Source of Title Blogs Feed

Mineral Rights Lawsuit Spotlights Property Rights "Balancing Act"

bossman@jbizinfo.com — Fri, 10 Oct 2008 12:15:20 EST

A recent local news item provides the perfect illustration of why the proper evidencing and reporting of title to real estate interests is so important to our fundamental rights as well as to the regional and national economy.

A local businessman has filed suit against Allegheny County, PA, claiming that the county is denying him the right to remove about 700,000 tons of coal that he owns. 74-year-old Nello Fiore, of Whitehall, PA says that if the county won’t let him mine the coal, then they should pay him for the value of the coal, which lies beneath 92 wooded acres in the Sleepy Hollow section of the county’s South Park, located just south of Pittsburgh. The high-quality coal, which sells for about $143 per ton locally, could be worth well over of $100 million, according to Attorney Thomas W. King, who represents Mr. Fiore.

Southwestern Pennsylvania, which lies in the heart of the Appalachian Basin, has often been referred to the “Saudi Arabia of Coal”. In fact, coal mining has been a mainstay of our region’s economy since the dawn of the Industrial Age. Because of this, Pennsylvania real estate law recognizes surface and subsurface interests separately. Typically, when someone purchases a parcel of real estate in Pennsylvania, only the surface interest is conveyed unless the mineral or subsurface interest is specifically mentioned in the deed. (See my previous blog entry, Searching Mineral Interests: Don’t Try This at Home.)

The county, to which the surface interest in the land was donated in the 1930s, considered a proposal to strip mine the coal at a community meeting this past June, which was attended by about 300 people, including Allegheny County Executive Dan Onorato. Mr. Onorato nixed the plan after it was discovered that a 2001 County Parks Master Plan designates the area as “an important biological zone” which has also been recommended for designation as an Open Space Reserve.

Mr. Fiore’s lawsuit alleges that the county is acting unlawfully in preventing him from removing the coal, which he inherited from his brother, who purchased it from Consolidation Coal Co., the predecessor to Consol Energy. According to Attorney King, the deed gives Mr. Fiore the right to mine the coal at any time, regardless of who owns the surface interest. “If the county will continue to tell us we can’t mine the coal, Mr. Fiore, under the Pennsylvania Constitution has a right to be paid for it.” Mr. Fiore and his attorney claim that to deny his mining rights amounts to the county exercising eminent domain over his coal, thus he is entitled to reimbursement.

The county says that it’s not preventing Mr. Fiore from mining his coal because he can still retrieve it by underground mining. “He has access to his coal,” says Kevin Evanto, a spokesman for the County Executive’s office, “[the county] is just saying that we’re not willing to allow you to destroy 91 acres of park land to get at it.” However, the lawsuit states that “the coal cannot be recovered by the deep-mining process.” Attorney King says that Mr. Fiore has offered to include a post-mining reclamation plan for soccer and football practice fields and picnic facilities, as well as royalties to the county in excess of $1 million.

Several members of the County Council are on record as saying that they wouldn’t support the proposal, which would be subject to review by the state Department of Environmental Protection. Local residents like Mary Franko have also expressed concern about what strip mining operations will do to their property values. Some nearby homes are located as little as 1,000 feet away from the proposed mining area. In an interview with a local television station, Ms. Franko said, “It's dangerous, dirty, and I don't know how they can possibly protect the perimeter when there's going to be blasting going on. I'm afraid that this is going to devastate our township. We're a small township. Our property values will absolutely diminish”.

To be honest, I’m not really sure where I come down on this one. Mr. Fiore certainly does seem to be on firm legal ground here, (no pun intended) and if I was in his position, I’d probably move to assert my rights as well. On the other hand, if I was one of the residents of that area, I’m not sure I’d want someone coming in and “tearing up my back yard”, regardless of any promises to improve the area afterward. One thing is for sure, the Court is going to have its work cut out for it in dealing with this issue. Let’s just hope the abstractors who researched this thing knew what they were doing.

Sheriff Refuses To Serve Evictions Resulting From Foreclosures

rfranco@sourceoftitle.com — Thu, 09 Oct 2008 12:33:49 EST

It seems rather obvious that if you don't make your payments, the lender will foreclose and you will be evicted from your home. But, what if the owner doesn't live there? What about the landlords that have failed to meet their obligations, and their renters who have paid the rent? The system seems to be breaking down when innocent people, who have met their financial obligations, are thrown out on the street.

Sheriff Thomas Dart, in Cook County, has had an attack of conscience and he has announced that he just won't evict innocent people from their homes anymore. He is suspending foreclosure evictions in Cook County, which includes the city of Chicago. He could find himself locked up in his own jail for ignoring eviction orders, but this wouldn't be the first time a sheriff spent time behind bars for refusing to evict people from their homes. Are you curious to know what happened to the last lawman who took a similar stand?

According to Dart, the mortgage companies are supposed to identify the occupants of a building before they seek to have them evicted. This, however, is not being done in Cook County. Dart wants the legislature to do something to protect the many innocent people that are unaware of their landlord's financial problems... at least, unaware until a deputy knocks on their door to evict them. (see Illinois Sheriff Scolds Banks for Evictions of 'Innocent' Renters)

"These mortgage companies ... don't care who's in the building," Dart said Wednesday. "They simply want their money and don't care who gets hurt along the way.

"On top of it all, they want taxpayers to fund their investigative work for them. We're not going to do their jobs for them anymore. We're just not going to evict innocent tenants. It stops today."

The Illinois Bankers Association, not surprisingly, is opposed to any legislation that would place a further duty on the lender to identify those who are tenants in buildings that are the subject of their foreclosures. They simply want Dart to enforce the court's eviction orders.

The Illinois Bankers Association said that Dart "was elected to uphold the law and to fulfill the legal duties of his office, which include serving eviction notices."

The association said Dart could be found in contempt of court for ignoring court eviction orders.

"The reality is that by ignoring the law and his legal responsibilities, he is carrying out 'vigilantism' at the highest level of an elected official," it said. "The Illinois banking industry is working hard to help troubled homeowners in many ways, but Sheriff Dart's declaration of 'martial law' should not be tolerated."

This may be an area where legal rights intersect with moral wrongs. Tenants have rights. In order to evict a tenant in Illinois, a landlord must follow proper procedure - including notifying the tenant.

"The complete process of evicting a tenant in Illinois involves five distinct steps although the occurrence or execution of all the five steps may not be necessary for the tenant to lose her right to possession: the first essential step is that the tenant must be delinquent in her rent, second, the landlord must notify the tenant, in writing, that the rent must be paid within no less than five days, third, the specified time period mentioned in the notice must pass without tender of payment by the tenant, fourth, the landlord must sue for possession or maintain ejectment and obtain a judgment for possession and fifth, a writ of possession issued pursuant to the judgment for possession."
Robinson v. Chicago Hous. Auth., 54 F.3d 316 (7th Cir. 1995)

But, in these cases in Cook county, the tenant isn't being evicted by the landlord because they didn't pay the rent. They are being evicted because the landlord has failed to make their mortgage payments. The rights of the lender in this instance are superior to those of the owner and his tenants. Still, this doesn't change the fact that the tenant is an innocent third party. The rights of the tenant should not be cast aside in such a cavalier manner. Shouldn't they at least be afforded notice of the foreclosure action, and the likelihood of eviction?

This seems to be all that Dart is looking for. Make the lenders do their due diligence and notify the tenants before they seek to have them evicted. The landlord would have to do the same if he were seeking to evict them. The tenants should not lose all of their rights merely because the eviction is a result of a foreclosure, rather than an action for forcible entry and detainer.

Dart has taken a moral stand on behalf of the innocent tenants. As I mentioned, he is not the first sheriff to refuse to throw people out of their homes. In the early 1980's, Sheriff Jim Traficant refused to execute foreclosure orders evicting Youngstown, Ohio, residents from their homes. During that time, Youngstown was experiencing a high rate of unemployment due to steel mill closures.

Out of a sense of compassion, or maybe because it made for good theater, Traficant refused to evict these workingmen who were guilty of nothing but losing their jobs. Traficant spent time in jail for his refusal to serve the eviction notices, and he became a folk hero. Some people thought he could walk on water.
(see Welcome to Youngstown...)

Traficant was later charged with racketeering and accepting bribes. He became the only person to ever win a RICO case representing himself. He went on to be elected to Congress. He served as a member of the U.S. House of Representatives from 1985 to 2002 when he was expelled after a bribery conviction that earned him an 8-year prison sentence.

Perhaps Traficant is not a man that Dart would want to be compared to, but clearly this shows that following your conscience and placing a high value on standing up for a moral right can be good for your political future. Arguably, moral activism launched Traficant's career... and moral decay ended it.

In Dart's case, I think he is making a brave and righteous decision. Clearly the lenders have a right to foreclose, but the system needs to be changed and the rights of the tenants need to be protected.

