Mar. 9, 2013: How to steal a house; two sides to developments in closing agent vetting; one opinion on the state of the MI business
Rob Chrisman



 

Hey – don’t forget to “spring ahead” those manual timepieces tonight when you go to bed - based on the clock we’ll have one less hour of sleep in the next 24 hours.

 

Fraud stories still fill the press, in spite of the overwhelming majority of folks in our business that “do the right thing.” Here is one example of “stealing a house” in Florida: “Adverse possession allows someone who openly maintains a property and pays its taxes to gain title to it.” Title, escrow officers, and attorneys should pay attention: http://www.sun-sentinel.com/news/broward/southwest-ranches/fl-house-deed-fraud-20130228,0,5043951.story.

 

Speaking of escrow, certain segments of our industry are ruminating on the CFPB’s final escrow rule. In case you missed it, here is a good write up from a couple weeks ago: http://www.buckleysandler.com/uploads/36/doc/BuckleySandler%20Special%20Alert%20on%20CFPB%20Escrows%20Rule%202%2015%20201300.pdf.

 

The escrow, title, and closing industries continue to apparently evolve, and there are two sides to the closing agent vetting story. Andrew Liput, the president of Secure Settlements (SSI), wrote, “There has been some consternation among the title and escrow industry because SSI verifies trust account information.  Much of this involves confusion about the information we actually capture, none of which is private, and all of which is contained on the front of every check that is issued at millions of closings annually.  The reason that SSI advocates greater trust account data verification is to focus on two key factors (1) is the account truly a trust account separate from a personal or operating account, and (2) can the account status be verified by a bank officer.  Many banks merely collect wire instructions, never checking their validity.  Those banks that do verifications merely run the ABA number against the Federal Reserve database to verify that the account is really an account number at the stated institution.”

 

Andrew’s note continued, “SSI feels that is not enough for good risk management and here is why.  We recently were vetting an attorney who provided us with his trust account information.  The account number was validated through the Fed but we also obtained his authorization (SOP) to verify the account details with his bank.  The result?  His “trust” account was actually a personal account.  This account had been overdrawn in the past 12 months, and furthermore the bank advised that a fraud claim had been asserted against the account.  We are unaware of any other process that obtains this level of detail and prevents a lender from wiring funds into such a risky situation. This information was real time, not the result of a once annual audit. Our client was pleased, the agent was not.  Transparency and accountability has a cost, but the cost is one that is and should be borne by those who are entrusted with the important role of being a fiduciary for banks and for consumers.”

 

By the way, Secure Settlements Inc. recently launched its “Know Your Agent™” program which enhances the company’s closing agent vetting and risk management service for lenders. Under this program, SSI has been issuing full color ID cards to vetted closing professionals. The ID cards, which are intended to be worn as identification at mortgage closings nationwide, will fulfill several important fraud deterrent goals. The first is to clearly identify to all parties at the closing table, particularly consumers, the identity of the agent handling the mortgage proceeds and documents. The second is to confirm the agent’s independently vetted risk status. Each ID card is electronically imbedded with the agent’s name and registration number. This feature will allow the card to be used with SSI’s proprietary, at-closing Best Practices and Fraud Control Application for droid, iPad® and iPhone® technology. This first ever App, which will be widely available sometime in April 2013, will verify Best Practices are being followed at closing and will capture critical data to assure lenders that the closing is being conducted in a professional and compliant manner. The data will be uploaded to the SSI database and available to Secure Settlements service subscribers.

 

For the other side of the story, last month Terry Monnie, owner of Terry Monnie Title in Kentucky, wrote to me, saying, “I read the article, ‘A New Era for Mortgage Closings’ and have the following comments and suggestions. First and foremost, it is my belief that the title industry IS acting aggressively to purge the system of the ‘bad actors,’ and without the unnecessary involvement of vetting companies. I am a licensed agent of Stewart Title Guaranty and Stewart has aggressively eliminated agents whose business practices do not meet their standards. Furthermore, we have daily reconciliation of our escrow accounts with Stewart. We ‘good actors’ welcome and encourage this joint effort to maintain a strong and honest operation.”

 

And Terry’s note continued, “The vetting companies have changed their tune recently to emphasize their supposed ability to obtain and distribute information about individuals’ ‘current conduct’. I would suggest that the bad actors will have done the bad deeds by the time the vetting companies are aware of any malfeasance or bad practice. The title insurance underwriters, on the other hand: are aware when claims come to them; whether an agent has reconciled their accounts; or if the agent is remitting premiums or policies. How would a third party vetting company obtain information about current claims or other really relevant information in a timely manner to be worthwhile? Most importantly, what form of insurance is being offered by the vetting companies in the event of their negligence or failure to prevent fraud? Is SSI offering insurance perhaps; or guarantees? Finally, I will continue to resist efforts to collect information that I feel to be private.”

