The Company Loses Money Due to Counterfeit Checks
By Lisa A. Tyler
National Escrow Administrator
All-cash transactions have been considered the least risky, least complex transactions to close in the escrow and title industry. Now the rules have changed: In two recent closings, all-cash buyers presented counterfeit checks. The first incident occurred in Illinois; the second unrelated incident occurred in California. The checks were in the amounts of $639,900 and $848,365, respectively. In both cases we accepted the funds, recorded and disbursed. Find out how these stories end in "Beware of All-Cash Buyers" in this month's edition of Fraud Insights.
A short sale is a purchase and sales transaction in which the outstanding obligations (loans) against the real estate are greater than the amount for which the property can be sold. These types of transactions are occurring more frequently. When closing a short sale you should know a few new tricks the fraudsters are pulling. Learn more in "Short Sale with a Flip" and "Short Sale Gone Bad."
Have you heard the news? The Fraud Insights reward program has been a huge success. Since January 2005, the Company has paid $13,000 in rewards to 26 employees in recognition of their extraordinary efforts to stop crime in their own transactions! The program has been so successful and widely recognized throughout the industry that the Company has decided to up the bounty to a cool grand! That's right: If your heroic story is published, you will be rewarded with $1,000.
We want to hear from you. Please submit your stories to us by calling your National Escrow Administration at 888.934.3354 or send us the details by using our submission form which can be found under Internal Publications at home.fnf.com.
Beware of All-Cash Buyers
Counterfeit checks have been presented at closing in the states of Illinois and California. We closed, recorded and disbursed funds before receiving notification that the checks were counterfeit, causing a $1.5 million loss to the Company.
The first incident occurred in Illinois. The buyer presented an Official Check in the amount of $639,900 drawn from an account at Wachovia Bank. Since Illinois is a round table closing state, the closer accepted the funds and disbursed the seller proceeds immediately. The buyer overpaid at closing and as a result walked out of our offices with a $10,000 check.
The second incident occurred in California. The buyers were a man and woman who recently met on the Internet. The man presented a check in the amount of $848,365, drawn from the John Hancock Life Insurance account at the Bank of New York. The funds were remitted on May 24, 2007. We released $250,000 to the seller the next day without clearing the check. The (former) employee of our Company recorded and released the balance of the funds five days after the check was presented to our offices. Ordinarily, five days would be sufficient for clearing a check, but the five days included the Memorial Day weekend.
On June 5, 2007, we received notice from our bank that the check item was returned with the stamp "Bank of New York Counterfeit." Our office immediately contacted the buyer, who, as in the previous story, was occupying the new residence. She agreed to execute a deed to the Company until she was able to replace the counterfeit check with a wire transfer. Unbeknownst to us, she had since deeded her interest in the property to the male buyer she met on the Internet.
When the female buyer confessed she had deeded her interest to her Internet boyfriend, we located him and had him execute a deed. We are currently holding legal title to the property and are waiting to see if the wire transfer ever arrives – according to the woman's bank representative, she recently inherited millions. Luckily, there is a good chance we will recoup our losses, regardless of the outcome of the property transaction.
In both cases the local police were involved and are continuing to investigate the crimes. In the meantime, in order to protect the integrity of our trust accounts, the Company had to transfer the funds from our operating accounts to our trust accounts, resulting in a net loss of almost $1.5 million.
Moral of the Story
- When checks are presented at the closing table, make the parties aware that we will have to wait until the funds can be deposited and cleared by the bank prior to the Company making disbursements against the money.
- Carefully look at the check instrument – in the Illinois incident, the bank logo was fuzzy and the paper it was written on did not have any watermarks or security features.
- Never treat an Official Check like a Cashier's Check. An Official Check has to be cleared through two banks before the funds are credited to our trust account. A benefit of the Official Check is the ability to provide extra days of float on the remitter's money. Also, unlike a Cashier's Check, the remitter can place an immediate Stop Pay Order on an Official Check.
- Create a separate deposit ticket for the amount that is going to be tracked. Write the escrow file number on the face of the check so that, if returned, you will be immediately notified.
- Verify the deposited funds have been credited to the trust account by phoning your bank representative or checking through the online banking system.
- Only record and disburse after the funds have been credited to our account, no exceptions.
Short Sale with a Flip
More and more institutional lenders are refusing to negotiate a short payoff amount on their loan when the property is being flipped.
Short sales occur during a recessive market because of fire, flood or other damage to the property, or when the property was originally built in a great neighborhood that has since dropped in value or experienced an increase in crime.
Most lenders realize that a consumer would only know about his/her option to negotiate a short sale if they were informed of that option by a real estate investor. It is likely if the seller is working with an investor, there is more value to the property than originally disclosed. In other words, for an investor to be involved in the sale, the investor has to be able to turn a profit. If the investor is able to sell the property for more money to a bona fide purchaser, then the property was of a higher value to begin with.