Robert A. Franco
SOURCE OF TITLE

Is Traditional Abstracting Making A Comeback?

rfranco@sourceoftitle.com — Wed, 08 Oct 2008 13:30:47 EST

In most parts of the country, true abstracting hasn't been done in a long time. I have never done a true abstract. Though we often refer to a title search as an abstract today, it is not quite the same thing. A true abstract of title reflects a complete history of the parcel searched. It would show all of the conveyances of any interest in the land going all the way back to the original land grant. Every mortgage, every release, every court case - both closed and open, every encumbrance and restriction whether or not they still impact the title. The examiner would then decide what information was relevant.

Today, the "abstractor" does a hybrid of abstracting and examining. We only show those items that still affect the property. We make decisions during the course of the search and decide not to show old mortgages that have been released, eliminating the need to abstract them. We also determine whether certain liens are out by time, extinguished through foreclosure, released, etc. These decisions were previously made by the examiner, or an attorney, after the abstractor completed the abstract.

The way we do things today could be seen as much more efficient - why waste time abstracting documents that we know no longer impact the status of title? However, there are some problems with "title searching" as it exists today. This could be the reason why some clients are starting to request a quasi-abstract of title instead of the customary title search. Will this be a new trend?

We have recently had a couple of clients order unusual searches that more closely resemble true abstracts of title. They aren't asking us to search back to the original land grant, but they are asking that we show everything - including all of the mortgages and releases, any liens which may be out by time, released, or otherwise extinguished. This is certainly something we can do, although there will be a premium added to our fee for the extra time involved. But, I wondered why the client would ask us for obviously irrelevant information. I have a hypothesis... they are probably in a claims situation and they are trying to figure out why.

Most likely, something was missed, or misinterpreted, on a previous title search, and the client wants to see everything to see what the abstractor might have incorrectly excluded from the report. A true abstract-like product will be extremely helpful for such a purpose.

So, what are the problems with the way we search title today? There are a few that I can think of, but they have been largely ignored by the industry mainly to save money.

Title searching today borders dangerously on the practice of law. True abstracting didn't - because the abstractor was merely providing a report showing what documents were filed in the public records. However, today, a title searcher makes legal determinations when they decide to omit documents from the report because they no longer affect the title.

This wasn't a problem when the title companies employed their abstractors because a title company doesn't engage in the practice of law when it makes determinations of insurability.

The business of insuring land titles, with its necessary incidents, does not constitute the practice of law. A title insurance company may take such steps as may be necessary to inform itself of the status of the title which it purports to insure.
Land Title Co. v. State, 299 So. 2d 289 (Ala. 1974).

But, does the same hold true when independent abstractors are hired by the title company to provide a title search? Certainly, the argument could be extended to independent abstractors when their searches are used by a title company to determine the status of title. On the other hand, the general rule could be seen as allowing the title company to do their own title search as incident to issuing a policy, but a third-party who provides a title search is crossing the line into the unauthorized practice of law. An independent abstractor is providing an opinion of title because they have made legal determinations as to which documents to include in their report, and since they are not issuing title insurance - it is not really incident to issuing a policy.

A Massachusetts case provides an interesting point of view.

[A] title evaluation is a two-step process: a search for the pertinent documents and an assessment of the legal significance of those documents. It is the latter task that requires a thorough knowledge of the law. For example, an attorney must be familiar with the law relating to easements, adverse possession, attachments, bankruptcy, condominiums, divorce, leases, partnerships, liens, trusts and corporations in order to adequately evaluate title to real property. A title examination for issuance of a title insurance policy in a residential purchase transaction is the same examination that an attorney conducts when he certifies a title...

[T]he search of records of real estate to ascertain what may there be disclosed without giving opinion or advice as to the legal effect of what is found does not constitute the practice of law. Title examiners who search the records of the registry of deeds and prepare abstracts of the title detailing its history, including encumbrances and defects, are not practicing law.
Mass. Conveyancers Ass'n v. Colonial Title & Escrow, 13 Mass. L. Rep. 633 (Mass. Super. Ct. 2001).

The problem with this opinion is that despite their very detailed analysis of what is, and is not, the practice of law as it relates to title evidencing, it is vague. What exactly does the court mean by "pertinent documents," "opinion or advice," and "detailing its history?" By pertinent documents, is it indicating that it is acceptable for a searcher to decide what is pertinent? Or, does omitting a document because the searcher "knows" that it is no longer relevant to the status of title providing an opinion or advice? When it states that preparing abstracts of the title detailing its history is not the practice of law, is the court referring to true abstracts (which are rarely done) showing everything?

This is a very murky area of the law. They use the term "abstract" that now has a different meaning than it once did, at least in its practical application. Quite clearly, an abstractor, as we consider them today, must be familiar with all of the areas of law the court mentions, i.e. the law relating to easements, adverse possession, attachments, bankruptcy, condominiums, divorce, leases, partnerships, liens, trusts and corporations.

This is important because many title searchers today are not familiar enough with these concepts to make the determinations that are now required to provide title evidence. I was recently speaking to some colleagues at a conference regarding the qualifications of abstractors, or more accurately, the lack thereof. Too many abstractors believe that they are qualified to provide title searches if they can use the index and provide copies of deeds and mortgages - but there is much more to it than that.

An abstractor today must be familiar with several areas of law and their state's title standards, where such standards exist. One of the attorneys I spoke to told me that he was involved in litigation over a divorce case that was omitted from a title search. The abstractor admitted that she did not even pull the case file because she didn't believe it was relevant. In choosing to omit the information from her report, she made a legal determination that she apparently was not qualified to make - she arguably engaged in the practice of law by making such a determination.

An abstractor should also have a thorough understanding of title insurance underwriting practices. Many do not think it is their job to make underwriting decisions. However, by choosing which documents can be properly omitted from a search, they are making underwriting decisions. How can that be done without understanding how the client uses a search and what coverage title policies provide.

I would even hazard a guess that most abstractors have not even read an ALTA title policy. If an abstractor doesn't know what coverage will be extended, how can they possibly decide what is relevant on a title search? Obviously, they cannot. Yet, it happens every day.

Basically, abstractors today are not permitted to provide a legal opinion of title and they are doing that to some degree because of their determinations to omit certain documents from their searches. And, they most likely do not fall into the "incident to issuing a title policy" exception because they do not work for a title company. Most are even woefully unprepared to make the underwriting decisions they are charged with.

I think many of us have noticed that there are more and more title problems cropping up in our land records. This was also a topic of discussion at the conference I attended. It was said that our land records are vital to our economy and a stable housing market. This is undoubtedly true, but the state of our land records is most definitely on the decline. Problems are not getting corrected. This is, in part, caused by the mentality of our title insurance industry today - insure over it, issue an indemnity letter, etc. But, there is also another aspect that many do not consider. Too many abstractors do not recognize, or report, all of the potential title defects on their searches.

I believe that this may explain why we are starting to see requests for searches that include all of the recorded documents - including those that no longer apply. There are many problems that have been overlooked, or intentionally omitted. By requesting everything, the client is essentially taking the examining function out of the hands of their searchers so they can make the underwriting determinations. Perhaps that is the way it should be. True abstracting, if the industry heads back in that direction, would eliminate the concerns about the unauthorized practice of law.

I do not believe that a J.D. is necessary to provide title evidencing. However, more and more of the examining process is left in the hands of non-attorneys and non-title company personnel. If a further exception to the unauthorized practice of law is carved out for independent abstractors, then something must be done to ensure that they are well qualified. Abstracting is a profession, but most do not treat it as one, nor behave in such a manner. In the vast majority of states there are no regulations for independent abstractors, they are not required to possess any minimum level of education, they are not required to have any specialized training, and they are not required to obtain any continuing education courses. Is this wise?

If the abstractors do not take it upon themselves to become more educated in their profession, they may become extinct. A strong argument could be made that they are crossing the line into the practice of law. If that were the case, they would be forced to operate under the supervision of an attorney (as some states now require), or their jobs will be moved back in-house at the title companies they now work for. The only other alternative is to go back in time to when abstractors provided true abstracts of title - without any opinion or advice as to the status of title. Unfortunately, that would be too costly for the industry and is not likely to be a viable long-term option.

To some extent, this self-preservation through education is a goal of NALTEA. The education committee has prepared a very thorough certification test. Such a test could be a springboard for state licensing programs. This serves two lucrative purposes. First, it shows that the abstracting industry recognizes deficiencies in state regulation and that it can effectively self-regulate. Second, it promotes the idea of state licensing laws. State licensing of abstractors would carve out a statutory exception to the unauthorized practice of law.

The best way to remain independent is to make sure that abstractors are providing an exceptional level of professional service and skill. In other words, do not give the industry any reason to doubt their abilities or qualifications.

