4th Quarter Commercial Corner-The Recording and Perfecting of a Lost Mortgage by Affidavit

While the recording of Lost Document or Lost Mortgage Affidavits has been a long standing practice, when such an original document appears to have been lost between execution and the intended recording, Case Law and Bankruptcy Trustee challenges have left a lack of clarity as to the validity, enforceability and priority of such Affidavits.  But, after a great deal of hard work spearheaded by the Michigan Land Title Association, the Michigan Legislature recently (finally) passed a series of laws (Public Acts 347, 348 and 349 of 2014), resulting in revisions to MCL 565.201(6) and MCL 565.451a. 

The statutes set forth requirements for the contents of such Affidavits which must be followed, including a statement by the affiant that “to the best of the affiant’s knowledge, the original mortgage was delivered from the mortgagor to the mortgagee.”  Additionally, the affiant must state that he/she either mailed a copy of the affidavit and unrecorded mortgage by first-class mail or registered mail, return receipt requested, to the mortgagor at their last known address, or personally served a copy of said documents on the mortgagor.

These statutes, designed to eliminate ambiguities and confusion regarding such recorded documents, are retroactive, and apply to mortgages already recorded in this manner.  This serves to codify common practices and should result in fewer title claims and more security for mortgage lenders.  Congratulations to the MLTA and all who were involved with this effort.

Estate Planning Variations and Deeds – One Popular Option, the Lady Bird Deed

Through the years people have sought economical ways of streamlining succession plans of owning real estate and avoiding the prospect of probate court upon the owner’s demise.  Often this resulted in a parent or parents deeding property to themselves and their heirs or desired successors, as joint tenants with rights of survivorship.  In many cases that achieved the desired goal, passing title to the designated survivor(s) and voiding the time and expense involved with probating an estate.

But such a practice was not without potential issues or problems.  What if: (1) the grantor changed his or her mind as to who should get (or share) the real estate after his or her death?  Of course, there could be numerous factors that might change the relationships or appropriate nature of the grantees.  Perhaps one of the heirs (grantees) moved across the country and thus had no need or interests in the real estate.  What if one of the heirs had been the principal care giver in recent years and was deserving of a greater share?  Or what if there was a falling out between the grantor and one of the heirs?  How could the grantor change his or her mind and undo what had been previously put in place?

With such “joint tenant” deeds, it would take the cooperation of all of the grantees to re-convey into the configuration now desired by the original grantor.  That might be simply undertaken.  But there is certainly no guarantee.  Equally problematic might be the scenario where the original grantor now wishes to take out a mortgage on the property or refinance.  Of course, that mortgage will need to be signed by ALL the title holders (even though they are not the “borrower”).  The same would apply should the grantor decide to the sell the property.  All this ties the original grantor's hands, in exchange for avoiding probate.  Is there a better way?

Perhaps, yes.  A different estate planning tool, developed 40+ years ago by U.S. President Lyndon Johnson to transfer property to his wife “Lady Bird” Johnson, seems to have gained popularity in recent years.  Simply put, the grantor conveys his or her (or their) interest in the property, while at the same time retaining a life estate, coupled with the full power to convey, mortgage or otherwise alienate the property during the grantor’s lifetime.  If the grantor does not exercise this power during his or her lifetime, the grantee(s) (remaindermen) become vested in fee title without any further action or probate court process.

There are variations as to the language and style that can achieve this end result.  And, as always, estate planning and the drafting of such specifically worded deeds should only be done by a real estate attorney after the necessary counseling with the grantor/client.  But it is another estate planning tool.  This form of conveyance and reservation is supported by Michigan Land Title Standards 9.3 and 9.9, and Michigan Compiled Law 565.114.  

Know Before You Owe

In our last issue we mentioned the Dodd Frank Act and the resulting Consumer Financial Protection Bureau (CFPB).  In the CFPB’s efforts to provide easier-to-use mortgage disclosure forms, improve consumer’s understanding  and ability to shop for mortgages, and to prevent surprises at the closing table, the CFPB has created its Know Before You Owe program, and will be combining the elements of the Real Estate Settlement Protection Act (RESPA) and the Truth-in-Lending Act (TILA) into a new Loan Estimate (replacing the GFE) and a Closing Disclosure, which will replace the HUD-1 in August, 2015.  The CFPB also created the Qualified Mortgage (QM) rules for lenders, which we discussed in our last issue, focused on the consumers’ ability-to-repay.

But, real estate investors and individual sellers, considering seller financing as part of their transaction, should know that the QM rules may also apply to them!  The CFPB has issued rules regarding seller financing, which includes carry-back mortgages and land contracts.  Investors and Realtors should be aware of these rules, as they may impact the sellers’ options and obligations.

