Source of Title Blog

Is a Conveyance Fee Due on the Conveyance of an Easement in Ohio?

rfranco@sourceoftitle.com (Robert A. Franco) — Fri, 24 May 2013 10:02:23 EST

When a deed is recorded in Ohio, the Auditor's office normally charges a conveyance fee of $4.00 per thousand of the value of the property conveyed. I was recently told that at least one Ohio County has been charging the conveyance fee at the time easements are recorded. This has not been the normal practice, to the best of my knowledge, but that doesn't necessarily mean that it is not proper. So, is the conveyance of an easement subject to the conveyance fee?

When you record a deed, the process requires taking it to the Tax Map Office to get the legal description approved, then to the Auditor's office to pay the conveyance fee. Both offices must affix their stamp prior to recording the deed in the Recorder's office.

If there is consideration paid for the conveyance, the deed must be accompanied by a "Real Property Conveyance Fee Statement of Value and Receipt," that specifies the Grantor, grantee, address of the property, tax billing address, a breakdown of the consideration which includes the "consideration for real property on which [the] fee is to be paid," and other information related to the use of the property.

The rate depends on which county the property is in. The state set the rate at $1.00 per thousand of the purchase price, but counties can add as much as $3.00 per thousand. In most counties, the conveyance fee is $4.00 per thousand.

Sometimes, the conveyance is exempt from the conveyance fee. In which case, the deed must be accompanied by a "Statement of Reason for Exemption From Real Property Conveyance Fee." O.R.C. § 319.54(G)(3) provides specific types of conveyances for which "no fee shall be charged when the transfer is made." Common exemptions include conveyances to or from the government, gifts between husbands and wives or parents and children, on sale for delinquent taxes, pursuant to certain court orders, etc...

Typically, easements that contain legal descriptions would still be reviewed by the Tax Map Office and Auditor's Office, but they would routinely receive a stamp that simply stated "transfer not necessary."

Recently, I was told that Seneca County was charging a conveyance fee on the transfer of an easement. The specific easement in question stated that "in consideration of $8,000" grantor grants to grantee an easement in land described below (or something similar). Thus, the Auditor required a conveyance form and the payment of the appropriate fee.

While this is certainly not the norm, it appears to be technically correct. After all, an easement is a conveyance of an interest in real property. And, the legislature clearly intended these conveyances to be subject to the conveyance fee - they included a specific exemption for a transfer "of an easement or right-of-way when the value of the interest conveyed does not exceed one thousand dollars." O.R.C. § 319.54(G)(3)(p).

So, why don't most counties charge the conveyance fee on easements? I have heard that at least one county tried, but gave up the practice when it was deemed impractical. Generally, the value of these easements generates a very nominal conveyance fee. For example, an easement acquired for $5,000 would generate a $20 fee. And, because many easements are drafted to recite the consideration as "one dollar and other good and valuable consideration," placing a value on the easement can be difficult. I would suspect that any county that attempted to require full compliance with the statute would soon find that it costs them more to implement than it would generate.

Though it appears that any time there is a conveyance of an interest in real property, whether by deed, easement, or even a lease, it should be accompanied by either a conveyance form or an exempt form. [Although leases are exempt unless they are renewable forever.] It takes time to process those forms and it might not be worth the effort.

Perhaps the Ohio legislature should consider revising these laws to better conform to the practicality of these types of conveyances and the practices followed by most counties. They could increase the exemption amount to $10,000 for easements, or better yet simply provide that such conveyance shall be stamped "transfer not necessary," and remove the requirement for filing either the conveyance form or the exempt form.

In the mean time, don't be too surprised if an Auditor's Office requires a conveyance fee on the transfer of an easement.

Why the cost of Closing Protection Coverage has increased in Ohio

rfranco@sourceoftitle.com (Robert A. Franco) — Thu, 02 May 2013 09:38:08 EST

Effective yesterday, the cost to consumers for closing protection coverage has increased by $5 for each covered party. Public records obtained from the Ohio Department of Insurance show that the change was largely due to concerns that losses caused by defalcations are uncertain and closing instructions are evolving. A Demotech report recommended the premium increase.

Closing protection coverage provides protection when a title agent fails to comply with written closing instructions. The most costly example of these failures tends to be when a title agent fails to follow instructions for handling money entrusted to them-- particularly when the agent puts the money in their own pocket instead! But closing protection also covers for failure to comply with other written closing instructions-- which are changing with great frequency, due to regulation and other factors. One could even guess that lenders are intentionally drafting their closing instructions in an attempt to include more potential losses under the protection of closing protection coverage.