I would be curious to hear what you think. Obviously, these issues vary to some degree by state. Do you think that abstracting as we do it today infringes on the practice of law? Why, or why not? Are you concerned that if the general of level of competence in our field does not improve, an unauthorized practice of law challenge could put us all of out business?

Robert A. Franco
SOURCE OF TITLE

Bipartisan effort in Congress underway to restore "Down Payment Assistance" scam

Slade Smith — Tue, 07 Oct 2008 04:56:23 EST

Leave it to the geniuses in Congress-- they already want to undo the smartest move they've made all year.

As part of The Housing and Economic Recovery Act of 2008, signed into law by President Bush in June, Congress correctly banned all forms of seller-financed down payment assistance for FHA-insured mortgages:

SEC. 2113. CASH INVESTMENT REQUIREMENT AND PROHIBITION OF SELLER-FUNDED DOWN PAYMENT ASSISTANCE

...

(A) IN GENERAL- A mortgage insured under this section shall be executed by a mortgagor who shall have paid, in cash or its equivalent, on account of the property an amount equal to not less than 3.5 percent of the appraised value of the property or such larger amount as the Secretary may determine.

...

(C) PROHIBITED SOURCES- In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:

(i) The seller or any other person or entity that financially benefits from the transaction.

(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).

This part of the law went into effect October 1st, discontinuing the use of these sham down payments that have already cost taxpayers $4.6 billion in unexpected losses due to excess defaults on FHA-insured mortgages this year alone, according to HUD Secretary Brian Montgomery.

But to the surprise of approximately nobody, there is already a movement underway in Congress to abolish this common-sense return to a true 3% down payment requirement for FHA-insured loans. Representative Al Green (not the R&B singer, but the Democrat from Texas whose largest campaign donor is the National Association of Realtors) has introduced a bill that would once again make seller-financed down payment assistance legal for FHA loans. In a legislative environment where Democrats and Republicans can't agree on the color of the sky, no less than 26 sponsors from both sides of the aisle are eager for the taxpayers to once again back mortgages with fake down payments.

It's not like these folks don't have some suspicions about how down payment assistance works. Consider this exchange in a House Financial Services Committee hearing in 2005 between Congressman Pat Tiberi (R-OH) and Robert Newman, CEO of AmeriDream, a major down payment assistance provider:

Mr. TIBERI. ....My neighbor last year sold their house for $168,000 or $169,000. Their house was listed in the low-$160s. They ended up selling to a first-time homebuyer who participated ... in a program similar to AmeriDream... The seller... ended up gifting to the program and in exchange for that gifting, they raised the price of their home to around $168,000, which was then financed by the buyer through this gift program. Is that how it is normally done?

Mr. NEWMAN. That is not something that we condone at all. We do not advocate that. We depend tremendously on two people in the transaction, really three. It is the lender to qualify the buyer and the terms. The lender is also going to get the appropriate appraisal for the property. After all of that is done, then they reach out to us for the gift amount. We are not involved in the qualification of the buyer nor are we involved in the listing or the appraisal of the property. We do not condone, and we do not advertise and we do not do any outreach on the product to suggest to individuals to increase the price of the home.

Notice the sleight of hand in the answer by the AmeriDream executive. Congressman Tiberi's question was not whether AmeriDream "condoned", "advertised", "did outreach on", "suggested", or "advertised" the practice of sellers raising the selling price of their home in exchange for contributions to down payment assistance "charities". The Congressman asked whether the practice was "normal". Newman knows darn well that this is how it is normally done, and being under oath, he never denies it.

Unfortunately, Tiberi never followed up on his promising line of questioning. It appears that he just didn't think it was that important an issue that FHA was insuring loans to borrowers with no equity and no skin in the game. Here's what he says later in a conversation with Janis Bowdler, Housing Policy Analyst for La Raza:

Ms. BOWDLER. I just wanted to take an opportunity to stick up for the counseling process just a little bit.

Mr. TIBERI. You do not have to with me. It is in the bill, required in the bill. [Laughter.] That is why I argue that this program is actually going to be stronger than the 3 percent down program.

It takes a very special kind of optimism to believe that an hour or two of mortgage counseling is "stronger" than a real 3% down payment paid for by the buyer out of their own savings. But this is the dreamworld in which Congressman Tiberi still resides, as evidenced by his appearance as a cosponsor on the latest bill to once again legalize Enron-style down payments.

The Ohio Association Of Independent Title Agents Heads To The Ohio Supreme Court

rfranco@sourceoftitle.com — Fri, 03 Oct 2008 14:38:28 EST

Mandamus: A command by order or writ issuing from a court of law of competent jurisdiction, in the name of the state or sovereign, directed to some inferior court, tribunal, or board, or to some corporation or person, requiring the performance of a particular duty therein specified, which duty results from the official station of the party to whom the writ is directed, or from operation of law. (Ballentine's Law Dictionary)

The Ohio Association of Independent Title Agents ("OAITA") has filed a Petition For Writ Of Mandamus with the Ohio Supreme Court asking the court to force the Ohio Department of Insurance ("ODI") to enforce laws that it has been ignoring. Quite simply stated, the OAITA believes that the existing laws prohibit affiliated business arrangements ("AfBA") in Ohio, but the ODI has been lax in its enforcement and it has allowed many sham operations to become licensed and receive a share of title insurance premiums through a split of "profits."

In a press release, the OAITA stated:

The suit is the first of its kind in the United States and is an important step towards reducing the overreaching power and influence a bank, realtor and mortgage broker has over a homeowner’s real estate transaction and, in particular, a homeowner’s statutorily protected choice of title insurance provider.

This is a novel suit and brilliant in its simplicity. There have been laws on the books for a long time prohibiting banks, Realtors and mortgage brokers from engaging in the title insurance business. But, powerful lobby groups have been trying to find creative ways around them for years. The Department of Housing and Urban Development ("HUD") carved out exceptions to the Real Estate Settlement Procedures Act ("RESPA") to allow for AfBA's, effectively eviscerating the anti-kickback provisions of Section 8. Everyone seems to have forgotten about the state laws... until now. The OAITA has put this issue center-stage in Ohio and I'm sure it will draw national interest, especially from the lobby groups that have been successful in obtaining a share of the title revenue for doing nothing more than directing their customers to purchase their title insurance from an affiliated title agency.

Since the mid-1970's, Section 8 of RESPA was the main provision that prevented affiliated business arrangements, along with a host of other kickback schemes in the title industry. The main provision states:

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

This is pretty clear. However, there is some fee-sharing that happens by necessity. Thus, the statue clarifies that it is acceptable for an underwriter and its agent to split the premium, real estate brokers and their Realtors to split the sales commissions, to pay salaries and compensation to those who actually perform services, etc. In 1983, another major exception was created for controlled business arrangements (in 1996, "affiliated business arrangements" was substituted in place of "controlled business arrangements").

Nothing in this section shall be construed as prohibiting... affiliated business arrangements so long as (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred..., (B) such person is not required to use any particular provider of settlement services, and (C) the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest...

Well... that certainly seemed to be the end of the prohibition on kickbacks. Now, there is a very elaborate, legally sanctioned loophole that allows banks, Realtors, and mortgage brokers to insist on getting a piece of the title insurance action. To HUD's credit, it did require these new ventures to be bona fide settlement service providers; they set forth a list of 10 factors that they would look at to determine if the AfBA was a sham. However, due to the vague nature of the "factors," and HUD's lack of ability to enforce them, they aren't really worth mentioning further.

But, there was another change in the 1983 amendments that nobody seemed to notice... or conveniently ignored.

No provision of State law or regulation that imposes more stringent limitations on affiliated business arrangements shall be construed as being inconsistent with this section.

It seems rather clear that that the statute was not intended to preempt state law when the state afforded more protections to consumers than did RESPA. Thus, contrary to the belief of many proponents of AfBA's, the analysis does not end with the federal statute; the state law must also allow for AfBA's. The OAITA makes a very strong case that Ohio law does not. Ohio's laws provide more stringent limitations, but the ODI has not enforced them.

§ 3953.25. Payment of commissions to agents
A title insurance company may pay a commission only to a title insurance agent...

§ 3953.21. Annual certification of agents
...
(B) No bank, trust company, bank and trust company, or other lending institution, mortgage service, brokerage, mortgage guaranty company, escrow company, real estate company or any subsidiaries thereof or any individuals so engaged shall be permitted to act as an agent for a title insurance company.

A title agency's profits are mainly derived from premiums earned by issuing title insurance. When a bank, Realtor or mortgage broker is the referring partner in an AfBA, they are receiving a share of the agency's profits - consisting of title insurance premiums. Ohio law prohibits these entities from being agents for a title insurance company, thus it prohibits them from sharing in the premiums.