Essentially, there are two different rules applying to seller financing, which may allow a seller to avoid being characterized as a “loan originator” under the CFPB regulations.  A lender/seller may qualify under the 3-Propety Exclusion (within a 12 month period) or the One-Property Exclusion (1 property in 12 months).  In the 3-Propety Exclusion, the seller financed mortgage (or land contract) must fully amortize (no balloon payment or negative amortization), have a fixed rate of interest or a rate that adjusts no sooner than 5 years, and the lender/seller must determine that the consumer/buyer has a reasonable ability to repay.  The lender/seller may be a natural person or an organization, but must be the owner of the property.  The lender/seller may not be a builder.

In the One-Property Exclusion, only natural persons, their estates or trusts may be the lender/seller (again, they must be the owner).  The repayment schedule may have a balloon payment, but may not have negative amortization.  There is no obligation relative to the buyer’s ability to repay.  It may be a fixed rate financing or adjustable rate with reasonable annual and lifetime limits on rate increases.  The National Association of Realtors issued a bulletin entitled Impact of Loan Originator Final Rule on Seller Financing, which includes more detail on this subject.  Seller (and Realtor) beware. 

3rd Quarter Commercial Corner-Third Party Sheriff’s Sale Purchaser Opportunity to Secure During Redemption

Of possible interest to Third Party Sheriff’s Sale Purchasers (or prospective purchasers), seeking to protect and secure their purchased property, in January of this year, MCL 600.3240(13) became effective, which allows a sheriff’s sale purchaser to inspect the interior of the foreclosed property during the redemption period and initiate an action for possession if the inspection indicates that the property is damaged.  MCL 600.3237 and MCL 600.3238, effective June 19, 2014, replace MCL 600.3240(13) and outline the steps a sheriff’s sale purchaser must take in order to lawfully inspect the interior of the foreclosed property and commence an action for possession, during the redemption period.

Before inspecting the interior of the property, the purchaser must serve the mortgagor with two pre-inspection notices.  The second of which must be at least seventy-two (72) hours in advance of the date of inspection.  If the initial inspection of the interior reveals actual or imminent damage to the property, or the inspection is unreasonably refused, the purchaser can then send a notice of the purchaser’s intent to commence an action for possession, unless the property is repaired within seven (7) days after the mortgagor’s receipt of the notice.  MCL 600.3238(11) provides examples of “damage,” including but not limited to local ordinance violations, exterior conditions that present risk of criminal activity on the property, stripped plumbing, electrical wiring, siding, or other metal material, missing or destroyed structural aspects.

The current version of the law provides the investor (third party purchaser), or its counsel, and the courts with greater guidance as to how an investor puts itself in a position to remediate conditions on a “damaged” property prior to expiration of redemption.  With this greater guidance and clarity, local communities will hopefully begin to see investors bid more aggressively on at risk properties.

2nd Quarter Commercial Corner

Endorsements, which add or modify the coverage provided by a title policy, have become more uniform over the years, being sanctioned by the American Land Title Association. Endorsements that were once created and filed locally in Michigan have given way to nationally standardized language.  As such, they are periodically reviewed and occasionally revised by the ALTA forms committee.  While such revisions may often be minor language adjustments, every so often more dramatic changes in the coverage are approved by the ALTA and promulgated nationally.

A prime example of this is the recent revisions of the ALTA 9 Endorsement, once identified as the Restrictions, Encroachments, Minerals (“R.E.M.” or “Comprehensive”) Endorsement.  This Endorsement was first used in the 1980’s to bundle affirmative coverages, which most lenders routinely requested in connection with matters shown on Schedule B of the Loan Policy or were not covered by that policy.  It insured the holder of the indebtedness (the lender) against loss or damage resulting from a number of potential adverse matters.

Those matters included possible violations of covenants, conditions and restrictions (CC&Rs), encroachments of the improvements onto adjoining land or into easements on the land, and damage to existing improvements as a result of the exercise of mineral rights for extraction or development. Similar, although more limited coverage of this sort was later provided with Owner’s Policies – the ALTA 9.1 for improved land and the ALTA 9.2 for unimproved land.

The ALTA forms committee has carved up and created several variations of the former ALTA 9, resulting in a virtual menu of ALTA 9 Endorsements, including variations when the property is under development or has existing improvements.  The issue of enforceable “Private Rights” is another issue that may be afforded coverage for a Loan Policy.  And, the new ALTA 9.1 and 9.2 Endorsements now only provide CC&R coverage.  There are separate endorsements created to deal with coverage for encroachments and the exercise of mineral rights.  Through this all, the basic ALTA 9 for Loan Policies is still intact. But, it becomes rather clear that the endorsement landscape is a continually changing one.  Check with your experienced commercial title professional at BHT Commercial, if you have any endorsement or title coverage questions.             