Seeking support for a proposed increase in closing protection premiums, the Ohio Title Insurance Rating Bureau (OTRIB) authorized Demotech to analyze historical premium and loss experience for closing protection coverage in Ohio. Demotech's analysis found that "the pattern [of losses] is clear - the more recent the experience, the worse the loss and loss adjustment expense ratio."

According to Demotech, the data collected showed that total premiums collected for closing protection coverage have declined, while losses have risen. OTIRB members collected approximately $4.4 Million in Closing Protection Coverage premium in 2011, down from $5 Million in 2010. Losses, however, were nearly $2.6 Million in 2011, up from just under $1 Million in 2010.

Demotech's analysis cited two areas of "uncertainly and risk of material adverse deviation" in losses and loss adjustment expense ratio:

Given that Title insurance premium levels, and the underlying mortgage activity associated with Title insurance premiums, seem to have stabilized at a relatively low level compared to the peak years of 2003 through 2006, licensed agents that have been hiding escrow shortages or defalcations through a Ponzi like scheme, no longer have the financial capacity to continue the charade. Therefore, recent loss and loss adjustment expense ratios have deteriorated, and are likely to continue to deteriorate, due to the emergence of escrow shortages and defalcations.
Over the recent past, in response to changes in regulations, in response to suggestions from the United States Department of Housing and Urban Development or in anticipation of rules from the Consumer Finance Protection Bureau, the closing protection instructions issued by lenders have been revised several times. This is in marked contrast to the stability of procedures and instructions that had existed for more than 25 years. in this operating environment, meritorious claims based upon the fundamental coverage document have increased. With additional changes anticipated over the next several years, it is likely that the increased emergence of meritorious claims will continue until closing instructions stabilize and industry familiarity with lender instructions is enhanced.

Demotech is saying here that losses from defalcation are very hard to predict, and closing instructions have changed a lot recently and are expected to continue to change, causing additional losses for events other than defalcations.

The proposed rate change has gone into effect. Rates for Closing Protection Coverage in Ohio are now as follows:

$40 for a lender, its successors and assigns
$55 for seller(s)
$20 for buyer(s) or borrower(s)
$20 for each additional applicant for title insurance
There is a minimum premium of $40.

The study also noted that premiums in Ohio for Closing Protection Coverage are "well below the closing protection coverage premiums in other jurisdictions." The premium in Pennsylvania and Delaware is $75, according to Demotech.

More on Schwartzwald: Ohio Supreme Court Reverses Another Foreclosure

rfranco@sourceoftitle.com (Robert A. Franco) — Mon, 21 Jan 2013 15:14:16 EST

The Schwartzwald case held that a Plaintiff in a foreclosure case that does not hold the note or mortgage at the time it files the complaint lacks standing, and the court therefore lacks jurisdiction. The big question that this left open was: what effect does that have on all of the faulty foreclosures that have already been completed? We may now have some insight into this thanks to a case that was reversed and remanded just last month, Washington Mutual Bank v. Wallace.

In 1999 Wallace purchased her home with financing from Norwest Mortgage. The note attached to the complaint had not been endorsed by Norwest and the mortgage was in favor of Norwest. In July 2008, Washington Mutual filed a complaint for foreclosure, alleging that it was the holder of Wallace's note and mortgage. The following month, on August 14, 2008, Wells Fargo Bank, successor to Norwest, executed an Assignment of Mortgage to Washington Mutual, "together with the Promissory Note secured thereby and referenced therein." The Assignment was recorded on August 21, 2008.

Wallace never filed an answer and the Court granted default judgment against her on August 20, 2008. Wallace did not appeal. But, about nine months later, on May 11, 2009, Wallace filed a Motion to Vacate a Void Judgment. Wallace claimed that because Washington Mutual failed to establish that it was the holder of the note and mortgage, the court lacked standing and its default judgment was void.

On May 14, 2009, Wallace filed a Motion for Relief from Judgment, arguing that it should be granted because Washington Mutual falsely represented that it held the note and mortgage when it filed its complaint, and that she had a meritorious defense to the action - that Washington Mutual lacked standing to bring the foreclosure.

