Demotech's report on defalcation aka escrow theft

Several years ago I went to Harrisburg and met with representatives of the insurance department.  There were a few things on the agenda.  High on my list was a warning about a potential tsunami of defalcations as the mortgage credit crisis, then just beginning, evolved.

I knew from my experience in continuing education classes and that full reconciliation of escrow and other important controls were being ignored by agencies.  It was obvious to me that things looked normal to the outside world only because so much money ran through the accounts. Deficits by theft or mismanagement were covered by the constant flow of new money.  Once the flow of funds slowed or stopped with the expected steep decline in business, we would see widespread defalcations.

This is a problem in the title insurance industry.  It's one more thing for real estate agents, lenders, and consumers to keep in mind when choosing to work with a title insurance agency.  With that in mind I tried to come up with some observations that could be made from the outside looking in to try to determine if you are working with a title agent who responsibly manages their escrow funds.  This is pretty hard because from the outside I think you can only observe a philosophy or structure controlling the collection and disbursement of funds.

So, you want to be working with a title agency who requires "good funds" coming into escrow.  That means they want a cashiers check or wire for all but nominal amounts.  You also want to be working with a title agency who verifies that they have all funds in hand before disbursing a transaction.  For instance, let's say a buyer's mortgage company hasn't yet funded the transaction and the parties are sitting at the closing table.  The pressure is high, they want to move, the real estate agent wants their commission.  All eyes are on the title agent.  Does the title agent hold their ground and say they cannot disburse until they have the lender's funds or do they take a chance and disburse?

The "easy" title agency, the one who takes a check that isn't "good funds" or goes ahead with a disbursement when they do not have funds in hand, is the title agency who also probably doesn't fully reconcile their escrow account.  They don't take the responsibility of guarding other people's money seriously.  They may even be living off of the escrow.  So be careful.

Here's the Demotech report.