§ 3953.26. Payment to induce title insurance business; prohibition
No title insurance company and no title insurance agent shall pay or give [to] any applicant for insurance, or to any person, firm, or corporation who is acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee, or of the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission or any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business. Nothing in this section shall preclude the payment by a title insurance company of a commission to any attorney, if said attorney is also a licensed title insurance agent of such title insurance company, or the payment by such title insurance company or its agent of a fee to an attorney for services rendered in the examination of title or certification thereof.

Again, this seems pretty clear to me. When one of the aforementioned parties, who is prohibited from acting as a title insurance agent, is the referring partner in an AfBA they are clearly receiving part of the agent's commission from title insurance premiums and other fees. Though this is done indirectly through a share of the profits, it is still prohibited by the statute. And, why are these referring partners getting a share of the profits? Is it merely because they happen to own an interest in the AfBA? I'm sure that is what the AfBA proponents would have us all believe. However, we all know that they are brought in specifically because of their ability to refer work to the AfBA. In practice, that is exactly what happens nearly all of the time - the work from that referrer is locked up by the AfBA and no longer available through competition in the marketplace.

They may provide the necessary disclosures to comply with RESPA, though from my experience even this is rare, but under Ohio law disclosures are irrelevant. Ohio law, though similar to RESPA, does not contain the exception for AfBA's. Thus, Ohio law provides more stringent laws and are not preempted by the federal statute.

The ODI recently released an administrative ruling, OAC 3901-7-07 to establish ownership and licensing standards for title insurance agents and agencies in accordance with § 3953.21(B), which prohibits certain persons from acting as agents for a title insurance company.

No business entity may be licensed as a title insurance agency where one or more prohibited persons control the business entity.

However, they defined "control" as directly or indirectly owning or controlling 50% or more of the AfBA. There is no control test in the Ohio law - rather the Ohio law focuses on whether the prohibited parties, i.e. banks, Realtors, and mortgage brokers, are getting a part of the agent's premium and fees. If they are, they are not permitted to act as title insurance agents, and they may not be licensed by the DOI. The DOI's interpretation of the law exceeds its authority.

OAC 3901-7-07 further states:

A business entity may not become licensed or remain licensed where the entity is merely a sham arrangement used as a conduit for inducements or compensation for business payments...

They go on to adopt the same "sham-test" established in RESPA, which not even HUD is capable of enforcing. The DOI does no better. Though its own ruling indicates that an existing sham AfBA will have its license revoked, it is not actively pursuing them.

While the DOI is attempting to promulgate rules that are more consistent with RESPA, allowing for AfBA's to operate legally, there is a crucial difference - the changes to RESPA were enacted by Congress; they changed the federal statutes. The Ohio legislature has not made any such changes and AfBA's are not legal under Ohio law.

This lawsuit is a bold move by the OAITA. The theory is very simple - Ohio law on this issue has not changed since it was adopted in 1967, long before RESPA was adopted at the federal level. It provides more protections than does RESPA and, therefore, is not preempted. The DOI is ignoring the Ohio statutes and promulgating rules inconsistent with the letter of the law. Further, the DOI is refusing to enforce the laws as they apply to AfBA's and continuing to allow prohibited entities to engage in the title insurance business. Thus, the OAITA lawsuit seeks to have the Ohio Supreme Court order the DOI to properly construe and enforce the laws as they currently exist.

If successful, the DOI would be forced to cancel all of the AfBA's it has licensed and prevent them from licensing new AfBA's. This will surely attract attention nationwide. The National Association of Realtors, the Mortgage Banker's Association, and RESPRO will most certainly be getting involved to attempt to salvage what they have been fighting for on the federal level for years - their members' ability to obtain a lucrative piece of the title insurance business, that they contribute to by directing their clients' settlement services.

The traditional land title agencies must be furious! For a long time, they have been able to play in the middle of the road. Now that a big truck is coming, they will have to run to one side or the other. This is probably one of the biggest issues ever taken to court in our industry - how will they be able to sit this one out? They have a tough decision ahead. One one hand, they have to contend with their largest supporters, the underwriters who have quietly supported AfBA's, and their large agency members that have been setting up AfBA's. On the other, they have many independent agents that despise what AfBA's have done to our industry. Of all the amicus briefs that will undoubtedly be filed, it is those from the land title associations that I am most eager to see.

Robert A. Franco
SOURCE OF TITLE

How A County Turned Four Dollars Into Hundreds

rfranco@sourceoftitle.com — Thu, 25 Sep 2008 12:09:20 EST

We recently did a title search for a client and it revealed a state tax lien that held things up for weeks. The lien was not released, but the client insisted that they spoke with a state official who assured them that they sent a release of the lien to the county. We checked again - still no release of record. The client, again, spoke with the state office that filed the lien and was told that it was released. This time we scoured the courthouse. We asked everyone that could have possibly seen it. Finally, we found it... but it was not recorded.

This was our third trip to investigate this lien. When we finally tracked it down, we were told that it had been received some time ago, but it did not come with the $4.00 required to record it. Apparently nobody at the county wanted to call the state and tell them that they would not record its release without the $4.00 release fee. And, nobody thought they had the authority to record it without the fee. So, it just sat on someone's desk waiting for $4.00.

My examiner reported this to the client. I was half-amused and half-irritated. That sounded like something only a government employee would do. I asked my examiner why she didn't just pay the $4.00 and get it recorded. She said that when she called the client to inform them of the situation they didn't ask her to do that. Fair enough... it wasn't really our responsibility, but it was only $4.00 and it had been held up long enough. Sometimes, it is just cheaper, easier and faster to take care of these issues ourselves.

About a week later, I got a call from the client about this lien and she very politely asked if we could advance the $4.00 and bill them. Of course, I was more than willing to do that, but I chuckled a bit. I remarked that this had cost us, the client, the state, and the county far more than $4.00 to resolve this problem. If you just add up the time everyone involved in this transaction wasted, and multiply that by everyone's hourly wage, this $4.00 quickly became hundreds of dollars in costs.

The time it took:

for us to look for a lien that was sitting on someone's desk
for us to discuss the problem with the county clerk
for us to explain it to the client
for the client to listen to our explanation
for the client to figure out how to handle the situation
for the client to talk to the state official
for the state official to review the file
for the state official to explain to the client they had sent the release to the county
for the county to figure out what to do with a lien they couldn't record
for the county to explain to us why they didn't record the release

My point is that some problems just aren't worth the hassle. We got caught up in a bureaucratic SNAFU over a measly $4.00. Because the county wouldn't record this release, we wasted a considerable amount of time searching for it, only to find that it was sitting on someone's desk waiting for $4.00. I suppose we could have billed our client for our additional time, but it wasn't really their fault either. They also wasted considerable time over this issue.

If only our government could reduce this kind of waste, we would all be amazed by how much money could be saved. I understand that the county has its procedures and if they are going to reject a document because of insufficient fees, shouldn't they notify someone? That just seems like common courtesy. It could have saved everyone much more than the $4.00 at issue here.

Robert A. Franco
SOURCE OF TITLE

How "my side" blew it on GSE reform

Slade Smith — Thu, 18 Sep 2008 23:23:53 EST

In my previous entry, I focused on the flawed GSE reform bill which passed the House in 2005.

As it turns out, there was a much stronger bill coming out of the Senate Banking Committee at about the same time. That bill, authored by Chuck Hagel (R-Nebraska), would have addressed many of the problems which eventually contributed to the downfall of Fannie Mae and Freddie Mac.

The main feature of the Hagel bill was the establishment of a "world class regulator" to oversee the GSEs. The regulator was to be given powers similar to the regulators of banks and other key financial institutions:

The bill gave the regulator full power to limit the size of their own investment portfolios at the sole discretion of the regulator in order to ensure the soundness of the GSE
The regulator could also prohibit any assets unrelated to the mission of the GSEs from their portfolios, again at the sole discretion of the regulator
The regulator was given authority to limit what kind of business the GSEs could undertake.
Finally, the regulator was given full authority to take over a failing GSE.

Sounds good to me; the situation cried out for a strong regulator. The GSEs had been recklessly abusing the borrowing power afforded to them by their government charter-- accumulating huge, debt-financed investment portfolios and engaging in sophisticated hedging strategies to manipulate earnings which had nothing to do with their mission of ensuring the availability of mortgages. But while the bill passed in committe, it was on a strict party line vote, getting no votes from Democrats, which virtually assured that the bill would not become law.

One Democratic objection to the bill was the portfolio caps:

In opposing portfolio caps, Democrats expressed concern that such restrictions would harm Fannie and Freddie's ability to ensure the mortgage market liquidity needed to foster affordable housing.

"There seems to be an expectation on the part of some that if Fannie and Freddie stop holding the assets in their portfolios, that the rest of the market will somehow instantaneously fill the void and that prices will not be affected," said Sen. Jon Corzine (D-New Jersey). "I do not believe that is a reasonable expectation."

