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Source of Title Blog

Is That Mortgage Open-Ended?
by Robert Franco | 2011/12/27 |

I got a call from a client this morning asking if a mortgage we showed on a title search was open-ended.  It is an important question.  When we do a search, we report what we find.  If the mortgage is open-ended we write "Open-Ended Mortgage."  If it is not, we simply write "Mortgage."  But, this reminded me of an email I received a few months ago.  It seems that an abstractor did not indicate whether the mortgage was open-ended or not.  As it turned out, it was open-ended and there was a claim on the title policy because of the discrepancy. The question in the email I received was simply "who is responsible for the claim?"

Source of Title Blog ::

Why does it matter whether the mortgage is open-ended or not?  An open-ended mortgage allows for future advances.  Most commonly, these are home equity lines of credit where the homeowner can write checks to draw additional funds on their mortgage.  When there is a sale, it is very important for a close-out letter to accompany the payoff.  Otherwise, the balance is paid off, but the account remains open and the borrower can continue to write checks, running the balance back up, which is still secured by the mortgage.  This can be important in a refinance, too, because those future advances may have priority over the new mortgage.  Although in a refinance, it may be possible to argue equitable subrogation saves the new mortgage's priority over the equity line. 

This becomes a title insurance claim when the borrower on the equity line, who has now sold the property, defaults on the line of credit secured by the open-ended mortgage, which was paid off but never released. The lender files a foreclosure on its open-ended mortgage and discovers the property has sold; they then serve the new owner with the summons and complaint.  The new owner now has a title claim.

The facts as presented in the email were essentially as described above - the open-ended mortgage was shown on the title search as a "mortgage" and it was paid off.  But, because the title agent did not realize it was open-ended, no close out letter was provided to instruct the lender to close the account.  The borrower then continued to borrow on the account and subsequently defaulted.  When faced with a claim on the policy it issued, the agent blamed the abstractor for not noting on the search that it was an open-ended mortgage.  The abstractor's E&O carrier was notified that there was a potential claim.

There is certainly a valid claim on the title policy.  But is this the responsibility of the abstractor?  In the abstractor's view, he showed the mortgage.  But was that enough?  Was he still negligent for failing to inform his client that it was open-ended?  

Maybe.  It is the responsibility for the abstractor to accurately show what he finds - given the importance of the fact that this was an open-ended mortgage, the client has a good argument that the abstractor was negligent.  However, there are additional facts that would become relevant in determining if that negligence was the proximate cause of the claim and whether the abstractor is liable.  Perhaps the client was also negligent.

Often times, a payoff letter from the lender will indicate if a close-out letter is required to close the account.  This would be sufficient to put the agent on notice that it was an open-ended mortgage.  And, if this was a second mortgage, perhaps the client should have inquired further to find out if this mortgage was open-ended.  I would also like to know how long ago the closing was in relation to the default on the line of credit.  The title agent should have followed up to get a release - if the mortgage went unreleased for a long period of time, it should have caught the mistake before a large balance was incurred and the borrower defaulted.  This could have minimized the risk and exposure of the title agent.

There is most likely enough blame to go around in this scenario.   The problem could have been easily avoided if the abstractor had properly noted on the search that the mortgage was open-ended.  It is important for an abstractor to understand the significance of the documents he reviews so that they can be accurately reported to the client.  Not all mortgages are created equal.

On the other hand, the agent here could have done more to prevent this claim, too.  So is it really fair to place the blame on the abstractor?  In my opinion, this is a claim that the title company should just cover... that is what title insurance is for.  But, since it is arguably a claim related to searching error, there are two E&O policies from which the underwriter can recoup its losses - the agent's and the abstractor's. Regardless of which bears the greater responsibility, there is an E&O claim and the cost of doing business (for all of us) will go up.

What do you think?  Who should be responsible for the claim?




Rating: 

Categories: Abstractors, E&O Insurance, Risk, Liability and Claims

1136 words | 14289 views | 15 comments | log in or register to post a comment


Abstractor and Agent Share Responsibility

Open-ended mortgages have presented a problem for a number of years now, and agents and abstractors alike should be aware of, and take steps to minimize, their risk. 

