achieve their dreams.

Always Be Closing.

Then comes the day you find yourself on the other side of the table.  You become the consumer of someone else’s professional services.   Short of a sugar-laced, mid-afternoon double espresso, what better jolt to the system than being on the receiving end of lackluster service?

“Good morning Mr. Luzier, this is your wake-up call.”

For me it started innocently enough.  A quick email to a previously-utilized mortgage resource led to a phone application and a rapid approval for a refinance at a favorable rate.  Then, the real work began – providing account statements, insurance information, expense verification, tax returns, blood type – and so on and so forth.  Over, and over, and OVER again.

For One Hundred and Sixty. Nine. Days.

Yes, you read that correctly: 169 days.  My own refinance was taking so long that my office colleagues kept track by counting down for everyone to see – along the lines of the way the world waited with unfailing anticipation during the Iranian hostage crisis – i.e. “Day 145 – need updated bank statements AGAIN.”  Meanwhile, I convinced myself the repeated delays, unanswered questions, and glacial pace were no different than the treatment I often see my own clients endure at the hands of their mortgage lenders.

“This is the nature of the beast.”  “It doesn’t matter who you are or what you have – everyone gets treated the same way.” “Getting a mortgage these days is a marathon, not a sprint.”

These are all words I’ve said to others (in earnest) to assuage their feelings of having been chewed up and spit out by the mortgage process.  They are the same words I told myself to divert my attention from the cycle of disinterest demonstrated by those who had agreed to help me achieve my goal of completing a garden-variety refinance.

Thankfully, somewhere around Day 155 I had a moment of clarity, and on a hunch picked up the phone to reach out to a mortgage originator many of my clients hold in unusually high esteem – someone whose low-key demeanor and ability to answer people’s concerns in a methodical and intelligent way made me hope that perhaps even my simple project could one day reach its intended conclusion.

The difference was like night and day.

The approach from the new lender was simple and logical.  They took a quick look at my credit history in the context of the requested loan, then drilled down to assimilate the information necessary to provide their underwriter with a fully-defensible application package.  Since all was in order when application was made, the approval occurred promptly, and the list of pre-closing conditions to satisfy was reasonably short.

Barely 30 days will have elapsed from the first contact with the originator to the closing of the new loan.  Granted, all of the information requested of me was close at hand thanks to my prior experience, so I was able to short-circuit much of the document assemblage challenges that hog-tie so many in their effort to move their mortgage request from application to closing.

Meanwhile, I’ve received regular status updates throughout, enjoyed prompt responses to my inquiries, and was repeatedly impressed with the interactive nature of the conversation with my lender who expressed genuine concern about me, my financial goals, and what would work best for me and my family with this particular transaction.

Out of the morass came the simple affirmation that just because many have a dismal experience in a particular business sector, doesn’t mean this is the new normal.

As with most things, the right people on the job can make all the difference – because they are veterans who know the ropes and stay on top of the process –  because they want to do a good job for you and earn your repeat business –  because they care.

Life is all about choices, and the moral of this story is to choose wisely when it comes time to suggest to whom your clients should turn to satisfy their mortgage lending needs.

Realtors and novices alike know the mortgage approval process is not what it used to be thanks to drastic changes in regulatory oversight in the wake of the Great Recession.  So why waste your time with those who are not totally invested in or easily capable of delivering a 5-star experience under the new rules and regulations, when there are professionals out there who understand the challenges, and know how to negotiate the process so you come out the other end happy and satisfied?

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Would You Like Fries With That?

Castle frontWe’ve all been there: that crucial moment of decision when faced with an option that can add cost (Leather upholstery? Carpeted floor mats? V-8 engine?), and even calories (French fries? An extra scoop of ice cream? Bearnaise sauce?).

Thanks to the US government’s consumer protection regulations, buyers who finance their homes using mortgages are now advised that owners title insurance coverage is “optional.”  Buyers who read their closing disclosures closely are keying into this description, and beginning to wonder whether they actually need such coverage, especially since it is spelled out as an extra cost item.

The short answer to this query is YES, but know that I am biased; our firm issues the title insurance policy.

The purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past.  To achieve this, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage.

Mortgage companies require a lender’s policy of title insurance for their benefit in connection with closing, therefore the description of the owner’s coverage as “optional.”  The lender’s policy doesn’t do a thing for the homeowner.  It only insures that the mortgage is a first lien.

The lender, of course, would be concerned IF the buyer lost title to the property, but only WHEN that occurred. The lender would be concerned IF they found out there is a judgment or municipal lien ahead of their mortgage in lien priority, but only WHEN the mortgage is in foreclosure.

Put another way, the lender gets concerned once the tragedy has already happened. An owner is concerned before it gets that far.

Since the title policy is an indemnity contract for losses, the mortgage company must suffer a loss before they actually have a claim under the lender’s title policy. Therefore, they must proceed to foreclosure, sell the property and obtain less than the debt due on the loan. By that time the owner has been ejected from the property.  And, without an owner’s policy, a buyer is not covered and must pay someone else’s debt.

Given these risks, why is owner’s title coverage  now being considered “optional,” and why do lender’s title insurance policies all of a sudden seem so expensive?