In other words, Corzine was worried that Fannie and Freddie wouldn't be able to buy as many mortgages if the Hagel bill became law; they would only be able to buy as many mortgages as they could package up as securities and sell. Dems like Corzine may have calculated that many investors who wanted exposure to the American residential real estate market, especially international investors in Fannie Mae and Freddie Mac bonds, would not be interested in direct purchases of Fannie and Freddie Mortgage-Backed Securities (MBS) instead of the GSE bonds.

But there was a flaw in this reasoning. The real reason why international investors found Fannie and Freddie debt attractive was the implied government guarantee of the debt, not the quality of Fannie and Freddie's investment portfolios or the soundness of their businesses. There was good reason why a prudent investor wouldn't have wanted those securities which were in the portfolios of the GSEs-- they were chock full of mortgages which should have never been made. If the GSE's had been required to sell all those extra MBSs, they likely would have had to reach out to a more discerning class of investor. Those MBSs likely would have commanded a lower price or simply have been rejected out of hand due to the quality of the underlying assets. In either case, the end result probably would have been that Fannie and Freddie would have had to scale back their purchase of mortgages, but those that they would have purchased would have been of a higher average quality.

In retrospect, that would have been much better for everybody involved. If it mean that mortgage originators had to make fewer mortgages, that would have been okay, because nobody was served by the last marginal 10% of mortgages made during the housing bubble anyway -- not the homebuyer, who found him/herself underwater on their mortgage and unable to pay the payments a few years later, and certainly not Freddie and Fannie, who found themselves crushed under the size of their portfolios, losing billions once the MBS assets began to lose value.

Democrats wanted to promote homeownership, but were trapped in linear thinking. The way to promote home ownership at that moment was not to maximize the number of mortgages that Fannie and Freddie could buy, but rather to ensure the soundness of Freddie and Fannie so that they could weather a downturn in the housing market and live on to fulfill their mission.

Senator Hagel responded to the concerns of the Democrats:

S. 190 co-sponsor Sen. Chuck Hagel (R-Nebraska) countered that the GSEs' portfolios are profitable for Fannie Mae and Freddie Mac shareholders, but do little to advance their housing mission.
"Fannie and Freddie are public companies with shareholders, and their boards have a fiduciary responsibility to those shareholders. But Congress did not create GSEs to enrich share-holders and executives," said Hagel. "They were created to provide stability and capital in the secondary housing finance market."

Hagel is to be particularly commended for bringing up the issue of stability. Stability is seldom compatible with "maxing out". The GSEs were maxing out on the number of mortgages they were purchasing (by lowering their standards), keeping an increasing amount of them in their own portfolios, and financing this by floating increasing amounts of debt at artificially low interest rates to people and institutions who really didn't care what kind of crap they had on their balance sheet because this debt was essentially insured by the American Taxpayer. This was sustainable only so long as home prices went up, because the balance sheets would fall apart like a $100 sofa otherwise. There was nothing stable about any of it. It was like building a beachfront house out of heavy cardboard and hoping the hurricane never comes.

I have generally supported Democrats for all of my life, for a variety of reasons. If they would like to enjoy that continued support, however, they had better have a little better foresight on important issues than they showed on the issue of GSE regulation. They blew it on this one.

Mike's Email

rfranco@sourceoftitle.com — Wed, 17 Sep 2008 14:10:16 EST

I wrote recently about Mike Pryor, the president-elect of ALTA. (See I like Mike). Mike is a traditional title guy that really understands the importance of providing a quality product and service to our customers. He wants to communicate with title agents and he wants to include more than just current ALTA members. To that end, he has established a Website, www.MikePryor.net, and he plans to send out a periodic email chronicling his experiences as the president of ALTA and to share his thoughts along the way.

Mikes first email was sent out September 15, 2008 and there is a lot there that I'm sure we would all agree with. His perspective on the difference between insurability and marketability is evident in the way he views short searches. Sure short searches may be acceptable to our underwriters, but is it really in the best interest of our customers?

Oh, I know, we can argue all day about how good is good enough, but unfortunately, we as an industry, have spent too much time arguing about how good a search should be before issuing a title policy when we SHOULD be discussing how good a search is necessary to satisfy our duty to our customers.

That’s where most people have lost focus.

Sure, we have insuring decisions to make……and yes, an underwriter may permit a “short search’, but most of MY customers do not want insurance….. they want peace of mind.

They want to know not just that they have a financial coverage, but that the home of their dreams will always be theirs. They want know that I have done a thorough job and informed them of anything that might interfere with the peaceful enjoyment of their home. They don’t want to be named in a lawsuit….even if someone else is picking up the cost of defense. They want to know their trust in me to properly search the property ON THEIR BEHALF was not misplaced.

They do not come to me for insurance……they come for my personal assurance that their transaction is as trouble free as it can be.

Mike's message is refreshing to hear. All too often this industry seems to focus on the minimum requirements, but that is surely nothing to aspire to. We should all strive to provide our clients with the "peace of mind" of which Mike speaks. These days, that is what separates the good agents from the not-so-good.

The underwriters have set the bar pretty low, but we can all manage to do better than that, and we should. The premiums and fees have not gone down (at least not around here), so why should they be getting less service than they once had from every title agent? Just because we can get away with doing less is no excuse to stop giving our full attention to clear title.

I'm looking forward to Mike's future emails. I have spoken to Mike and I believe that he can relate to independent title agents. He sincerely wants to reach out to more of them while he is serving ALTA and I think he found a great way to do it.

You can sign up for Mike's periodic emails at www.MikePryor.net. I encourage you to do so; keep an open mind and listen to what Mike has to say. I think you will enjoy his commentary and it might even remind you that traditional title people can still exist in this industry.

Robert A. Franco
SOURCE OF TITLE

Growing Pains: More on the OAITA

rfranco@sourceoftitle.com — Tue, 16 Sep 2008 13:04:57 EST

The organizational discussions at the inaugural meeting of the Ohio Association of Independent Title Agents ("OAITA") reminded me of the early days of the National Association of Land Title Examiners and Abstractors ("NALTEA"). Some of the most emotional debates in 2004 were over who should be allowed to join. The main issue for NALTEA was whether to include employee abstractors, or just independent abstractors, and whether the vendor management companies, title agencies and underwriters that employ abstractors should be allowed to become members.

For the OAITA, the membership issue focused around whether to allow independent abstractors - partly because I opened the "can-of-worms." Prior to attending, I had been asked if abstractors could join. So, I posed the question at the meeting. All I can say at this time, is that the issue remains unresolved. That isn't a bad thing - it is just evidence that the OAITA still has some growing pains to work through.

There were two distinct factions among those involved in the formation of NALTEA. One group was adamant that NALTEA should only represent the independent abstractors and that allowing non-independent abstractors to join would possibly allow the association to be "hi-jacked" by big companies that were their clients. Others, including myself, believed that anyone who shared the goals of the association should be allowed to join and show their support. The fear of being "hi-jacked" could be handled by creating classes of non-voting members and limiting which type of members could serve on the board or hold officer positions. The latter is the position that was ultimately adopted by NALTEA.

Not surprisingly, those in attendance at the OAITA meeting were very supportive of the goals of the association to "promote the general welfare of the independent title agents." The only topic that was really debated was the scope of membership.

There were three main objections to allowing abstractors to join the OAITA. As a long-time advocate of abstractors, I'd like to address those issues. But, first, I think it would be fitting to examine the bylaws of the OAITA.

Article Two lists among the objects and purposes of the Association, "to promote the goals of independence in the abstract and title insurance industry." Furthermore, the single class of membership includes anyone "...who is legally qualified to engage in the business of land title evidencing or insuring as an abstractor, who is not affiliated with a bank, mortgage broker, builder or real estate company..." Arguably, the bylaws are already structured to allow independent abstractors to join. However, the membership application only indicates options for Independent Agencies, Independent Title Agents, and Employees of Agencies.

Membership is prohibited by underwriters and anyone affiliated with another service provider; presumably, affiliated would mean a common-ownership interest. Underwriters are "expressly prohibited from gaining membership," or advertising, sponsoring, or otherwise supporting the efforts of the association.

So, what were the three objections raised to including abstractors in the OAITA?

First: Abstractors would likely use their membership merely as a marketing tool.

This concern definitely has merit. I don't think there is much doubt that are abstractors who would gladly join to expand their marketing efforts and networking contacts. Nobody joins a professional organization to be solicited - that can be an annoying side-effect. In fact, that was one of my gripes with ALTA. After becoming a member I was constantly deluged with solicitations to attend events I couldn't afford, buy training and marketing materials, purchase E&O insurance through TIAC, etc. Because ALTA's lobbying efforts didn't seem to represent my interests, the only benefits I was getting from the association quickly became only those I was willing to pay extra for.