I think I would assign more blame, however, to the agent, especially if the example above was a purchase, and not a refinance.  It is standard practice for agents to obtain at least limited documentation with the title search, enough to recognize the open-ended mortgage.  As you pointed out, Robert, the payoff statement often identifies the mortgage as a credit line.  I would go further to say that, in most cases, the payoff statement on a credit line almost always contains the close out authorization within, to be signed by all borrowers.

More problems occur if the borrowers continue writing checks against the credit line after the sale contract, or application for the new mortgage, whichever the case.  There is always the risk of outstanding checks at the time the payoff statement is issued.  I think it's a good practice for agents to instruct that the credit line be immediately frozen as a condition to insure.  Although I don't think it would go over well with borrowers or lenders, I think the best protection to the agent would be collect and hold an amount equal to the unused credit line balance in escrow as a title indemnity, until the release is issued.

Who should be responsible for the claim?  Agent 70%, abstractor 30%.

 
by Patrick Scott | 2011/12/27 | log in or register to post a reply

Title agent is equally as culpable
I feel it to be a requirement of any title agent to actually READ the documents referred to in the title report.  If the title agent failed to actually read the document they cannot find the abstractor wholly liable.  I use the services of seasoned title attorneys to do my title searches locally.  I require that they report to me what they find in as much detail as they feel necessary, but, ultimately, I am writing the policy and I am have the responsibility of knowing what that title report contains and how to interpret the documents contained therein.  
by CHARLENE PERRY | 2011/12/27 | log in or register to post a reply

Good points...

Pat:  I had not thought about the problem of outstanding checks at the time the payoff was requested.  Freezing the account for a few days after the payoff would seem to be a reasonable solution, so long as the borrower was aware.  I think the large escrow would be a hard-sell, though.  In some cases (many today) there probably wouldn't be enough money to do that.  But, thank you for pointing that out.  How is that usually handled??  A quick phone call prior to disbursement, maybe?

Charlene:  If there were copies of the mortgage with the title search, I would agree.  And in that case, I'd shift all of the blame to the agent.  However, there are still a lot of clients that don't ask for copies (or will not pay for them if provided).  With our searches, I don't think the copies are needed because we abstract enough information for the client.  I do understand, however, why so many clients do ask for copies.  It would seem to be a good practice, particularly if you don't know your abstractor well enough to trust that all of the information is being provided.

 
by Robert Franco | 2011/12/27 | log in or register to post a reply

No reponsibility to the abstractor whatsover as long as you provide supporting copies.

As I'm sure Charlene will back up, the standard practice of abstractors in Maryland is to provide copies of all open Mtg/DOT. 

I make no assumptions as to what kind of security instrument is shown on the land records or in my reports.  I just report it (and provide supporting copies).  Not my job.  I do not give an opion of title.  That's what the average $300-600 title opinion/review line that our clients' charge for on the HUD-Est.  Supposedly our reports get reviewed by an attorney for this fee but after 20 years in the business and numerous conversations with processors that don't understand the difference in the legal opereration between a mortgage and deed of trust, a transfer of partial interest, or numerous other basic real title legal concepts, I have my doubts as to what they actually do to collect their fee which is substantially less than what we get paid(AS A SEPARATE LINE ITEM).

 
by Richard Olson | 2011/12/28 | log in or register to post a reply

Think you've hit the nail on the head Richard

I find them - you fix them is my motto.  I provide copies of all documents in the chain that are pertinent & it's up to the attorney to read them & make a decision about what to do with them. 

 

I heard a story from a local attorney about another attorney, who post-closing, sent the homeowner to the bank with a check to payoff his equity line.  The bank employee asked the homeowner if he needed a discharge & the homeowner, not having any clue as to what that might be, declined the offer - so the balance was zeroed out, but the loan was never officially discharged.   Guess what happened next.  The homeowner was beseiged with offers from the equity line holding bank to use his equity line - which he proceeded to do.  When he went belly-up on his refi, that's when the bank discovered that they were second in line to the equity line. 

 

 

 
by Leigh Attridge | 2011/12/28 | log in or register to post a reply

Reply to Richard

Richard I am glad that you are among the minority.  But, as a matter of fact, at least in Maryland, if you give me the book and page reference, I can see the documents on line, I don't have to charge a copy fee etc.,  and so, I still feel that the title agent/attorney is ultimately responsible for reviewing the document. 

We are too quick in this industry to pass  the buck of blame on to others. We are responsible for the end work product;  the title policy and as such should take the steps necessary to insure that all pertinent documents referred to in the chain have actually been reviewed.

