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EDITOR’S NOTE: As we turn the corner and enter a new inning in the “game” of securitization, the real issues are starting to erupt as the players get nasty with each other and not just with homeowners. As pointed out to me recently by a pro se litigant with experience in the real estate industry (Dan Earl), nobody can actually issue a warranty deed without incurring substantial exposure to liability and litigation. And anyone who who accepts such a deed does so at their peril — IF there was a loan anywhere in the chain of title that was or is subject to claims of securitization or sale into the secondary market.

In recognition of this monumental problem, Freddie Mac is experimenting with throwing the burden onto title agents, closing agents and even real estate brokers demanding that they execute affidavits attesting to facts that they probably don’t know anything about. The result is an uproar. Without the affidavit, the transaction doesn’t close. That means fees are not earned by these agents.  So Freddie is essentially blackmailing these people into covering tracks and continuing the policy of plausible deniability.

This ploy can’t work. Those who insure the agents won’t cover liability on the affidavits. In fact, the title policies already issued are not going to be honored if the question of title comes up and it relates to securitization of any loan in the chain of title. The title companies are going to claim that the lien was not perfected, the title representations were untrue and that they did not assume risks that were undisclosed — i.e., the same argument that is being made for homeowners as to whether the mortgage has been perfected as a lien.

Eventually, there does not seem to be any way out of this mess except the path of honesty and application of existing law. The result will force a recalibration of the value of the mortgages, the mortgage bonds and the interests of all concerned. But that is exactly what is required to stop the housing industry from continuing its free fall, dragging the rest of the economy down with it. The simple fact is that the essential details of the closing were not disclosed to the borrower or the title carrier. In fact, they were misrepresented. Whether you call it fraud or negligence, the result is that title is corrupted and needs to be corrected.

The question remains: who do you want to save — the country or the banks?

Agents hold on to your wallets as this could cost you big time!  This is just too big and important to let one blog article suffice.  And developments on this are occurring quickly.  The problem was pointed out in my re-blog Freddie Mac Short Sale Addendum – Item #13 – I DON’T THINK SO!!  on September 9, 2011.

On September 3rd there had been a telephone conference call between ALTA (American Land Title Association) staff in Washington, DC and Freddie Mac’s Short Sale team to specifically discuss the addendum reproduced in Freddie Mac Short Sale Addendum – Item #13 – I DON’T THINK SO!! .  No resolution was then reached and as of today, none has been presented.

According to the below emailed alert to certain ALTA members (including our title underwriter), the problem with the document goes much further than even reported in my earlier blog article.  ALTA points out that (1) the document requires closing and escrow agents to certify information that is not available to them; (2) the document places a negligent misrepresentation standard on the escrow / closing agent that requires the escrow / closing agent to use reasonable efforts to determine if the transaction is arm’s length – without setting forth what those reasonable efforts would or could be; and (3) the document requires that the document be signed by the escrow / closing agent individually, without corporate protection, meaning that if there is a loss because of fraud or misrepresentation by any party to the transaction, the agent could be fully and personally liable. SINCE REAL ESTATE AGENTS ALSO SIGN THIS DOCUMENT, THE SAME LIABILITY AND RISK AFFECTS THEM AS WELL.

I am checking with my E&O carrier to see if they will cover such a claim.  If they don’t, then I cannot risk my own capital and family wealth for the meager fees of a short sale closing, and I suspect anyone who actually realizes what this document does, also will not close such a sale.

For any of you that think this is negotiable, here is a response I got today when I told a Bank of America negotiator on a Freddie Mac loan that I can’t sign if the E&O won’t cover the claim. “Thank you for letting me know.  Without the document we cannot proceed with the short sale and must decline the file.  How long do you think it will take for your E & O carrier to make a decision as to allow you to sign the document?  I cannot have any outstanding files, so should I decline the file at this time or do you think this is something that can be checked on quickly?

Fraud is a big problem with some markets of distressed property and I have written about it in several articles – often times with flipsters phoo phooing the concept as being fraud: SHORT SALE FLIP – QUESTIONABLE METHODSShort Sales and Title Insurance – Critical Look at Hybrid Closing SchemesIS SHORT SALE FLIPPING CRIMINAL ACTIVITY?.