This becomes a balancing act - is it worth allowing abstractors to join the OAITA, and run the risk of having members inundated with solicitations, in order to increase membership and support for the goals of the association? If the OAITA decided not to allow abstractors to join on this basis, I would understand it - and I would still laud their efforts.

Second: Abstractors are still going to work for AfBAs, thus aid and abet the enemyy.

This argument, though mostly likely accurate, is not very convincing. AfBAs are everywhere. Many lenders and real estate offices have AfBAs, and, though they direct nearly all of their work to it, some orders escape their grasp. So would this argument mean that if a Realtor with Howard Hanna, for example, were to direct an order to an independent agent, instead of its AfBA, the independent agent should decline the order because it would be lining the pockets of an affiliated partner? Of course, not. In these lean times, we all take what work we can get - short of setting up an AfBA.

And, there are practical problems with this argument. Abstractors are not really "in the loop;" and, most of the time they don't even know if their client is an independent agency or an AfBA. Even if they did, it wouldn't likely make a difference. Why? Because abstractors operate on razor thin profit margins. Refusing to work for a client based on their involvement in an AfBA would be like saying "No thanks. I don't want to pay my electric bill this month."

Still, it doesn't mean that the abstractors wouldn't wholeheartedly support the goals of the OAITA. If abstractors understood that the AfBAs were the companies most likely to ask for price reductions, they would much prefer their work come from an independent agent. Because AfBAs start out with only half of the profit from the venture, they are the clients constantly trying eek more money out of every closing.

Third: Independent abstractors caused the AfBA epidemic.

I think I can understand where this idea comes from, but I must disagree. Certainly, it can be said that the availability of so many independent abstractors makes it easier for AfBAs to operate. But, this argument is flawed for two reasons. First, before I was a title agent, I was an independent abstractor - long before AfBAs came into existence around here. Most of my abstracting clients were, and I believe still are, independent agents.

Second, if there weren't independent abstractors, the title partner in an AfBA would have staff abstractors that would gladly provide title work to the AfBA. In fact, the largest AfBA title partner in my home county does the majority of the title work for its AfBAs with staff abstractors.

Independent abstractors are just another tool utilized by both independent agents and AfBAs. I don't think the availability of independent abstractor spurred the decisions of many affiliated partners to set up AfBAs - they would have found a way, regardless.

Despite these concerns, not everyone was completely opposed to the idea of allowing independent abstractors to join the OIATA. In fact, there was some discussion about the importance of independent abstractors and good, reliable title work. One attendee stated that it is hard to find title abstractors in some parts of the state and that he was forced to rely on underwriter-owned abstracting companies. The drawback to these "abstract-factories" is that you never know whether the search was done according to local title standards, or sent to a thin-title plant in India.

NOTE: At this point, I wanted to let everyone know about the Source of Title directory, which lists thousands of independent abstractors nation-wide. But, I wasn't invited to shamelessly plug Source of Title.

This discussion proves that the OAITA and independent abstractors share some common ground. Independent abstractors, and NALTEA, very much support the use of local abstractors and title searches conducted according to marketable title standards.

In my opinion, the OAITA should create an "associate membership" category, not just for abstractors but for anyone interested in supporting the objectives of the association. This could encompass abstractors, surveyors, appraisers, and even many individuals and businesses that may be engaged in AfBAs because they felt it was the only way to keep their customers. That doesn't mean they need to have voting status or be able to influence the direction of the association, but what is the harm in allowing them to show their support and strengthen the numbers of the OAITA?

That being said, I would like to stress that this should not become an all-consuming issue of debate. It really doesn't matter; and, it should not detract the OAITA from their ultimate goal of representing independent agents.

It is, after all, an association of independent title agents. If those at the helm believe that they can best serve their members, and the industry, by maintaining a narrowly tailored membership base then they should proceed accordingly. I don't think it is meant as an insult to those excluded from membership. And, those not permitted to actively participate can still wish them well and quietly cheer them on from the sidelines.

Robert A. Franco
SOURCE OF TITLE

The Fannie And Freddie Bailout Is Good For Everyone, Except... Well... Everyone

rfranco@sourceoftitle.com — Mon, 15 Sep 2008 10:50:26 EST

If we try to imagine who benefits by the Fannie and Freddie bailout by the Federal Government we could include Wall Street Investors, homeowners, mortgage lenders, foreign investors, politicians, etc. In the few short days since Sunday's announcement we have seen Wall Street soar, mortgage rates tumble, and politicians seizing the opportunity to curry political favor with voters. The only people who seem to lose, and lose big, are the shareholders who have seen their investments in the GSEs wiped out. But, what about the taxpayers who just "volunteered" to guarantee more than $5 trillion worth of outstanding mortgages? This seems to be a "raw deal" for taxpayers - and doesn't that include just about everyone?

William F. Shugart, II, a senior fellow at The Independent Institute and a professor of economics at the University of Mississippi, wrote an article on August 18, well before the bailout was announced, prognosticating the affects of a failure of Fannie and Freddie. For me it put the massive scale of the bailout into perspective.

In a worst-case scenario, the two companies would be taken over by the federal government. Taxpayers would then be fully responsible for their combined $5.2 trillion in debt, instantly increasing the national debt by 50 percent.

Many have tried to predict the actual cost to the taxpayers, but the truth is nobody knows... yet. The best estimate I have seen is "roughly $200 billion," which appeared on The Atlanta Journal Constitution.

In the very near future, you and I as taxpayers will guarantee the principal and interest payments to the bondholders. You and I will stand behind what the New York Times referred to as “huge potential liabilities” that could cost the taxpayers “tens of billions of dollars.” How much could we be on the hook for? If we assume a 4 percent net loss on a loan portfolio of $5.2 trillion in Fannie and Freddie mortgages during the government’s watch, the taxpayers would conservatively be on the hook for roughly $200 billion.

Clearly something had to be done, and perhaps this take-over by the government was the best of a set of bad options. But, this bailout doesn't fix the problem - it merely allows it to grow larger and cost the taxpayers more... and more... and more.

The government created the "twin monsters" to create liquidity in the mortgage market - that seems to have come to mean "make lots and lots of cheap money available so that people who really couldn't afford homes could buy one anyway." And, wow... did that ever work! In 1940 the homeownership rate was 43.6% - it peaked in 2004 at 69.2%! The homeownership rate for married couples in 2007 was 83.8%.

The real question here is why was the homeownership rate so much lower in the early 1900's and what really spurred the growth? I don't think it was a lack of available funds to lend - rather it was the perceived risk of lending. Before the secondary mortgage market was created - lenders were more frugal. They actually required that someone be able to repay a loan before they could qualify for a mortgage. I know... just ridiculous, right?

Banks used to loan other people's money that was held on deposit. They charged a little bit more to lend, than they paid to deposit. That is how the bank made a profit. It also created risk - if a borrower defaulted, the bank still owed the depositor. Risk is an important factor that can not be over-emphasized. The risk factor was responsible for sensible lending guidelines. The banks wanted to make sure that their borrowers had a job and could afford the monthly payments. And, they required a substantial down-payment so in the event of a default, they could foreclose and sell the property and not wind up with a huge loss.

That was just unacceptable to our legislators. Homeownership is the American dream, it became a right - not a privilege. People should not be denied their right to own a home simply because some "banker" didn't think he could repay the loan. So.... we had to create "liquidity" in the mortgage market to make more money available, right. Well... not so fast. They didn't create more money, they eliminated the risk.

Finally, the bankers could say "yes" to anyone who could manage to find their way to a local branch - "No credit, no job, no problem!" The secondary mortgage market allowed the bank to make risky loans and sell them to Fannie and Freddie. The bank didn't get the interest differential anymore, but they got something better - origination fees! What a great deal for the banks. They were finally able to make more loans and get all of their money upfront in "fees" instead of "interest." When they needed more money, they packaged up a bunch of loans and sold them so they could start over.

So, where did Fannie and Freddie get their money? They had shareholders, but most of it came from selling bonds. This was similar to the deposits that the banks had used previously. Other people gave their money to Fannie and Freddie at a fixed rate. They were happy to do so because the GSEs were created by the government as quasi-public entities and there was an "implicit" guarantee that gave people the warm and fuzzy feeling that if anything went wrong Uncle Sam would make sure they got paid. As it turns out, they were right.

By shifting the risk of default from the banks to the GSEs, homeownership soared - loans were approved left and right. But, it still wasn't high enough. So we created "interest-only" loans to fool even more people into believing they could buy a home. Still not enough... we invented the "liar's loan," so that anyone who could keep a straight face while applying would qualify. Fannie and Freddie kept right on buying and investors kept lining up to buy the bonds.

But it all came to head over the past few years. Some people actually had the nerve to question the Ponzi scheme and they wanted tighter controls on the GSEs. The GSEs spent millions of dollars on lobbying firms to convince our government that they needed to grow even larger.