If an abstractor fails to note an open Mortgage/Trust well that's another issue altogether. 

 

 
by CHARLENE PERRY | 2011/12/28 | log in or register to post a reply

EXAMINERS!

Of course there's plenty of blame to go around, but as an underwriter for a large abstract comany in New York State I must report that so far this morning I've had to return so called "abstracts" to examiners for the following reasons:

1) Description in deed did not match description in mortgage. Turns out multiple prior tax lots were dropped in to a larger tax map but examiner elected to examine just one of the proir lots.

2) Last deed reserves a power of appointment.  Application indicates tilte to be in the estate. Examiner doesn't bother to run name in surrogate's court. (to ascertain if the power of appointment was exercise under the LW&T)

3)  Prior, old deeds in chain reference title taken subject to mortgages.  Return to examiner to double check.  Guess what? Mortgages still open of record. "Oops, I'm, sorry."

4) Failure to run heirs at law under an estate when title certified in fiduciary.

 This is all in one morning! 

Computerization of records has enabled my company to perform many of the examinations in house where we have control over the process and the type of work we are doing.  But I always say, we do a better, more thorough job on our in-house searches than is done by our outside vendors.  

I've been at this for 26 years and it never fails to amaze me how  the qaulity of examining has gone down, down, down.    Examiners are dinosaurs, destined to pass into history.  You may not like to read this, but it's the truth.   Human error is human error.  We all mistakes, but what is the definition of making the same mistakes over and over and over again? 

EDUCATE YOURSELVES and oversee the people you have doing your work.  Run your business like a business, or find something else to do! (or buy a lot E & O insurance)

 
by Vincent Racaniello | 2011/12/29 | log in or register to post a reply

Sounds like you need to change examiners

Back in the day, before photocopiers were placed in the Registry, we learned title work, by abstracting everything by hand - which meant we had to read all the documents put in front of us.  The law firm I worked for refused to use pre-printed forms, so there was lots & lots & lots of writing.  All that writing, plan tracing , running handwritten indices that weren't always alphabetized  plus a supervisor who was Captain Bligh's twin, meant that you either learned the work thoroughly or you went home.  There's nothing particularly wrong with technology - I can now do in a couple of days, what used to take a week to do, but we had something else, that's missing today , & that's time.  After the title was ordered; completed, checked & approved by my boss was when the closing date was set & not a minute before then.  I got an order on Monday of this week (a holiday) for a full, 50 year search, which, I was told, is closing tomorrow - Friday, first thing in the morning.  That's only 4 working days.  I wonder if some newer examiners are being trained at the speed of light to accomodate super rush closings, which is pretty much all I ever see anymore.  I don't really think we're dinosaurs, at least I hope not; but I do agree that standards need to be where they were 36 years ago when I started in this business. 

Happy New Year everyone!!

 
by Leigh Attridge | 2011/12/29 | log in or register to post a reply

To Vincent...

Vincent:  I agree that there are a lot of examiners/abstractors out there that don't understand what they are doing.  They know how to find documents at the courthouse (or online), but they do not understand the significance of them.  They simply don't know or understand that there is more to the job than finding deeds and mortgages - they don't know what they are looking for in estates, for example.

What I have to wonder is why we have those kinds of abstractors in the business?  How do they manage to find clients?  I like to believe that my clients use our services because we know what we are doing... and WHY we are doing it.  Most of our clients know that we are well versed in Ohio real estate law and we will provide a search that they can rely on.

Unfortunately, the reality today is that most clients will send work to any absrtractor who can provide the fastest, and more importantly, the cheapest search.  This means that those abstractors who don't know what they are doing not only get work - they thrive!  Why clients keep using abstractors who have demonstrated that they don't understand the basic premise of the work they do, I'll never understand.

Since you brought up the problem, let me ask you... rather than advocating that the abstractors need to educate themselve (which I agree is very good advice), why aren't you using abstractors who are already educated?  It would seem that you could save a lot of time (and time is money, right?) if you used better abstractors, even if they charge a little more.

 
by Robert Franco | 2011/12/29 | log in or register to post a reply

Reply to Robert.