ALTA is looking for examples where the Addendum is causing hardship to borrowers and consumers.  If you have any please send the information to Steve Gottheim, Legislative and Regulatory Counsel to ALTA at steve@alta.org.

Here is the information transmitted by ALTA:

ALTA Meets With Freddie Mac Short Sale Team About Troublesome Addendums
On Friday, ALTA staff held a conference call with members of Freddie Mac’s Short Sale team about the industry’s concerns over new short sale addendums. These addendums are intended to help prevent short sale fraud (which is on the rise) by requiring all of the parties involved in the transaction to sign an affidavit attesting that it is a true arms-length transaction.

The addendums present three concerns for the industry. First, the affidavit requires a closing or escrow agent to certify information that is not available to them, in particular whether the transaction is arms length. The relationship between the buyer and seller may not be evident from the public record information or their identification documents. Second, the affidavit places a negligent misrepresentation standard on the escrow agent. Unlike a “to the best of my knowledge standard” a negligence standard requires the escrow agent to use the reasonable efforts of an ordinary person to determine whether the transaction is arms length. Instead of laying out clearly what the escrow agent must do to release themselves from liability, the escrow agent is at risk of liability if fraud is discovered after signing the affidavit. Lastly, the affidavit requires the escrow agent to sign the transaction in a personal capacity as well as in a corporate capacity. Thus if fraud is discovered, then Freddie or the servicer can go after the escrow agent’s personal property and monies in addition to going after the corporation.

Before signing any of these addendums, ALTA suggests escrow agents reach out to their attorneys to discuss the legal risks and whether the agent has the authority to sign the document. It might also be good practice to review your companies E & O insurance policy to determine whether these addendums are within the scope of that policy.

While the short sale team expressed sympathy for the title industry’s concerns and were open to discussing potential solutions, Freddie’s general counsel is not keen on removing the requirement all together unless the problem becomes a bigger issue. Over the next few weeks, ALTA staff will be working with interested parties to develop potential solutions. If you would like to learn more or have any comments please contact ALTA’s Legislative and Regulatory Counsel Steve Gottheim at steve@alta.org


Copyright 2011 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660   RPZ99@Florida-Counsel.comFLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW – We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com

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7 Responses

  1. I guess the title insurance companies arent doing too bad


  2. Have you heard about the Freddie Mac class action lawsuit where Freddie Mac promises to pay for title insurance if the purchaser of the foreclosed property uses their vendor for title insurance and then they renege on that promise? It’s just smoke and mirrors by the great and powerful Freddie Mac. They can’t get rid of the properties they have because they were foreclosed on illegally so this is just a ploy in my opinion.


  3. The saga goes on…


    Once everyone is done suing everyone else for everything under the sun, banks will be flat broke (if not dismantled), homeowners might not be “whole” but, Holly Smoke, attorneys are gona be soooo friggin’ rich!

    I picked the wrong career… No unemployment there.

  4. Okay, this ANON person is the NEW one—not our ANONYMOUS of old…okay?

  5. Things will really heat up when Citibank sues JP Morgan Chase, for example. Then, they will really be eating each other. After all, the mortgage crisis was a free for all of obtaining monstrous fees on all levels of the mortgage transaction–appraisal fees, mortgage broker fees, realtor fees, origination fees, title fees, servicing fees, etc. They will all be pointing the finger at each other as this crisis continues. The title companies can see their liability in this mess, and they will not hesitate to nail a bank or two rather than go down. The one for all and all for one thing between the participating entities is going to sink right into the quicksand. Good! F%^& them!

  6. My quest for today is to see if there are attorneys in Maryland that are informed about the issues raised in this site and see if they are reputable in legal representation for the Maryland Homeowner to face off and delve into any and all device types of fraud commited by any lender in this state

    Along my journey I found some interesting sites I’d like to post, one from an actual attorney site with relevant links from Massachusettes.

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