 

Secure Settlements put out the results of a recent survey on mortgage lender risk management issues and practices information that was conducted February 28-March 2 2013 and polled 3609 warehouse banks, mortgage lenders, community banks and credit union nationwide. Almost 90% of all lenders surveyed use some form of loan origination fraud deterrent tool, including SSN verification, IRS 4506T, credit checks and AVMs. Only 10% however have a dedicated closing agent fraud deterrent and risk management tool in use. Half of the lenders polled do not have the highest confidence in their loan quality assurance and legal compliance policies. 40% of lenders surveyed have been victimized by mortgage fraud in the past 12 months with the average number of incidents listed as three during that period of time, and almost 20% have had as many as 5 fraud crimes affect their business. More than 30% of lenders in the survey have had repurchase or indemnity demands from investors, HUD and GSEs in the past 12 months directly or indirectly related to closing table issues, and 10% have had up to 10 buybacks in that period. And nearly 25% of mortgage lenders have been specifically victimized by closing agent mistakes that caused actual losses in the past 12 months, and 12% have had between 10-20 files with losses.

 

One link in this chain is mortgage insurance, and here is a note which is certain to upset MI folks. “I was called by an MI company that I had cut off because they are a poor counter-party. Maybe they are in Poughkeepsie, maybe they are in Minnetonka, maybe somewhere else - it doesn’t matter. Their very existence is in question and they are, as a consequence, rescinding everything they can possibly rescind for what an outsider might term entirely spurious reasons. When they can’t find something to justify a rescission, they invoke the totally subjective defective appraisal issue based on a retroactive appraisal that is performed maybe seven years after the fact and with the benefit of hindsight. It’s a tough spot for them, I’m sure, because they are looking at a conflict between what I would term routine business ethics and their fiduciary duty to their shareholders and that probably isn’t an easy call.

 

From a game theory perspective, I think everyone knows why the agencies are continuing to do business with firms that are on life-support. I assume the agencies have done the math and decided there is greater value in letting these guys live than in ceasing to do business with them and likely putting them in run-off.  I suppose the math looks like a choice between getting paid maybe 50% in run-off or getting paid on 50% of filed claims plus having a shot to collect from the seller holding the origination reps on the 50% that are eventually are rescinded due to a purported defect.  Maybe I’m unduly cynical, but it sure seems like the short-term math tilts in Fannie and Freddie’s favor if they continue to do business with firms that under any under circumstances would not be thought of as having adequate capital to be approved to do business with the agencies in the first place.”

 

The note continued. “I’ve been watching the new entrants in the space raise capital and go through all kinds of gyrations in order to qualify to do business with the agencies and it just seems that there is a decided lack of consistency at work here. You have a few new super capitalized companies in the space competing against at least two dramatically less capitalized companies that have unquestionably worse performing books of business. More game theory here – but one assumes that the weaker competitors have to at least be considering end-game strategies like lowering credit standards or premiums in order to capture more business (and immediate premium revenue and cash) today in order to support their poor legacy books. The risk, of course, is that they may price at such low rates that while there is a short-term shot in the arm, over the long-run they won’t earn enough to cover their cost of capital. Put another way, if the new business they acquire fails to perform as expected its no loss to the weak legacy insurers because they were going to fail anyway. If it performs, the Hail Mary has worked and they live to see another day. Of course, either outcome punishes those companies that are not “dead men walking” and which actually possessed adequate capital because their returns will be reduced over the short term by the speculative market share grab if the two weaker companies ultimately fail and over the short and long-term if the weaker companies happen to complete the Hail Mary and survive.”

 

And lastly, “Ordinarily, there would be a state insurance regulator that would step in before this kind of end-game maneuver happens, but no insurance regulator that dreams of becoming Lieutenant Governor some day is about to shut down an insurer in the middle of Poughkeepsie or Minnetonka and be the person that cost the state economy 1,000 white collar jobs. Also, I think state regulators are more interested in protecting individual households and consumers than they are protecting companies. Since the consumer/household in this instance pays the premium for the benefit of not (at least not directly) the consumer but some far away company or mortgage holder, it is easy for the regulator to overlook inadequate capitalization because it’s not household, consumers or – importantly –voters that are going to be directly impacted in the event that the mortgage insurer fails, it’s just another company that is domiciled in a different state that will be impacted.”

 

 

A chicken farmer went to the local bar. He sat next to a woman and ordered champagne.
The woman said, "How strange, I also just ordered a glass of champagne."
"What a coincidence," said the farmer, who added, "It is a special day for me. I'm celebrating."
"It is a special day for me too, I am also celebrating!" said the woman.
"What a coincidence." said the farmer.
While they toasted, the farmer asked, "What are you celebrating?"
"My husband and I have been trying to have a child for years, and today, my gynecologist told me that I was pregnant."

"What a coincidence," said the man. "I am a chicken farmer and for years all my hens were infertile, but now they are all set to lay fertilized eggs."
"This is awesome," said the woman. "What did you do for your chickens to become fertile?"
"I used a different rooster," he said.
The woman smiled and said, "What a coincidence."

 

 

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog is how "Basel III Could be a Game Changer for Lenders and Servicers." If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.

Rob

(Check out
http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries or to subscribe, go to www.robchrisman.com. Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

 

 



                  










Copyright - Rob Chrisman