Friday, February 28, 2014

What happens when an old mortgage is insured over?

Hi Ms. Cipa,

We came across your web site about title insurance and it very helpful. We have an urgent situation that we'd appreciate your help with. We are purchasing a property and the title search found a $45,000 mortgage on the property. They are not able to get a letter of indemnity because the mortgage is very old. The title search is handled by a real estate attorney who is an agent for Stewart Title. Should we be concerned and hold off the settlement?

Below is from attorney's office -
There is nowhere to go for a Letter of Indemnity. I spoke with our Underwriter when the title came in. He said that considering this is a 52 year old mortgage which was due and payable 32 years ago, Stewart would insure over it.
I am attaching a copy of the first page of the mortgage where you can see that this mortgage had a 20 year term ending in September of 1982."

Hi, T: When there are old unsatisfied mortgages the title insurer assesses the risk and then decides whether or not to insure. Stewart is willing to insure over it so you don't need indemnification. I offer this advice as a title insurance agent and not an attorney. The way title insurance works is that Stewart insures that if someone comes to you and asks for the money or attempts to foreclose, you'll be covered.

You should know, however, that this question may come up again should you decide to refinance or sell the property. The mortgage will be discovered once again and another decision to insure or not will take place. I personally wouldn't worry about that because the owner coverage purchased from Stewart will provide a basis moving forward for indemnification if your buyer is getting title insurance. If for some reason you get a buyer who is unrealistic about risk and wants a perfect title, they may not buy the property. Those types of folks are rare but we do come across them.

So, I would say, bottom line, if you are getting an owner policy with no exception for this old mortgage, as a title agent, I'd say that's a low risk scenario. Make sure you get a copy of the title insurance commitment to review prior to closing to make certain this item is not shown as an exception. Hope this helps. ;)


Thursday, February 20, 2014

economic impact of Act 93 - making it harder to sell distressed properties in Pennsylvania

In an effort to raise revenue for municipalities, Pennsylvania lawmakers have passed a law that will have a major impact on how distressed property owners - including REO holders - liquidate their assets.

This law, Act 93 of 2013, was meant to target slumlords and other property owners who have the ability to pay their property taxes but are unwilling to pay.  The law, once fully implemented, will allow in personam judgments to be filed by a municipality - without a court proceeding - against any property owner who has failed to pay taxes and has reached the stage when the tax is considered a claim absolute.  The claim absolute status would normally be reached one year after the tax goes delinquent.

How does Act 93 change tax collection? It removes the barrier of a court proceeding for the approval and filing of an in personam judgment. Since the law sets no further restrictions beyond claim absolute status for selection of property owners, we have to presume that some counties, if not all, will file such judgments against ALL property owners vested in title with such delinquent taxes, including Fannie Mae.

That's right. It is important to note that Act 93 does not distinguish between types of property owners.  Mortgage lenders and other market entities who routinely acquire property through foreclosure are treated in the same manner as all property owners under this new law.

What happens when an in personam judgment is filed against an individual or entity? The judgment automatically attaches to ALL real estate owned by that individual or entity in the county. This means that one property could not be sold without also paying the judgment or judgments.  It's an all for one and one for all method of delinquent tax collection.

This is perfectly fine for targeting so called slumlords and others who have the ability to pay, but what about properties were the owner doesn't have the extra cash or equity?  What about owners who are close to break even or underwater because they are in financial distress? How do they liquidate assets to avoid foreclosure or get out from under a bad situation?

Tying one property to others in these cases, I argue, will cause harm.  If an owner is able to liquidate the asset, the good old fashioned in rem tax lien will cause delinquent taxes to be paid.  If an owner is not capable of covering an additional judgment caused by Act 93, then taxes aren't paid, the property remains distressed and if mortgaged, a candidate for foreclosure.

Let's talk about two techniques used by mortgage lenders and property owners to avoid foreclosure - short sales and deed in lieu.

