Opening Titles and Closing Remarks

Under a new Indiana law title companies will no longer be allowed to accept cashiers, corporate, or personal checks for their real estate closings after July 1, 2009. Mortgage lenders and many real estate buyers will need to wire transfer their funds to the title company or closing agent in most situations.

The law (House Bill 1374) requires that any party to a closing that must deposit more than $10,000 must wire transfer those funds into the closing agent's escrow account. Certified or cashier's checks or cash may accepted from any single party that needs to deposit less than $10,000. Corporate checks under $10,000 from Realtor's® trust accounts for earnest money will be acceptable in most situations.

I've been asked why such a law is necessary. One reason is that we live in a financial environment now where the previously unthinkable is happening all too often. Another reason is to ensure that funds from one closing are not used to cover checks written for another closing.

Title companies use the same bank account for many closings. If we accept a bad check--yes, lenders have gone out of business in the middle of our transactions--it may be a week or more before the bank knows and then notifies us.  The reversal of the deposit may not result in a shortage in our checking account until days or weeks later because we are constantly making deposits from other closings. When the float disappears and if we don't immediately make up the shortage, checks from completely unrelated transactions will bounce. When checks from a closing bounce, the resulting carnage is not pretty. The law helps to protect all parties to the real estate closing from the effects of this happening.

The fact that cashier's checks are no longer considered good enough has more to do with bank rules about collected funds rather than the risk that a cashier's check will be dishonored. When you deposit a check in a bank--even a cashier's check--the bank will not let you draw against that deposit until the bank considers that the check is collected funds (meaning that in the bank's opinion the likelihood of the check bouncing is remote). Wire transfers are generally considered collected immediately upon receipt. Some banks treat cashier's checks as collected funds the next day; other banks take longer. Personal and corporate checks may not be treated as collected for more than a week. If the collected funds balance in an account is not sufficient to cover all the checks presented for payment that day, the bank may withhold clearing those checks or may even bounce them. Every bank has some leeway in determining when funds can be considered collected. Characteristics of the check, the check maker and the bank that it is drawn on are part of the usual criteria.

Lenders who currently fund their loans with wire transfers should like the new law. Your competitors who insisted on providing corporate checks, drafts and forms of positive pay, held a competitive advantage over you. Their costs of funds were lower since they didn't have to actually let go of the loan proceeds until their check was presented for payment several days after the closing.

The essence of the new law is that title companies are no longer allowed to disburse closings until they are certain that the specific funds associated with that closing are collected. Everyone should feel more comfortable about that.

There are some practical and logistical implications of the new law, especially with daisy chain closings. I'll be posting about them in the coming week so check back.

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Yes, I've been a little absent lately with blog posts. Business is crazy busy and so is my non-business life. But I've restructured my time and will be posting again on a regular basis. Thanks to all my friends who've been asking where I was. Well, I'm back.

Tuesday I attend a presentation by representatives of Federal Home Loan Mortgage Corporation (Freddie) in which they discussed their new Relief Refi program. This is program is a big step in the right direction that will help the many families that are living responsibly within their means and making their mortgage payments.

I've posted here before lamenting the fact that many mortgage borrowers are prevented from taking advantage of the current low interest rates because they no longer qualify for the same loan someone made them two or three years ago. In the brave new world of tightened loan underwriting guidelines their credit scores are no longer good enough or their property value has declined to less than they owe on their mortgage.  The Relief Refi program will help in many of these situations.

The program is based upon the common sense principal that if people are making their payments at 6 ½ percent interest they probably will make them at 5 or 5 ½ percent interest as well. In most instances, the lender will not need to re-underwrite the loan. One of the few requirements of the program is that during the previous twelve months, the borrower must be current on all their mortgage payments.

The property value issue is addressed by Freddie's willingness to accept the loan up to 105% of the valuation indicated by their automated appraisal tool. Closing costs and pre-paids may be added on top of the loan up to $2500. Cash-out refinances are not part of this program and all subordinate liens must be re-subordinated.

The program is Freddie Mac's contribution to President Obama's Making Home Affordable plan announced a couple of weeks ago. It is for any loan that is owned by Freddie and is serviced (who the payments are made to) by the lender who sold it to Freddie. You can read the full press release here.

Federal National Mortgage Association (Fannie) also announced two programs of their own. One for existing lenders and one for lenders working to refinance loans made originally through another lender. George Suoto summarized their programs quite well here. Fannie's 18 page announcement can be found here.

Fannie and Freddie both require that eligible loans be closed on or before June 10, 2009 (see correction below) I encourage homeowners to contact their mortgage company to see if their loan qualifies.