The majority of lenders now put the following phrase on the face of their short payoff statements: "This transaction is between the Seller and Buyer as indicated on the certified HUD-1. Any unauthorized title transfer or change of Buyer(s) will be a violation of this demand, making it immediately null and void."
In order to monitor compliance with short pay terms, the loss mitigation team is employed by the short pay lender to check the public records after closing to confirm the property owner's name matches the buyer's named on the final settlement statement. Non-compliance results in a return of the funds to the escrow holder and a refusal to release the lien of record. This means that the escrow holder has an obligation to notify the payoff lender when the transaction involves a flip of the property simultaneously to a new buyer.
Susan Miedema, a manager for Ticor Title Company in Highland, IN., was savvy enough to realize she had a similar situation occurring in a recent real estate transaction.
An investor appeared at her office to open a new transaction. The investor admitted to Susan the existing lender (Countrywide Home Loans) would not accept a short payoff if the property was to be vested in a corporation or flipped at closing. The purchase and sale agreement was executed by the property owner as seller, and the investment firm as buyer for all-cash. In accordance with the terms of the short payoff letter, the investor could not hold title in the name of his company, and could not flip the property through a double escrow.
Desperate to put the deal together, he found a straw buyer to take title. He structured a double-escrow, wherein the straw buyer would take title and then turn around and deed the property to the investor's Company. Susan, with the guidance of her underwriter, refused to close the transaction and has been rewarded $1,000 for her insightful view of the transaction.
Moral of the Story
Sometimes the best answer is "no," not "maybe." It is not in our nature to refuse a transaction, but one that will ultimately end in a claim or loss is not worth trying to structure on behalf of the principals.
Short Sale Gone Bad
Desperate times call for desperate measures. Property owners who are unable to make their monthly mortgage payments and sell their property to get out from under their debt can become quite desperate. Check out the red flag warnings in this story.
Suzanne Adler, escrow branch manager for Fidelity National Title in New Smyrna Beach, FL., was presented with a request to close and insure a $400,000 sale transaction where John F. Flanagan was the seller and Manhattan Property Solutions was the purchaser. A title commitment was prepared and showed three liens, one of which was a mortgage to H&R Block for $658,750.
Red Flag: Liens to be paid off were quite a bit more than sale price.
At about the same time, a second file was opened where Manhattan Property Solutions wanted to sell the same property to David and Dawn Case for $512,000. The investor from Manhattan Property Solutions presented an executed deed from Flanagan to Manhattan which was not yet recorded, but which would be recorded simultaneously with the deed from Manhattan to Mr. Case.
Red Flag: Flip transaction with a double escrow.
A short sale payoff statement, which did not look official, was provided by an investor at Manhattan Property Solutions. The statement was from Option One Mortgage, but was not addressed to the company or the property owner.
Red Flag: Short sale with a Flip and a suspicious payoff statement from a third party (not the payoff lender).
Suzanne attempted to contact the name provided on the payoff statement to validate the figures from Option One, but was unsuccessful. During the time we had the file, she was not able to get in touch with the right person at Option One to verify the figures on the short sale payoff.
Suzanne agreed to close the transaction if it was done properly, whereby double escrow disclosures would be signed and she would receive a valid short payoff statement from Option One. The investor at Manhattan Property Solutions kept pressuring her to close the deal in the manner in which he submitted it. He maintained that the procedure he was advocating usually worked with the FNT Winter Park office, and that Winter Park had advised him to send the deal to Suzanne's office since the property was located in Volusia County.
Red Flag: Offices don't send deals to each other.
Red Flag: Pressure and intimidation from one of the parties.
Suzanne called the Winter Park office and they had never heard of the investor from Manhattan Property Solutions. Suzanne checked the investor name on the list of companies that FNT refuses to insure, but came up empty-handed.
Suzanne continued to stall in an attempt to close this transaction properly with correct documentation. During the process, she developed a relationship with Mr. Case, the ultimate buyer and his lender. The investor became irritated with the delays and insisted the closing be transferred to a local closing attorney.
Suzanne acted in accordance with mutual instructions and transferred the file to the closing attorney, but she never lost interest in the outcome of the matter. After closing she received a phone call from Mrs. Flanagan, one of the property owners. Apparently, the property was deeded by Mrs. Flanagan under a marital settlement agreement between herself and John Flanagan. She transferred the property with John to Manhattan and subsequently to Mr. Case prior to closing. She was not paid in accordance with the marital settlement agreement after closing. Suzanne referred Mrs. Flanagan to the closing attorney.
On March 16, 2007, Suzanne received a call from Mr. Case. He said that he wished that Suzanne had handled his closing because it had turned into a big mess. The payoff that was sent to Option One for $512,000 was not accepted and the funds were sent back. Option One would not accept less than $715,000 on their short payoff. The closing attorney stated he would unravel the entire transaction. Mr. Case said, "No way, someone is going to pay, and it is not going to be me!"
Moral of the Story
Through the good instincts and extra care from Suzanne, our Company was saved approximately $200,000 on this claim. In recognition of her extraordinary efforts, the Company has rewarded Suzanne with $1,000.