Rob: I shouldn't use your forum to "sound off" but the thing is, we train and use mostly in-house employees to examine the lion's share of our work.  Twice a year, usually during the peak summer season and at the end of the year when employees use up their vacation time, the number of abstracts of title that we source out increases to make up for the volume and/or slack.  And it never ceases to amaze me how our in-house people do a much, much better job at abstracting than the independents.   I would like to believe that the scarcity of work available to the independent examiner due to the combined collapse in the real estate market and the trend towards "in-house" searching such as my company follows would somehow compel, force or inspire the independents to up the quality and standards.  But since 2008, they never fail to disappoint.   I am, for lack of a better analogy, "The Title Catcher in the Rye."  I stand in the high grass of the cliff and keep those helpless titles from going off the ledge and landing in to the ravine of the Title and/or E&O claim. 

BTW, I too do examinations of title, so I am sympathetic to the plight of the independent.  But then again, I know what I'm looking for. 

 

 
by Vincent Racaniello | 2011/12/30 | log in or register to post a reply

We're here for "sounding off."

Vincent: I actually appreciated your comments - don't by shy about sounding off.  In fact, if you read my comment on Charlene Perry's blog, "Education in the title industry - a sorely missing component," you will notice that I expressed a very similar concern about independent abstractors.  I said:

When I started in this business, most abstractors worked for title agents, or attorneys, who were ultimately liable for their work. They made sure they were properly trained. These days, abstractors don't really get that kind of training.


There is no doubt that, generally speaking, independent abstractors are less well trained.  However, I can't seem to figure out why that is so.  When I started as an independent, the independent abstractors were usually better than many of the in-house abstractors.  That was generally because the clients didn't trust anyone they didn't feel was exceptionally well qualified to subcontract their work to.  You just couldn't get work as an independent unless you were very well educated and good at your job.   That doesn't seem to be the case anymore.

New clients never ask us about our qualifications, they only ask about turn-around time and price.  If they were really concerned about claims, you would expect that would be the opposite - qualifications would be paramount.

That said, I obviously do not believe that all independent abstractors suffer from the same lack of knowledge.  There are still many good ones.  When I was doing a lot of searching, I always tried very hard to keep up on changes in Ohio real estate law; I bought books and read them when I couldn't figure something out.  Eventually, I started this Web site so that other like-minded professionals would have a place to share their knowledge and learn from others.

What really amazes me is how little of that kind of sharing actually goes on here.  There are probably 20 posts in the forums about non-paying clients for every one about substantive title issues.  I find that very sad.  I have come to the conclusion that there are actually very few independent abstractors that actually care about being well educated professionals.  Though we have some that visit our site regularly, they are in the minority.

So... thanks for sharing, and "sounding off."  Please feel free to comment more often.  I appreciate the discussion.

 
by Robert Franco | 2011/12/30 | log in or register to post a reply

To Vncent & Robert

Vincent - I still can't figure out why you don't just change examiners.  They can't all be idiots in your neck of the woods; & Robert, one of the charms of this site is never knowing what's going to be posted next.  I enjoy reading each & every subject up for discussion - including the non-paying client ones.  I even enjoy the political posts that come up from time to time.  It's exceptionally nice to have a space where everybody speaks the same language.  I can't tell you how many people, when they ask what I do, think it has something to do with the Registry of Motor Vehicles - "you're a tire examiner?" is my personal favorite.    I have all kinds of odd title issues that come up - especially now looking at subprime mortgage foreclosures - but I hesitate to bring them up on the forums due to what I think are some confidentiality issues.  I do get some doozies though.  I will give you one example to mull over.  Joe Blow & wife bought a house in 2001 & took out a subprime mortgage in 2007, which was subsequently foreclosed.  Mr Blow was a general contractor doing business out of his home.  In 2004 he was named as a defendant by the plumbing subcontractor  on a mechanics lien where he was listed as the general contractor.  The property, though, was not his own house - it was for a land in a different town.    The mechanics lien was perfected correctly & at each step of the way he was listed as a defendant.  His 2007 mortgage was recorded June 1st & an execution by the unpaid plumbing contractor's lawyer was recorded a week later - so a day late & a dollar short - right??  My question, to the attorney, who is probably sick of taking my calls, was whether or not the original 2004 mechanics lien had any validity, even though it was not against his  property & could be regarded as an unsatisfied lien, something along the lines of an attachment,  prior to the 2007 mortgage.

 
by Leigh Attridge | 2011/12/30 | log in or register to post a reply

Risk Should Be Proportionate



How much liability should someone accept for a $75 search?