That (the government take-over) is an especially painful development for the small lobbying firms and solo consultants who rely on Fannie and Freddie for a large chunk of their income.

A CQ MoneyLine analysis of lobbying records found 40 firms registered to represent the companies in the first half of 2008, and billed the companies a total of $2.7 million during that time. Eight of those firms relied on the contracts for more than a quarter of their overall lobbying revenue.

Between 2003 and 2007, Fannie and Freddie took on nearly $4 trillion in additional debt. The GSEs bought more, and bigger, loans. Meanwhile, housing prices began to decline and borrowers began to default in record numbers. Many of the lenders who were making subprime loans went belly-up and left Fannie and Freddie holding the bag. Over the past year, Fannie and Freddie lost about $15 billion. In the same period, Fannie's stock price went from a high of $68.60 to 73 cents! Freddie's stock went from a high of $65.88 to 49 cents!

So what did we learn from this disaster? That mortgage-backed securities are risky investments? No... of course, not. Apparently, we just learned to find even bigger suckers to scam... the American taxpayers!

According to The Atlanta Journal Constitution article:

Placing a guarantee behind a risk asset creates moral hazards. Why? Because the loan originators do not care if the mortgage holder keeps making their payments since they can sell the mortgage to Fannie and Freddie, who in turn will place a guarantee behind the mortgage. If you remove those financial pledges, banks and investors would treat mortgages as risk assets, not a source of guaranteed revenue.

Instead of propping up Fannie and Freddie with taxpayer funds and guarantees, both firms should be gradually removed from the system, an option which is still open to policy-makers. The free market can supply mortgage capital to people who have the necessary debt-to-income ratios and credit history. The current state of the mortgage and housing markets clearly illustrates the results of placing guarantees behind risk assets. Fannie and Freddie are part of the problem, not part of a solution.

Is abolishing Fannie and Freddie even possible at this point? Continuing this business model is irresponsible. We have a system that clearly doesn't work - it has proven to fail! If it had not been for an artificial boom in the housing market, which was in part created by this faulty system, and an endless supply of "implicitly" (now "explicitly") guaranteed funds, we would have realized this a long time ago. Just like a traditional Ponzi scheme, a system like this can only work as long as it continues to grow. As long as enough money is coming in to cover losses, nobody notices that it's all just a house of cards waiting for a slight breeze.

Some "free-market" organizations and libertarians certainly think privatization of the GSEs makes sense. The Heartland Institute is among them.

An alternative to the options of expanded government power is beginning to garner meaningful attention: privatization. Removing Fannie and Freddie's status as government-sponsored entities would relieve the taxpayers of the present "private profit, public risk" problem. It would force Fannie and Freddie to compete as equals in the secondary mortgage market, rather than as anointed duopolists. It would eliminate the special regulator that oversees the two firms, leaving them open to the market's guidance and justice. Most importantly, it would eliminate the incentive for reckless lending at the two firms, as they would bear the full burden of their decisions going forward.

Gerald P. O'Driscoll, Jr., a senior fellow at the Cato Institute and a former vice president and economic adviser at the Federal Reserve Bank of Dallas, suggested privatization in a Wall Street Journal op-ed.

Whatever the outlines of what will inevitably be a hastily crafted bailout plan, the result must be true privatization. That means no more government lifeline: no Treasury line of credit, no Fed line of credit.

If the government takes an equity stake in the companies as part of a bailout plan, there needs to be a time line to end government ownership. Freddie and Fannie must cease to be "special," and become quite ordinary.

Libertarian candidate, Bob Barr, calls this the "bailout from hell." He also advocates the eventual privitization of Fannie and Freddie.

In the short-term, government has little choice but to provide an explicit but limited loan guarantee, thereby capping the public’s liability, now widely assumed to be without limit. At the same time, Congress must restrict the number and size of loans by Fannie Mae and Freddie Mac and set more substantial capital requirements, while authorizing greater Federal Reserve oversight of their operations. The organizations must begin downsizing their portfolios, reducing their risks, and reestablishing their financial credibility.

However, the ultimate objective must be full privatization—with both organizations turned into private companies, responsible for their loan portfolios, and without access to government guarantees or other forms of support. Government should not be in the business of creating multi-billion dollar enterprises to manipulate markets for the benefit of one group or another—in this case, in order to shave the interest rates for selected home buyers by a quarter or half percent.

The idea of privatization is even being touted by the McCain campaign.

Republican presidential candidate John McCain wants mortgage finance companies Fannie Mae and Freddie Mac to eventually be privatized, his chief economic adviser said on Sunday.

"In future the long-term reforms are to scale down Fannie and Freddie so their size is no longer a threat. And then privatize them. Get them off the taxpayer's books entirely," McCain's chief economic adviser, Douglas Holtz-Eakin, told Reuters.

This take-over by the government is only a sound decision if it is the first step toward privatization. But, I doubt that is the course we are on. Henry Paulson, the Secretary of the U.S. Treasury, has been trying for some time to gain more control over the GSE's. He is power-hungry; and, now that he finally has it, he isn't going to be eager to give it up.

Fannie and Freddie bonds have always had that "implicit" guarantee, so I do believe that the government had to do something. But, perhaps it should have sold off Fannie and Freddie assets and liabilities to the private sector with a guarantee to the bond-holders. The government must protect the bond-holders to prevent a global catastrophe. Unfortunately, pumping more money into Fannie and Freddie, with an explicit guarantee to new bond-holders, is only going to make this a bigger problem that we will have to deal with later.

After the take-over, mortgage rates fell by about half a percent. Why? Because you and I, and everyone else in the country, are now co-signing every mortgage. This move does nothing to "stabilize" the market - it only allows business to continue as usual - with no risk to investors. Unfortunately, that risk is an integral part of a truly stable mortgage market. Without it, sensible underwriting guidelines are secondary to churning fee-generating mortgages.

The take-over is good for the financial sector who can continue to sell mortgages without fear and generate fees. That is a boon to the stock market. Investors who buy mortgage-backed securities can continue to throw money into risky investments with no consequences for "bad mortgages." Homeowners can continue to borrow money at low(er) rates. And, our politicians can continue to propose new legislation to ease the burden on struggling borrowers in an election year. You see... this is good for everyone... except taxpayers - and that is just about everyone.

Robert A. Franco
SOURCE OF TITLE

David vs. Goliath: Taking On Affiliated Business Arrangements

rfranco@sourceoftitle.com — Fri, 12 Sep 2008 12:11:31 EST

I recently attended the inaugural meeting of the Ohio Association of Independent Title Agents ("OAITA") and the seminar on Affiliated Business Arrangements ("AfBA") that followed. The meeting was one of the most novel and informative gatherings I have been to. A good portion of the time was spent laying the foundation for the association - reviewing the bylaws, discussing membership issues, making committee assignments, etc. The remainder was devoted to the goals of the association. Though there is more to his group than just taking on AfBAs, that was the focal point of the meeting.

What exactly does "taking on the AfBAs" mean? It means going head-to-head with the department of insurance and the organizations that lobby for rules that allow AfBAs to flourish. Theses guys are talking about taking on the National Association of Realtors ("NAR"), the Real Estate Services Providers Council ("RESPRO"), the Ohio Banker's Association, the National Association of Mortgage Brokers, and to some degree even our other land title associations and the "Big Five" underwriters.

This is an Ohio association. However, it appears that the group already has interest from agents in other states and a national movement is afoot. No matter what state you are in, you have probably seen the effects of AfBAs - you should be paying attention to the OAITA.

So, what is wrong with AfBAs anyway? Most of the opponents agree that there is an inherent conflict of interest. For example, when a lender "owns" an interest in the title company that is issuing its loan policies, some would argue that pressure from the lender to get the transaction closed may influence underwriting practices. (Un-) Fortunately, I can give you a specific example from my own experiences.

The title company was in Texas and the property, of course, was in Ohio. Title was vested in Jane Doe, as to one-half interest, and her husband's estate, as to the other half. There was no probate case filed. All of this was perfectly indicated on our search. Yet, when we received the filing, Jane Doe had signed the mortgage and on her late husband's signature line they simply typed in "deceased."

I called the lender from whom we picked up the mortgage. I explained to them that their mortgage only covered a one-half interest. After a long period on hold, the manager told me that they didn't care because the title company was insuring the mortgage, and, if there was a loss it was their problem, not the lender's

This particular lender owned the title company in this case. We refused to file the mortgage and we returned it to the title company. However, they mailed it in to the county recorder and got it on record anyway.

When this happened, I remember specifically thinking that if I tried something like that, my underwriters would cancel me before the ink dried on the policy. Yet, somehow this title company remained in business; of course, we never worked with them again.

"Probate!? That could take months - just issue a policy so we can close."