In the case of a short sale, the property owner negotiates with the mortgage lender to accept less than what is owed on the mortgage loan making the case that the property value is insufficient to meet transaction costs and the unpaid balance on the loan. As part of these negotiations, mortgage lenders typically allow payment of normal closing costs including a real estate commission and delinquent taxes owing on the mortgaged parcel.  It is inconceivable to me that a mortgage lender would also allow the payoff of an Act 93 judgment for taxes owed on a different parcel so in cases where we have a property owner in distress and subjected to Act 93 rules, I would argue that they no longer have a short sale as an option for foreclosure avoidance.

The same is true with deed in lieu in which an owner would negotiate with a mortgage lender to simply take back the property rather than to foreclose.  If there are Act 93 judgments attached, the owner and lender are forced into foreclosure because it is only with good notice in a foreclosure that such judgments can be divested and cleared from the title to this distressed property.  I would argue then, that owners and mortgage lenders faced with Act 93 judgments lose the option of avoiding foreclosure with a deed in lieu.

Act 93 impedes the ability of distressed sellers liquidating assets to avoid foreclosure, thus delaying the payment of delinquent property taxes.  Once unable to avoid foreclosure, the property then is subjected to a lengthy proceeding which if done properly will divest the Act 93 judgments making the entirety of the exercise seem ludicrous if not simply sad.

Now we must take the Act 93 scenario one step further and consider what happens after foreclosure. Once a sheriff has deeded the property to the mortgage lender, now the mortgage lender itself may find this property attached with other properties owned by the mortgage lender in that county by Act 93 judgments. Stay with me because I know this might be confusing. Remember that no restrictions exist as to what kind of entities might be subjected to such judgments. Take Fannie Mae for instance.  In the normal course of business Fannie Mae owns multiple REO properties in every county and many of these properties have delinquent taxes. The same is true for all mortgage lenders.  Each would be a target for Act 93 judgments which would cause at minimum, a need for REO managers to change the way they do business and pay delinquent taxes as they acquire the property rather than when they sell the property. This may be easy for some and not so easy for others but it certainly would be a change. The question is, how big of a change is it and does it make doing business in Pennsylvania more onerous than doing business elsewhere?  How does that impact the business of mortgage lending?

Frankly, it's the long term impact on mortgage lending in Pennsylvania that scares me the most. There are all sorts of possibilities and I'm sure I haven't considered them all but here are a few:

Escrow waivers:  Will mortgage lenders continue to grant waivers so that consumers can pay taxes on their own?

Second homes and investment property: Will mortgage underwriters consider multiple property ownership more risky in Pennsylvania and what will that mean to these types of transactions?

Pre-qualification:  How do mortgage lenders and Realtors change the way they uncover information about buyers and sellers to avoid Act 93 transaction killers?

The bottom line is that Act 93 will fundamentally and negatively change the market mechanism for moving distressed properties in Pennsylvania and in the process have little, if any, positive impact on tax revenue.

Monday, February 17, 2014

economics in one lesson

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
—Henry Hazlitt, Economics in One Lesson

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Sunday, February 16, 2014

birth of Act 93...I found this on Rep. Parker's web site. It gives insight into the intention of lawmakers.

"Representative Parker will be introducing a bill to provide the City of Philadelphia with additional authority to collect delinquent property taxes.

Philadelphia needs additional tools to effectively collect delinquent property taxes from speculators who own vacant, blighted tax delinquent properties and from investors who purchase and rent properties and fail to pay their property taxes. An analysis of delinquent property taxes shows that many non-residents own ten, twenty or more properties that are tax delinquent, vacant or abandoned. Non-resident investors own rental properties that not only have code violations but are delinquent in paying their property taxes.

Simply putting a lien on the specific property that is delinquent has not been sufficient to cause payments to be made. The City needs the lien to be placed against all of the property owners’ real estate located within the Commonwealth. Then, when the property owner attempts to sell any of his/her property located within the Commonwealth, the lien must be satisfied."

