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By: Bryce M. Van De Moere
The collapse of the subprime mortgage market in 2008 created shock waves still felt today. Over-extended lenders such as Washington Mutual and Countrywide failed; larger financial institutions absorbed their loans and were tasked with trying to administer, process and enforce hastily executed loans poorly documented.
As the surviving financial institutions complete clearing out the remaining bundled loans, a trend has emerged where large institutions attempt to shift responsibility for collection of outstanding loans to other professionals in the real estate sales market. A target of big banks seeking to protect themselves from bad debt, uncollectible loans or defective security instruments has become the title insurers and the escrow holder. Historically, escrow has held the position of the third party in a real estate sales transaction that holds money while ownership, money and title transfer. The escrow holder is the fiduciary to the buyer and seller, tasked with following the buyer and sellers’ instructions in the sale of real property that ordinarily includes extinguishing existing loans in favor of buyer’s new mortgage. The title insurer protects the buyer and buyer’s lender to ensure the new mortgage is in priority to protect the lender’s security interest.
Where this issue has arisen is in the repayment of the mortgage after the sale of property, usually a home equity line of credit (HELOC) that was offered by the now-defunct lender. Much of this commercial paper was acquired in pools as opposed to individual transactions with a matching promissory note and deed of trust. New lenders change loan numbers from the old defunct lender’s account number to account numbers matching the system by the new owner of the paper. Other instances, the loan is marked as a secured but the original deed of trust is missing or no assignment of the security interest is recorded. A third situation occurs where there is an accounting issue when a seller claims to have made payments that are not credited on the account. Finally, in the waning days of Countrywide and Washington Mutual, people refinanced their loans but the paid deed of trust was not re-conveyed and included in the pool of notes and trust deeds transferred. Buyers and their lenders want free and clear title. Escrow can only rely on what the principle tells them the loan number on any HELOC is or if the old loan number is printed on the deed of trust pulled from the assessor’s office. If the loan number is the old number, a payoff demand may or may not pick up the correct loan account. Big lenders use clearing houses to issue reconveyances that may or may not record within the statutory 75 days required under California Civil Code 2941. A new buyer may receive a notice from its lender that has picked up an re-conveyed lien on the property that was to be free and clear. A title insurer wants to protect its insured so it will issue a release to clear title.
All the while big bank is putting the pieces of the puzzle together on the old account and realizes they have been underpaid. Civil Code 2943(d) offers a remedy, but it is often an empty remedy since the loan obligation is still enforceable, but only as an unsecured contract debt and their former borrower is long gone. What to do? Big Bank sues the escrow for preparing a faulty payoff statement and the title company for statutory violation of Civil Code 2941(b)(6), wrongful recording of the release.
Although existing case law holds the escrow holder’s duty is only to the depositors and not a third party outside of the escrow (Summit Financial v. Continental Lawyers Title, 27 Cal. 4th 705 (2007)); more and more trial courts are allowing bank’s claims against escrow companies to survive summary judgment forcing escrow companies to the exposure and risks of trial. Second, on statutory violations against title insurers, banks are using the remedy of subsection (b)(6) as a statutory indemnity, threatening title insurers with exposure to the remaining balance plus all accrued interests, costs, penalties and attorney fees.
Big institutional lenders are well positioned to force changes, legislatively and judicially in what was once thought of as solid law limiting insurers and professional clients’ liability. The next new horizon looks to be an assault on those limits of liability.
If you have any questions or would like more information, please contact Bryce Van De Moere at [email protected].