Some would argue, as one person did at the meeting this week, that ALL title agents want to close loans for their customers. After all, we don't get paid if the deal doesn't close, right? Well, that may be true, but most independent agents have lines that they won't cross. I think there is substantially more pressure with AfBAs. Independent agents have other clients and their license is more important than any one of them. However, AfBAs, for the most part, don't have other clients... if the referring partner pulls out, the AfBA closes.

The OAITA also discussed a new rule recently proposed by the Ohio Department of Insurance ("ODI"), 3901-7-06, Inducements to Title Insurance. The stated purpose of the rule is "to identify inducements and compensation arrangements which violate section 3953.26 of the Ohio Revised Code," which prohibits payments to induce title insurance business.

Of course, the problem with this rule is that it really only affects independent agents because AfBAs don't have to do any marketing... they have a "partner" that is going to send them business for a "percentage of the profits." Attorney Rob Holman, who is quickly becoming one of my favorite bloggers, explained this rather well on the OAITA Blog.

As for the land title associations, I'm not optimistic that they would push the Ohio Department of Insurance for strict enforcement of anti-kickback rules, either. How do I know? Take the new proposed rule 3901-7-06 for example. Can the ODI or the land title association actually say with a straight face that this rule actually helps to manage the epidemic problem of kickbacks and referral schemes in Ohio? If so, I want my money back. No, really. I'm serious. I want it back.

First off, the only thing the new inducements rule does is target independent title insurance agents. Why? Because affiliated business arrangements don't have marketing departments. They don't function in a competitive environment. The only ones who will be affected by the new rule are independent title agents. Wake me up when they nab an AfBA who bought a PSL at Cleveland Browns Stadium for a realtor. I think my sleep is safe. It isn't going to happen. Why would it? AfBAs have already locked that realtor into a "do-nothing, make money for same" business plan. All with the support and confidence of the land title associations, underwriters and ODI.

The regulators are constantly making it more difficult for independent agents to compete, while carving out "nice" exceptions for AfBAs. Of course, Ohio has rules that must be followed followed to make this "profit sharing" legal. These rules are really only "factors" that may be considered to determine whether a controlled business arrangement is a sham, and they are very similar to HUD's guidelines.

(1) Does the new entity have sufficient initial capital and net worth, typical of the industry, to conduct the title insurance business for which it was created or is it undercapitalized to do the work it purports to provide?

(2) Is the new entity staffed with its own employees to perform the services it provides or does the new entity have “loaned” employees of one of the parents?

(3) Does the new entity manage its own business affairs or is the new entity being run by one of the parents?

(4) Does the new entity have a office for business which is separate from any of the parents? If the new entity is located at the same business address as one of the parents, does the new entity pay fair market value rent for the facilities actually furnished?

(5) Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which it receives a fee?

(6) Does the new entity perform all of the substantial services itself or does it contract out part of the work? If so, how much work is contracted out?

(7) If the new entity contracts out some of its essential functions does it contract services from an independent third party or from a parent or affiliate of a parent? If the new entity contracts out work to a parent or to an affiliate of a parent, does the new entity provide any functions that are of value to the settlement process?

(8) If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for the services or facilities that bears a reasonable relationship to the value of the goods or services received?

(9) Is the new entity actively competing in the marketplace for business or does it provide services solely for one or more of the parents?

There are two major problems with these guidelines. First, none of the rules are determinative; they are only factors to weigh which may indicate that a particular AfBA is more like a shame than not. This is all rather subjective and would require substantial analysis on a case by case basis. Second, who is going to enforce the rules? There are several AfBAs in my part of the state and I don't think any of them could survive scrutiny under these factors. But that doesn't mean anything if nobody takes the time to investigate. Neither the ODI nor HUD are properly staffed to weed out all of the sham AfBAs.

But you really have to wonder how the ODI comes up with this stuff. You don't think they took it upon themselves to revise these rules, do you? Of course not. All of those organizations who are getting a "share of the profits" from the AfBAs are driving this train - with the help of the "Big Five" and the land title associations, of course.

Again, I refer you to the OAITA Blog.

Sure, rules get made, but it isn't the ODI that is solely responsible for the recent garbage that has trickled from Columbus. Nope, you can thank our title leaders for that. In fact, I recently received an e-mail from my land title association saying they (and the national underwriters they so adeptly represent) were "actively involved with the ODI in helping to draft the new rule."
. . .

I am told that meetings are currently being held between the ODI and the land title association to come up with the changes to the inducements rule. It is also my understanding that the NAR and RESPRO provided comments and changes to the inducements rule. To which I respond, WONDERFUL!

Can someone tell me why it is appropriate for the ODI to entertain comments from Realtors and a carpetbag group of AfBA nut-jobs like RESPRO when trying to "allegedly" curtail the use of kickbacks and illegal referral schemes in the title industry. Since when does the Devil have RSVP privileges at the ODI? I mean, seriously. We need Realtors to solve our inducement problem? You are joking, ODI, right? We know you didn't take advice on inducements from Realtors and RESPRO, right?

The NAR is quite possibly the most powerful lobby-force in the universe. The NAR's Political Action Committee had total receipts of over $11 million dollars and they have given over $2.2 million to federal candidates in the 2008 election cycle. What do you feed a 600 pound gorilla? Anything he wants! Seriously, if the NAR wanted free ice cream served at all real estate closings, we would all be out buying Good Humor trucks and investing what money we had left in Ben & Jerry's!

Add that to the other groups that could potentially benefit from these AfBA relationships (lenders, mortgage brokers, builders, etc.), and you can see what an impact it has on the industry.

Where is our lobby? I think most people have figured out by now that the "Big Five" pretty much run all of the land title associations. The national underwriters don't exactly have the same interest in this issue as the independent agents.

Think about it this way.... an independent agent gets whatever profits are left after he pays his expenses and 20% of the premiums to his underwriter. If that agent sets up an AfBA he only gets half of the profits, but the underwriter still gets its 20%. The underwriter isn't making any sacrifices. The underwriter is actually in a better position when its agents create AfBAs. The agent captures a larger market share by getting more of the affiliates' business, this means more total premiums for the underwriter.

The only reason an agent would consider an AfBA is to capture a larger portion of the affiliates' referrals - most of the time around here it is nearly all of the affiliates' business. In return the agent pays nearly half of its profits to the "affiliated partner." How is that really any different from "buying business?"

In my opinion, there is no practical difference between an AfBA "sharing profits" and an "illegal inducement." Except, of course... the powerful lobby groups have convinced our regulators that the former should be exempt from those inconvenient laws that the rest of us must abide by.

Finally, the independent agents have united to form their own association that isn't controlled by the underwriters, or influenced by the NAR and other beneficiaries of AfBAs. What is the OAITA doing for independent title agents?

We are actively involved in helping to shape policy regarding title insurance in Ohio. We are participating in private policy change by pursuing litigation to help reinforce existing Ohio law regarding title insurance. We are also participating in public policy change by contacting state and local representatives to gain their support for favorable initiatives relative to the independent title insurance movement in Ohio.

I guess you could call this the beginning of a revolution on behalf of independent title agents. It may have started here in Ohio, but the idea seems to be spreading quickly. The OAITA has announced that they are preparing to mobilize a national effort.

Since OAITA went "live" we have received many comments from other title insurance agents and real estate professionals outside of Ohio. The comments have ranged from "bravo!" to "when can we start one in (insert state name here)." Seizing upon this opportunity, we have held informal discussions with representatives from several states who believe, like we do, that it is time for independent title agents and independent real estate professionals to create a national independent organization and begin taking the policy fight to each of our respective states. So far, we've heard from representatives from AK, MN, CO, IN, PA, NJ, MD & DC. We hope that more folks (with equal issues at stake) will join the group.

A national meeting is planned for October 6, 2008. Keep an eye out for details; and, if you are an independent agent, you can email info@oaita.org or rholman@hfm-law.com for more information.

If the OAITA can pick up some momentum, they will surely meet strong resistance from the NAR, RESPRO, and the other organizations that have fought so hard to make AfBAs "legal." What will be really interesting, is to see what the land title associations will do; which side will they support? When they are soliciting members, they claim to represent "title agents." But when they are faced with an issue that divides their largest members and the independent agents, who will they choose to get behind? For the first time, the land title associations may be forced to declare a definitive position on AfBAs. I don't think they will be able to sit on the sidelines, or take a middle-of-the-road position this time - that would be as good as a slap in the face to the independent agents.

Next week, I'll post a follow-up to discuss some specific issues raised at the meeting. The formational discussions of the OAITA bylaws were interesting, as well. As a new association, I think there will be some growing pains. The meeting reminded me very much of the inaugural NALTEA meeting in 2004 where there were some heated debates over who should be allowed to join. But, in any association, these issues are secondary to achieving the primary goals and objectives of representing the interests of the membership.

Robert A. Franco
SOURCE OF TITLE