Posting for

Monday, July 31, 2000

by: Bert Rush

brush@firstam.com

FUNDING LENDERS/WHOLESALE LENDING/WAREHOUSE LINES/CORRESPONDENT LENDING/MORTGAGE BROKERS/ESCROW AND CLOSING/LENDER REQUIREMENTS/LENDER'S INSTRUCTIONS

Mike Fromhold (Valley Forge/Philadelphia) has forwarded an "Escrow Agreement" which one of our agents has been asked to sign in connection with a loan transaction. This request is unusual because it comes from a lender that, in the absence this "Escrow Agreement," we would think to be a stranger to the transaction.

The request apparently comes from what I would call a "funding lender." This lender is the source of funds to be used by a mortgage broker to close the transaction, under an agreement whereby the funding lender provides a "warehouse line" of credit secured by loans originated by the mortgage broker. After origination, the loans may be sold and assigned to the funding lender, or to another investor, and the proceeds applied to pay down the warehouse line of credit. This may also be known as "wholesale lending" or "correspondent lending" (but I confess my understanding of these terms is less than perfect).

Anyhow, by this "Escrow Agreement" the funding lender seeks the title agent's agreement to comply with a list of requirements "in order to induce the Lender to make loans to" the mortgage originator. To view this "Agreement," just click on the URL below.

Mike has some very interesting observations about this. First, he is bothered by the recital that the agent is "agreeing" in order to induce the Lender to make loans to the originator. This appears to be inaccurate since the funding lender already has entered into what it calls a "Mortgage Warehouse and Security Agreement" with the mortgage broker. Worse, this recital has potential for making the agent liable for whatever may go wrong with parties' relationship.

Second, he is wary of the provision for return of funds to the funding lender, by wire transfer, if the transaction fails to close within 24 hours of "receipt of such funds." As Mike points out, funds may be received in the form of a check which may not have cleared within the 24 hour period, so the agent may be put in the position of having to pay out "good funds" in exchange for an out-of-state check.

Third, Mike is concerned (as I am) about those provisions which seem to require the agent to make a judgment or guess as to what's expected. For example, in paragraph 2 the agent is asked to agree that funds will not be disbursed until "all documentation...has been properly completed,...and that all other customary conditions to the closing have been satisfied." Likewise, by paragraph 5 the agent agrees to cause each recorded document to "bear a legend directing the appropriate recording office to return the recorded Mortgage to the appropriate party."

So what's going on here?

I think this Agreement may be fallout from the Island Mortgage story, in which the Long Island mortgage broker is being investigated following allegations they diverted more than $50 million received from funding lenders to close loan transactions.

And, Island Mortgage isn't the first such case we've heard of. About six years ago, First American suffered an agent defalcation in Phoenix that was very costly. Our investigation disclosed that the guilty party (who ultimately went to prison) was previously the principal of a mortgage broker firm in Costa Mesa, California, that closed suddenly in 1991 amid reports of missing money. The mortgage broker firm wound up in bankruptcy, where court filings showed that warehouse lines had been drawn against without concurrent loans being made, so that funding lenders lost more than $16 million. The primary suspect in this scam next turned up in Phoenix, where he bought a controlling interest in a title agency. Two years later, more than $6 million was missing from escrow accounts.

We have yet another claim being handled now, from New Jersey, in which the mortgage broker attended loan closings but found an excuse to postpone fundings ("we need more paycheck stubs"). Somehow, our agent allowed the broker to take away copies of signed loan docs and settlement statements, which the broker then showed to a funding lender as evidence of closed loans. The broker diverted several hundred thousand dollars before the scheme was detected.

Point is, I think this "Escrow Agreement" represents an attempt to put the title agent, and perhaps an underwriter, on the hook for whatever may go wrong with the warehouse/wholesale/correspondent lending relationship. And, note that this agreement doesn't necessarily limit itself to one loan transaction (see paragraph 6).

What did Mike do in this case? He instructed the agent to notify the funding lender that the title underwriter's management will not approve signing the Agreement. This is the same approach frequently taken with unacceptable lender's instructions or lender requirements (see LandSakes Archive--using the search function).

Certainly there are ways we can cooperate with funding lenders, such as by returning "good funds" or providing copies of documents, pursuant to written instructions from parties to a transaction. But this form of "Escrow Agreement" goes too far. Let's be on alert for this.

**********

Following Monday's posting, Will Harley (Sacramento, CA) writes:

Sometime back for one of our escrow seminars we developed a sticker for an escrow officer to place onto a document or escrow instructions we preferred not to sign. Surprisingly we have very few complaints from attaching the sticker to something we did not want to sign. The sticker may not have worked in the case of the ChinaTrust Bank Escrow Agreement but we surely would have tried. In a few cases we have been able to work with the party and modified the offensive document.

The sticker is 1" x 2-1/2" inches. It is printed on a florescent label (color doesn't matter so long as it really shows up) that is easy to peel off and contains the following text.

NOTE:

The Management of First American Title will

not permit the completion of this form. If

you have any questions on this policy

please feel free to contact First American.