April 29, 2010

Do Buyers Have the Right to Choose Their Own Title Company?

OK . . . so . . . I'm talking to my colleague the other day . . . you know . . . just trying to find out what's been going on lately with his clients in the real estate settlement business.  Just wanted to know what people are buzzing about, what their issues are, what deals he had going, what deals blew up!  You know . . . the usual. 

So he started talking about his REO deals. [Sidebar: for those unfamiliar with the term, REO stands for Real Estate Owned.  And it's when real property has gone through the foreclosure process, failed to sell, and the lender takes the property back and sells it]. Well . . . apparently, when Fannie Mae sells a REO, it uses an addendum that makes the buyer responsible for paying all of the transfer taxes and stamps AND requires the buyer to use the seller's title company.

Huh?!!  Earth to Fannie!!  Earth to Fannie!!  Come in, Fannie!!!

OK . . .

First, it is my understanding that buyers have the right to choose their own title company. 

Second, when buyers use a seller's title company, that title company may not do an adequate title search. And in the absence of a quality title search, buyers expose themselves to potential title defects. For example, we've reviewed title reports for properties that have gone through foreclosure. And during the title review process we usually find a jillion errors. [Sidebar: jillion is actually a word.]

For example:

• Failure to give notice to junior lien holders
• A 1st deed of trust was not released prior to foreclosure and had to be paid before transfer
• "Power of attorney" issues
• Improper service
• Foreclosure attorney foreclosed on a 2nd deed of trust, rather than a 1st deed of trust because of incorrect recording and indexing

Such errors delay the sale.

Third, it is my understanding that under U.S. Code Title 12, Chapter 27, Section 2608, Real Estate Settlement Procedures Act (RESPA), directing the buyer is completely illegal!!!

That is to say:
"(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.
(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance."

I don't know about you, but I'm finding that language to be pretty unambiguous. You know . . . when they use words like "no seller" and "directly or indirectly" . . . things start to become crystal clear, don't you think?

Well . . . Fannie finally got the memo and has since "flipped the script" and come up with a new addendum. I'm told the new addendum says, "The closing shall be held at a place so designated and approved by the Purchaser." Further, Fannie may pay a portion of the cost of transfer taxes and stamps.

Woo-hoo!! Now REO buyers may select their own title company, buy their own title insurance, and protect themselves against potential title defects. Hopefully, all REO sellers will follow Fannie's lead.

Until next time.

Be well.

Posted by: shana@lakeviewtitle.com