Posting for

Thursday, April 12, 2001

by: Bert Rush

brush@firstam.com

PAYOFF DEMANDS/ESCROW AND CLOSING/CORONA CLAIM

Here's a story illustrating the pitfalls of handling payoffs in today's faster-than-light/who's-on-first? closing environment.

In March 2000, our Riverside County branch was asked to insure a new owner and purchase money lender for a single family residence in Corona, California.

The escrow was handled by an outside "independent" escrow company. Upon opening the order, the escrow officer asked the seller husband to fill out a form listing existing debts. The husband listed only one loan account, with Fidelity Federal Bank and a balance due of about $15,000.

Meanwhile, our branch issued a preliminary report (similar to a commitment) showing one existing mortgage, evidenced by a deed of trust in favor of Home Savings of America for $120,900, recorded in 1994. As shown on the recorded deed of trust, the loan no. was 1672309-0. The public records also disclosed this deed of trust was assigned to Beneficial Mortgage Corp. soon after origination.

As the closing date approached, the escrow company received a payoff demand from Fidelity Federal Bank, referencing "Loan Number 102231." This payoff demand recited that "Subject to the conditions set forth below, Fidelity Federal Bank will forward to you a Full Reconveyance/Satisfaction/Release in connection with the above referenced loan." The demand showed an "Unpaid Principal Balance" of $15,297 plus a "Demand/Reconveyance Fee" of $60 to be due. The demand also referred to the loan as a "credit card account," and required return of the credit cards with the payoff.

A copy of this payoff demand was faxed to our title officer (similar to an examiner), to document our file as to payoff of the existing deed of trust.

Escrow closed on June 9, 2000. The escrow company paid off the Fidelity Federal loan, and First American insured the new owner for $224,000 and the new lender for $212,800. The escrow company also paid the departing sellers $156,258.

Before long, the new owner and lender got foreclosure notices from trustee Beneficial Management Corp. of America, giving notice of a trustee's sale scheduled in connection with "Loan No. 139901-3," and claiming an amount due of $135,503. Claims under our recent title policies followed....

Our investigation disclosed that the 1994 deed of trust, originally securing $120,900, did not get paid off and was now in foreclosure. The Fidelity Federal loan, that did get paid off, was an unsecured credit card account.

First American has now paid $148,102 for a reconveyance of the "missed" deed of trust. The departing sellers are said to be living with relatives somewhere, having recently bought new cars. We've also heard the seller husband is working in the construction industry, under a new name....

Comment: Don't know where to hang the lights on this one. Involvement of an outside escrow company, coupled with pressure to move quickly in a high volume title operation, may tend to cause title officers not to stop and question irregularities--whether we condone this or not.

And what, after all, was irregular here? It's not unusual for loans to be given new numbers when they're assigned, I'm told, so that's not a 'red flag.'

How about the disparity between the principal amount of the 1994 deed of trust ($120,900) and the demand for $15,297-plus? Even this may seem to fall in place if you consider that the payoff demand referred to a credit line, and promised a "reconveyance/satisfaction/release" of lien by return mail. And who charges $60 for a credit card statement? Anyone??

My only comfort here comes from thinking that claims such as this may be avoided with the expanding role of MERS --Mortgage Electronic Registration System, Inc.--in the marketplace.

If the 1994 deed of trust had been registered with MERS (an impossibility since MERS began operations in '97 or so) it would have included on the face of the recorded instrument an eighteen digit identifying number--which would have remained its identifying number for the life of the loan, regardless of how many times or to whom the loan was assigned. When time came for payoff, the escrow officer would contact MERS for advice about who to ask for a payoff demand. The current holder of the beneficial interest under the deed of trust, as identified by MERS, would also provide a reconveyance/release on behalf of MERS and the current assignee.

I understand MERS has now registered more than 3 million mortgages and deeds of trust.

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Following Thursday's posting, Jay Dobson (Portland, OR) writes:

Unfortunately, this does not surprise me. We have had several similar occurrences; only the names and amounts are different. Although we have used these "episodes" as lessons, and training examples, given the pressures on our people, I would not be surprised to see it happen again.

Alan Rubin (Manhattan) writes:

With respect to payoffs of prior loans and account numbers, we recently had a claim with the following facts:

A prior mortgage was raised, and a payoff request was sent to the prior lender. The lender indicated that under the "account number" requested there was a balance due of $3,000. That amount was paid off and a satisfaction piece was requested. However, the account number assigned to the $3,000 amount represented only accrued interest due; in fact, there was a $30,000 balance due on the same loan, but under another account number. The lender threatened to foreclose, and we negotiated a settlement. However, it is essential that in paying off prior mortgages, a payoff for the entire loan balance must be obtained.