The Impact of the Consumer Protection Bureau

Perhaps you have heard of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by the U.S. Congress in response to the financial crisis that began in 2008.  Old news?  Not really, since that Act created that Consumer Financial Protection Bureau (CFPB) to regulate and oversee consumer protection with regard to financial products and services in the U. S., in particular mortgage lending.  Banks, financial institutions and mortgage lenders have become increasingly aware of the CFPB and the new rules it is mandating.  But, residential real estate professionals are impacted by these new rules and developments, as well.

The most readily visible development will be the switch from the familiar HUD-1 Residential Settlement Statement form, first created by the Real Estate Settlement Procedures Act of 1974, (RESPA) to a new Closing Disclosure form, which will combine the elements of the current HUD-1, the Good Faith Estimates (GFE) mandated by revisions to RESPA and the Truth-in-Lending Disclosure form, required under the Truth in Lending Act of 1968.  The deadline for implementing the new Closing Disclosure statement is not until 2015, and it will take some time for lenders, title companies and other settlement providers, and their software providers to amend their settlement software programs to accommodate the new form.  Then, the lenders and settlement providers will need to train on using the new form and format, and sample test those changes, before putting them into practice.  Change is always difficult.  This will be no different.

But, sooner than the conversion to the Closing Disclosure, is the implementation of the CFPB mandated “Qualified Mortgage” (QM) rule, which went into effect January 10, 2014.  The QM rule focuses on the “ability-to-repay” requirement, which applies to nearly all closed-end residential mortgage loans.  This was an obvious response to the finding that too many lenders made mortgages in the last decade without first considering whether the borrower could actually afford to repay the loan.  (And that was before the plunge in home values that resulted from the financial crises.)  So, what do the QM rules have to do with real estate professionals?

Well, in order to sell a home, you need a buyer – a buyer who can afford to purchase that home.  And that purchaser needs to find a lender, who is willing and able to make a mortgage loan within the regulations put forth by the CFPB.  One of the QM rules is that a borrower is not to exceed a 43% DTI (debt-to-income) ratio – based only on verified and documented income.  Another QM rule limits the lender to charging and collecting points and fees that do not total more than 3% of the loan amount.  And, those fees would include any charges from charges retained by the lender, loan originator or any affiliate, including a lender affiliated title company.  These QM rules may impact a lender’s ability to lend and a buyer’s ability to qualify.

The CFPB continues to scrutinize the practices and the protection on non-public-information (NPI) by the mortgage lenders, and has made the lenders responsible for the same security and protection of NPI by its vendors and settlement providers.  As a result, title companies have been getting their acts together and improving their security systems, and documenting the ways that they attempt to protect the consumer.  Accordingly the American Land Title Association has worked with major lenders and the CFPB to develop seven “pillars” of Best Practices to set a standard of practice and security in the title industry by which a title company might be evaluated. Best Homes Title Agency has been ahead of the game in adapting those “pillars” of Best Practice.  We will elaborate on how Best Homes Title Agency is maintaining those high standards in our next issue of Bits from the Best.

BHT Commercial

BHT Commercial is the commercial division of Best Homes Title Agency, LLC, a full service title agency, providing comprehensive title and settlement services for residential and commercial real estate transactions. While the name Best Homes might suggest a strong dedication to residential transactions, BHT Commercial has the personnel, experience and applied technology to handle all types of real estate transactions – commercial, industrial and developmental, as well as default, new construction and extraordinary situations.

Led by Chief Operations Officer, Allan Dick, with over 40 years of commercial title insurance experience with local, national and multi-site transactions, BHT Commercial’s staff of dedicated commercial real estate experts include Attorney-President Neil Sherman and Attorney-Vice President Peter Schneiderman. Peter has well over 30 years of experience with commercial transactions, representing lenders, developers and commercial realtors, as well as Best Homes Title Agency.

Allan Dick’s background includes having been senior underwriter for three major title insurance underwriters, national accounts division manager for First American Title Insurance Company and is currently President of the Michigan Land Title Association. With a hands-on approach, he has underwritten, coordinated closed a wide variety of commercial transactions.

With the help of a strong support staff of some 40 title and escrow personnel, BHT Commercial and Best Homes Title Agency, LLC have the experience, expertise and staff to provide the very best in title and closing services for commercial real estate transactions of all types and sizes