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.

working on a mystery, a title agent mystery that is

We're working with a consumer buying a commercial property who also planned to use their residence as collateral for a line of credit to make improvements on the new building. Routine process, their bank asked for a copy of the deed to their house and they can't find it. They called their mortgage lender who starting acting kinda weird and would only provide an unexecuted copy of a mortgage, so they asked me to look into the situation.

Guess, what? There is no deed on record for their residence or a mortgage.

Long story short, they were working with an out of state title agent who I'm not even sure was licensed in PA, who has since gone out of business and nobody, not even the seller has copies of a signed HUD-1 or any other documents from closing.

Thankfully, and for what reason I don't know, the seller's attorney had a copy of the signed title insurance commitment so this consumer has some basis for a title insurance claim.

Oddly, though this out of state title agent handled the entire transaction, including receipt of lender funds and disbursement, the unsigned HUD-1 has the name of a different company as settlement/title agent, supposedly a PA company that I can't find anywhere either.

In retrospect, these folks are kicking themselves for not being more diligent about getting copies and knowing who they were working with. They sort of went on automatic pilot and just trusted that they were working with professionals.

Please, folks, choose your title agent wisely. Know who they are and where they are and make certain you get a title insurance commitment to review prior to close, make certain you get a signed HUD-1 at closing, and then follow-up after closing to confirm receipt of the recorded deed and issuance of your title insurance policy.

query: what if the title commitment isn't received on time

You'll need to postpone your transaction to await the title commitment.

This is yet another reason to shop carefully for title insurance services. Ask how long it normally takes to produce a title commitment and then make certain you allow enough time.

When a consumer calls my office and asks that question, I tell them it will take 7 to 10 days to produce a title commitment. I don't bend on that because I know that's reality. I know lots of title agents who will bend on the initial promise and when they can't bend reality later, the consumer will be forced to face it and be disappointed.

Why does it take 7 to 10 days to produce a title commitment? We have a professional abstractor do a full search, we have to get lien letters from numerous municipal agencies who want a check in hand as payment for creating these letters. We have other customers who we are are serving and we treat all customers with equal care and consideration.

So, when you come across a title agent who says they can produce a title commitment in hours, you must ask yourself whether this person is doing a full search and examination, are they promising more than they can deliver, do they have no other customers or have they decided to place your interest before others and will they do that to you if a bigger deal walks through the door?

With interest rates fluctuating, we keep in mind that you have serious deadlines and we work with you to get where you have to be and with realistic expectations.

What about title insurance and refinancing?

SHOP SHOP SHOP SHOP

Get the message?

If you are in Pennsylvania and refinancing, you'll not get a better deal than our CHOOSE AND SAVE program.

Most title companies use independent notaries and you'll end up paying a signing fee or closing fee of some kind. If you are in our market area, we'll come to you at no extra charge. We close 8 to 8 Monday thru Friday and 10 to 5 on Saturday.

So, shop for title insurance and closing services. Do not just go wherever your mortgage lender wants you to go.

Here's our easy to use title insurance premium calculator. Look at those discounts for refinancing!