By the way, Claire mentioned to me that you'll want to be at the front of this line. If these programs are as popular as we think they will be, the entire system is going to be swamped by the deadline. 

Because Freddie and Fannie are now essentially owned by the federal government, the Relief Refi program is in actuality the way for us average Joes to get a piece of the stimulus package. So be patriotic. Do your part to help the economy recover. Take advantage of the Relief Refi and then go out and spend your monthly savings. Seriously. We'll all benefit in the end. 

Correction March 14, 2009. I'm having one of those moments wondering what the heck I was looking at and I'm feeling kind of stupid. The sunset dates on these programs are June 10, 2010 - not 2009. I apologize for the misinformation. So I'm certain that there's enough time and capacity in the system to accommodate most borrowers. At least I can take comfort that anyone acting on my misinformation will only save money sooner, than later.

My post yesterday "I'm just asking . . ." elicited many thoughtful comments.  So many comments in fact, that I thought another post is the only way to do justice to the issues raised by my readers.

This new and largest yet mortgage refinance boom will help homeowners with a significant equity and great credit. People got that way because they are careful with their money and responsible with their obligations. Helping people of this character will certainly increase the odds that the economy benefits.

There are millions of homeowners, many of them young families and single parent households that are also careful with their money and responsible with their obligations. Unfortunately they live in any of a number of other places where housing values have declined and they now are upside down.  Most of these families cannot refinance and increase their disposable income; even though they are still responsibly meeting all their obligations.

I am not pleading on behalf of people who live beyond their means and must pay the price for that lifestyle choice. Nor am I advocating against the homeowners who can refinance now.

I'm just really bugged about the unfairness of it all. Responsible families, who would benefit the most and in turn benefit the economy most, are shut out. They're making their payments at higher rates; I'll think they'll make them at a lower rate as well. If taxpayers weren't spending half a trillion dollars to help someone anyone, I would not be particularly bothered by this. So is the government making the wrong choices? Helping the wrong people? I'm just asking.

Lenn Harley astutely noted "that negative equity is the elephant in the room." Could some of the taxpayer funded bailout be used for kind of credit insurance or incentive? Help responsible families? I'm just asking.

Readers mentioned streamlined FHA refinances. No appraisal needed. Regrettably, you need to already have an FHA mortgage. In the few years prior to the subprime collapse FHA's share of all mortgages made is under five percent. Almost all low down payment transactions used piggy back second mortgages or some PMI. Those transactions cannot be refinanced with an FHA loan unless an appraisal shows minimal equity in their property.

Do we help any of the other responsible borrowers without FHA mortgages? I'm just asking.

It's been widely reported that ten percent of borrowers are at least one month late making their mortgage payment. Do we help a portion of the other responsible 90 percent who might benefit from lower rates but can't? I'm just asking.

I'm just asking and you're just commenting. Thanks to Active|Rain for creating a place we can discuss this in such a thoughtful and civil manner!

Most everyone knows by now that there's a flood of refinancing going on. Refinancing is front page news in the mainstream media. The low rates are artificially induced by the government's intervention into the mortgage securities market. Many homeowners are going to benefit. A lot of the money saved will be spent. That's good for the economy.

I think the Washington policy wonks got it wrong. Big surprise there. The intervention is not helping many people who need and deserve help the most. This post is not to argue whether or not the government should intervene. That decision is made.

The people benefiting from this artificially induced largess are homeowners with exceptional credit and lots of equity. There are millions of homeowners out there, through no fault of their own, who no longer qualify for the mortgage someone made them two or three years ago. (Dan Green explained this quite well one year ago here.)

These families are making their payments. They are making difficult lifestyle choices in order to enjoy the benefits of homeownership. Maybe they're carrying too much debt now, but what young family trying to get started doesn't? A combination of their debt to income ratio and loan to value ratio and not their payment history is preventing them from refinancing. Preventing them from putting an extra few hundred bucks in their pocket every month.

These families are struggling but still getting by; still living up to the terms of legal contracts that they entered into with eyes wide open; still managing to pay Peter and Paul because they forego some of the other luxuries in life. Now if you could help these families, wouldn't that help move the country towards better economic times? I'm just asking.

I'm not smart enough to know exactly how to help these families, but if they're making their payments at six and one-half percent or more, I think they'll make them at five percent. Despite the fact that their equity may be low or non-existent and that their debt to income ratio is high. Instead we're shutting these people out because they don't meet the new lending guidelines arbitrary rules.

Someone needs to start asking how we can help families who make responsible life choices.

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I'll be back in a day or so with my continuing series on 2009 real estate closing title insurance changes that may impact you.