PAR article on Act 93

Confusion regarding a recently signed bill has created some misunderstandings about how it will affect real estate and transactions.
“Act 93, originally House Bill 388 (Parker, D-Philadelphia), only changed how municipalities reduce property tax claims and tax liens to a final judgment in that county,” said PAR legal counsel Brett Woodburn. “As a result, municipalities no longer have to incur the expense of suing delinquent property owners to get a final judgment. This really expands the arsenal of weapons that municipalities have at their disposal to collect delinquent taxes and fees.

Be sure to read the comments.  Here is my response to Brett Woodburn's comment:

I agree that the laws enforcing money judgments have not changed. Presuming - as I have been told - that municipalities are on board and filing money judgments against delinquent property owners, what we have is a massive new overlay of money judgments attaching to real property.  It does not take an execution of a money judgment to make the judgment attach to real property.  It automatically attaches.  While these liens are attached to parcels, they cannot be refinanced or conveyed with good title until the liens are satisfied.  The unintended impact of Act 93 is to make distressed properties harder to sell, and in some cases impossible to sell.

The unintended consequence of allowing municipalities to forego the thought process involved in suing for final judgment is to take out of the mix review by the court and an opportunity for defense by the property owner.  The old system might have been costly and time consuming for municipalities, however, review by a competent attorney prior to filing suit would help municipalities consider which individual collection circumstances would be helped by the filing of such money judgments and which would be impeded.

Thursday, February 13, 2014

PAR, MBA & PLTA members...... We need to fight for a repeal of PA Act 93 of 2013.

I come from a family of Realtors. My mother, now retired, was a broker. I cut my teeth in real estate. In 1973 one of my 3 jobs was working as a secretary in a real estate office. I eventually got my license, became a Realtor, and after selling for awhile I took a position as a loan originator in 1978.  For 16 years I made mortgage lending my career, got involved in the MBA and eventually had the privilege of serving as president of our local MBA. When I transitioned into title insurance, I joined ALTA and PLTA.

Through these years I have had a chance to watch these trade associations in action and how they choose what to champion, fight or accept from state and federal legislators. Normally trade associations fight on behalf of their members.

I am having a hard time understanding why PAR, MBA, and PLTA did not fight against passage of a law that will take a certain percentage of transactions out of the hands of their membership who frankly need every transaction these days to make ends meet.

Even if you did not initially recognize the impact this law would have on those of us who deal regularly with short sales, distressed properties, REO, second home buyers and investment property buyers, now you do know.  Why aren't you fighting for a repeal?

Every property owner, potential buyer, Realtor, lender, and title agent who deals in these properties will be impacted by this new law in a negative way. Local governments will be impacted when they are faced with properties that can't be sold because of the addition of new liens as judgments in personam overlay and crisscross over multiple parcels.  What happens to properties that can't be sold?  Lots of them go derelict and become blights in neighbors causing all sorts of problems for local officials. This is not good.

I understand PLTA is now focused on pushing for an amendment to clarify the process of lien discovery.  Well, PLTA seems to have given up and granted to the state the ability to take money out of the hands of members who count on PLTA to protect them from government actions that destroy their business.

If these trade associations do not step up to the plate to fight for their members against a law that is ill conceived, who will?

PAR, MBA and PLTA understand real estate more than any other organizations in this Commonwealth. You need to lead this fight.  Please fight for repeal.

Tuesday, February 11, 2014

ain't lawmaking fascinating?

Had a chat with the legal counsel behind the drafting of legislation creating a new type of judgment for the collection of delinquent property taxes.  Would it surprise you to know that she did not understand that judgments attach to real estate?

I admit to being pretty darned surprised.

Monday, February 10, 2014

Delinquent taxes on one property creates lien on all of owners' other properties in that county

Under a new Pennsylvania law that will affect many real estate transactions, property owners who get behind on their taxes on one property will have a lien slapped against all their other properties in that county.
I admit to being blindsided by this new law. I can’t comprehend how it was passed without being blocked by Realtors, mortgage lenders and title insurers.
I can only imagine that they didn’t see it coming, or couldn’t conceive that the legislators would give it credence. Maybe they didn’t understand the full complexity of its unintended consequences.
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