Under Federal rules, the lender is required to lump a majority of the title insurance cost into the lender’s required coverage.  This is basically opposite of what Florida law provides, i.e., the bulk of the cost of the title insurance is associated with the owner’s policy, and the cost of the lender’s coverage is an incremental addition.

So, while the substance of what title insurance coverage is hasn’t changed, the disclosure rules relating to its costs have, leading to confusion and concern by consumers feeling like they’re being upsold for something they don’t necessarily need.

In such a case, the old adage of “penny wise and pound foolish” certainly applies, and an informed consumer should not feel guilty about incurring the incremental cost of the so-called “optional” owner’s title insurance, especially if he or she considers the protection of their substantial real estate investment a #1 priority.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

The Non-Titled Spouse (Part 2: Whose Obligation Is That Mortgage Anyway?)

Not all spouses are equally creditworthy, so it is not unusual to see one spouse be the sole obligor for the debt on a homestead property.  This does not, however, relieve the non-debtor spouse from the responsibility of signing the mortgage.

The Florida Constitution does not allow an individual to encumber homestead property without the joinder of the spouse, even if the spouse is not in title.  For a mortgage lender to have a valid first lien interest in a homestead property both spouses must sign the mortgage, even if: (i) both spouses are not in title, or (ii) only one spouse is the obligor under the debt.

What happens if the non-titled, or non-borrowing spouse fails to sign the mortgage?  Should the lender have to foreclose, then that spouse can raise their hand and say “not so fast – your interest is inferior to mine, and you cannot foreclose your lien.”  A sticky wicket at the very least.

Luckily for the non-titled, or non-borrowing, spouse, a conventional Fannie Mae/Freddie Mac mortgage anticipates just this situation, and specifically addresses the rights and obligations of that party in Section 13 of the uniform mortgage instrument, which states that: “any Borrower who co-signs this Security Instrument but does not execute the Note (a “co-signer”): (a) is co-signing this Security Instrument only to mortgage, grant and convey co-signer’s interest in the Property under the terms of this Security Instrument;  [and] (b) is not personally obligated to pay sums secured by this Security Instrument…”

Knowing this is particularly important at that awkward moment when parties are mid-divorce, yet one spouse has elected to buy a new home utilizing mortgage financing.  Just because the parties may have filed for dissolution does not mean the other spouse’s potential homestead right in the new property is extinguished.  It is only when the ink is dry on the final judgement that this is the case, so the challenge is in having to explain in the midst of the acrimony that the other spouse’s signature is required on the new mortgage, yet it is merely an acknowledgement and not a debt obligation.

As you can see, there are plenty of nuances to the concept of constitutional homestead and how that relates to financing a real estate purchase, so I encourage you to seek the counsel of an experienced real estate attorney should you encounter any hiccups with recalcitrant spouses come closing time.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Beware of Mortgage Lenders Demanding Contract Changes

We all have our stories from the trenches of new and unusual requirements by mortgage lenders and how they impact the successful conclusion of an otherwise pleasant closing.  An alarming trend we have experienced involves mortgage lenders dictating contract addenda.  I use the word “alarming” on purpose, since what might appear to be a reasonable request might have significant, unintended consequences.  At the very least, it can prove to be inconvenient and inappropriate.

Cases in point:

1)  Two weeks before closing a diligent buyer liquidated a six-figure amount from his stock account in anticipation of the cash he would need to close.  The buyer alerted the mortgage lender that he was sending the funds direct to the closing agent, rather than having to deposit them into his own account, then turn around and wire out prior to the closing.  Two days before the the scheduled closing, as the buyer was struggling to get the lender to give its coveted “clear to close” signal, the underwriter said “please forward a contract addendum showing the $***,000 in escrow as additional earnest money deposit.”

As a savvy Realtor, you know what this means legally – suddenly the cash to close would be subject to claim in the event there was a failure to perform under the contract.  Not to say that the transaction had been contentious, but there were some notable hiccups here and there, and most importantly, there was no reason at all for the buyer’s substantial equity contribution to be at risk.  When pushed, the lender capitulated and waived the requirement.

2) A the result of some minor walk-through issues the morning of closing, a Realtor agreed to a small (<$500) credit to her client, to be paid from her commission.  She called and had her broker quickly provide us with authorization for the adjustment, and as the parties sat at the table the revised HUD was sent out for re-approval.  The lender’s response was”we need a contract addendum to document the credit.”  While the parties were all accommodating, it was uncomfortable for the Realtor and her clients, who were first-time home buyers, and who had specifically instructed her not to say anything to the seller.

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Since there is no way to prevent a mortgage lender’s request for a contract addendum, the best approach is to remain vigilant about the substance of the request, and if it involves anything at all unusual or off the beaten path, do not hesitate to ask the closing agent or the buyer to seek clarification or push back as needed.  Oftentimes the underwriter making the call has no clear understanding of the practical impact of the addendum they’re demanding, and is just trying to check a box as to a perceived issue and move the file off their desk.  As a shrewd professional, you understand the potential pitfalls, and can help work through the problem the underwriter’s demand creates by getting to the heart of what is driving their request, and re-framing the conversation.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com