Ultimately, I think the onus should be upon whoever is issuing the title policy.  When reporting mortgages, we make such notations only when the language “open-ended” or “closed-ended” appears within the four corners of the instrument.  As to the issue of copies, we don’t include them unless specifically requested by the client.

A well-trained examiner should be capable of analyzing and reporting information well enough to enable a client to make a good judgment call.  Nevertheless, as someone else here indicated, we are only reporting factual information appearing in matters of record.  It is the job of the attorney or title agent to make the determination as to whether or not curative action is required.

Regards,
Scott Perry



 
by Scott Perry | 2011/12/30 | log in or register to post a reply

OPEN ENDED MORTGAGES

In my opinion the title agent is at fault. Since the property was being sold a close out letter should have been issued on all open mortgages in the current owners name.  Why would any other action be deemed acceptable?                                                                                                                         I do provide pertinant page copies with all of my searches, even when they don't want them, and I do report that a mortgage is open ended or not, but I find it increasingly difficult to determine if it is open ended. 16 years ago mortgages were 5 pages long, at the most, and it was simple to scan through them to determine if they were open ended. Now we have these 30 to 50 page mortgages that are increasingly more confusing.  Brings to mind the saying " If you cant dazzel them with brilliance, baffel them with BS."  When you have 10 to 15 searches to finish by the next day reading every mortgage is impossible.  I love it when I get a mortgage that states "Open Ended" on the first page.  Such a small thing can make everyones life a lot easier.    

 
by Karen Hurley | 2012/01/10 | log in or register to post a reply

Open-Ended Mortgages

This is directed to all that responded to the "Open-Ended" Mortgage question. I would like to voice my humble opinion and say that all points of communication on this subject are well taken. Why is it always, "whom do we place the blame?" In this case, the person did, I presume, a title examination on a piece of property that was to be sold and transfered to a new owner? When we examinne title for whatever reason, especially (open-ended,etc.) if it involves a sale, we always state on our face sheet the following, "Require release of record the following mortgage. . ." In doing such there is no doubt in any person's mind a mortgage must be released. Since this person did show a open mortgage, let's ask the closing agent, why was not a release requested from the lending institution especially when this was a sale? Next, the lending institution that held this mortgage knew there was an open mortgage! The person selling the property knew there was a open (line of credit) mortgage and he/she must disclose same! Also after closing, did the closing agent do a "Final Policy" for this transaction? If so, during the final update, this open-end mortgage would have shown open. Now, let's put the blame where the blame belongs. Person who gathered information abstract, etc., NO blame since mortgage was shown. Closing agent, YES, they are to blame because the did not do their homework. Seller, YES, at closing he/she did not disclose there was an open-ended mortgage. Seller, YES, why did he/she keep writing checks against the line of credit knowing the open-ended mortgage held the land (which had been sold) as an encumbrance and legally they did not own this property.Bank, YES, they knew there was a mortgage against the property of sale. Lastly, the closing agent did not due a diligent examination of title before, during, and after the transaction. Remember, we also must define the difference between an "Abstractor and a Title Examiner." Who actually examined the title and defined the requirements? In today's world, people working in the court houses or trying to work via the Internet do not do a diligent title examination but what I consider a Rube Goldberg piece of work. The quality of the people doing the exams is getting worse, the requirements of the title companies is getting worse, and the banks seem to have absolutely no idea what day it really is. So, you have my opinion, it was not ment to step on any toes, or defame any ones character. This business used to be fun, people spoke to each other, and sometimes conversed with each other concerning a problem they had encountered. Today, that is history. Get in and get out ASAP. One good thing about this terrible economy, it is weeding out the fly-by-night people who can not due work other than gather information as shown on a form, the limited abstract business is dying, and the trained people are now getting far and few between, and the people doing the work have absolutely no idea what they are doing and why they seem to be doing! Example, last week a well known title company had their person doing a lien search. Guess where this person was looking for a Mortgage Deed? Not in the mortgage index but guess where, the Grantee index! I am not surprised there are more errors of title found since the computers have taken over. Question, how do you do a diligent search when you are not certain how the data was inputed into the system? In the old days, all you really needed was a last and first initial and you could find what you were looking for. Today, how do you query a diligent examination of a computer. . . .

comment written by Alan L. Toth, EE/PE

 
by Bonnie Hoffman | 2012/01/11 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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