Mortgage Rescue Scams Increasing? You Bet!
So don't forget the title side! There is little doubt that the closing and the face-to-face contact of the escrow/closing/settlement office is what drives this business, but we always have to remember that we are selling title insurance policies.
The following editorial comments were provided by Barry Wolfinsohn, regional counsel for Ticor Title's Great Lakes Region:
Our business is very competitive – as with many other industries – and of course our family of companies prides itself on leading the marketplace in customer service. A few years ago it wasn't uncommon for title offices to get caught up in the race to please customers, but unfortunately lose sight of the basic premise of our business. Remember the wonderful thing that brings us all together: title insurance.
A few years ago, fraud and forgery claims were rare and few of us worried about some of the basic risks inherent in real estate transactions. Have you ever been to one of those boring seminars on what the title policy covers … you know, the ones where they have to serve more coffee than muffins and bagels just to keep people awake? Hopefully we will soon be running short on time to attend such presentations due to an increase in business, but when you do attend, you will learn about the Covered Risks in 2006 ALTA policies (formerly Insuring Provisions or Insuring Clauses in 1992 ALTA policies). Let's take a look at the fraud and forgery coverage provided by Covered Risk 2 of the 2006 ALTA policy:
(a) A defect in the title caused by
- forgery, fraud, undue influence, duress, incompetency, incapacity or impersonation;
- failure of any person or entity to have authorized a transfer or conveyance;
- a document affecting title not properly created, executed, witnessed, sealed, acknowledged, notarized or delivered;
- failure to perform those acts necessary to create a document by electronic means authorized by law;
- a document executed under a falsified, expired or otherwise invalid power of attorney;
Many of you might have heard or might have painfully experienced the fact that fraud and forgery are now among the leading sources of claims in our Company. Prior to the Fraud Insights newsletter, could you have spotted fraud or forgery? The March 2008 edition of Fraud Insights contained an article on rescue scams and served as an EXCELLENT example of a mortgage rescue transaction and why it is problematic. Two things should stand out: the fraud risk and the possessory/title risk.
While it might not be a complete forgery because there doesn't appear to be impersonation of a seller, there is certainly a fraud risk when the terms of the transaction started to change and the power of attorney brought into question whether the missing spouse would know about and understand the varied terms.
After the deal closed, a year went by and the people realized their house didn't appreciate enough to cover the new loan amount needed and that they couldn't qualify in this changing market, you can bet that we'd see a claim from the spouse that wasn't available. This is the title problem: Is that power of attorney really valid for this transaction? Might these people be viewed as being under duress when they were backed into a corner by their financial position given today's concerns over subprime mortgages?
These questions are certainly important. Often the escrow officer is put in a difficult position of having to re-sign or explain to a customer why we can't go forward with a transaction. This is a good opportunity to review the hidden title risk that prevents us from closing such a transaction and gives us an excellent reason not to proceed. The other title problem: The undisclosed possessory interest of the seller in a rescue transaction.
Most parts of the country raise five or more "general" or "standard" exceptions, one of which reads, "Rights or claims of parties in possession not shown by public records." Also, don't forget Covered Risk – The lack of priority of the lien on the insured mortgage upon the title over any other lien or encumbrance.
In a rescue, the seller sells to an arranged investor for 12 months and – often unknown to us – leases back his/her home, purportedly with the intent of buying it back after a year. This is, of course, an unrecorded leasehold interest, and due to the agreement, it might be categorized as an equitable mortgage that would prime the interest of our insured (referred to as recharacterization risk). Since we know that the seller will be remaining in possession under a hidden lease or possession agreement, we should be raising a Schedule B exception for the unrecorded leasehold interest of the sellers. The seller's right, or option to repurchase, should also be shown as a Schedule B exception. This exception should include the possibility that the seller's right or option might be recharacterized as an equitable mortgage that would prevent the mortgage we are insuring from becoming a first lien. Aha! A title risk!
Remember – it's not all escrow! We sell title insurance, don't forget the title side!