The trial court overruled both motions and Wallace appealed. The court of appeals affirmed the trial court's default judgment, relying in part on one of its earlier cases in which it held that "when the appellants failed to raise their real-party-in-interest objection or defense in the trial court at a time when the issue could have been effectively dealt with, the objection or defense was deemed waived." The Court then concluded that "the fact that WaMu did not become the real party in interest in the 2008 foreclosure until 34 days after WaMu commenced the action but before final judgment was entered in that action did not deprive the trial court of subject-matter jurisdiction to enter default judgment against Wallace and in favor of WaMu."

Wallace then appealed to the Ohio Supreme Court, which accepted the appeal with a stay on briefing until the Court decided Schwartzwald. Schwartzwald, of course, held that "a party commencing litigation must have standing to sue in order to present a justiciable controversy and invoke the jurisdiction of the common pleas court," and "a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest."

Washington Mutual urged the Court to reactivate the Wallace appeal for briefing and oral argument, arguing that the issue raised was not addressed by Schwartzwald. The difference, according to Washington Mutual, was that in Schwartzwald the defendants actively defended the action, raising the issue of standing in their answer -- and in Wallace the defendant did not defend, default judgment was rendered against her, and she did not appeal.

In essence, Washington Mutual presented the problem now created by Schwartzwald: what is the retro-active effect of the case on past foreclosures where the Schwartzwald problem was never raised? According to Washington Mutual:

This case affords the Court to opportunity to address how the rule in Schwartzwald applies to motion to vacate judgments, whether a lack of standing is a component of subject matter jurisdiction, and whether a lack of standing can be waived. If-- as contended here-- a plaintiff's failure to prove standing at the time of the complaint deprives a common pleas court of subject matter jurisdiction-- then every judgment rendered in Ohio could be attacked. Because void judgments are not subject to time limits of Civil Rule 60(B), those attacks would throw into question literally hundred of thousands of cases that have long been over.

Wallace argued that the propositions of law in both were identical and the Schwartzwald Court ruled on each of those points:

The Court ruled that standing is a necessary component of a common pleas court's jurisdiction. And it held that standing must be established as of the filing of the complaint. It clearly stated that Civ. R. 17(A) cannot be used to cure a lack of standing. And the Court made clear that its decision is premised on the fact that Freddie Mac was not entitled to enforce the note, and therefore had suffered no injury, at the time it filed suit.

The Ohio Supreme Court denied Washington Mutual's motion and reversed the court of appeals decision and remanded the case to the trial court for further proceedings consistent with Schwartzwald.

The sale of the Wallace property was confirmed on January 24, 2011, though it appears that Washington Mutual assigned its bid to its successor-in-interest and receiver, JP Morgan Chase Bank, which still holds title today.

Though the Supreme Court did not provide any written opinion to provide guidance on the issue, it appears that it may never be too late to challenge a judgment in a foreclosure case that is void for lack of standing under Schwartzwald. How then will the title industry deal with many properties plagued by old Schwartzwald problems?

Underwriters have begun to require exceptions on policies to make it clear that they will not cover claims related to attempts to set aside foreclosure judgments or subsequent sales based on lack of standing arguments. But, many policies have already been issued without such exceptions. Is there any way to cure this type of defect?

One possibility may be quiet title actions brought by the "new owners," but this was unsuccessfully tried in Massachusetts. Following the Massachusetts Supreme Court case, U.S. Bank v. Ibanez, which was similar to Schwartzwald, a homeowner plagued by defective title filed a "try title" action and the Court dismissed it for lack of standing.

Francis Bevilacqua had purchased the property from U.S. Bank after it foreclosed on Pablo Rodriguez. U.S. Bank, unfortunately, did not hold the mortgage at the time it purported to foreclose. Thus, U.S. Bank never acquired title to the property - the sale was "wholly void." Because U.S. Bank did not hold title to the property, it could not convey tile to Bevilacqua which was fatal to Bevilacqua's claim to "own" the property for purposes of his try title action.

Interestingly, Rodriquez did not even attempt to defend his title. Nevertheless, the trial court explained that the mere fact that Bevilacqua had a deed recorded in his name was irrelevant. The court wrote that "in the classic example, a litigant could go to the registry, record a deed to the Brooklyn Bridge, commence suit, hope that the true owners ignored the suit or... could not be readily located and [would thus] be defaulted, and secure a judgment."

[For more on Bevilacqua v. Rodriguez, see Bevilacqua v. Rodriguez-- Mass. Buyers out of Foreclosure Get the [Mostly] Bad News.]

Though I think the court got the Bevilacqua case wrong, it does have some merit and if followed in Ohio it would make it very difficult to cure Schwartzwald defects. In at least some of these types of cases, the foreclosures are long over and the party who would have standing to institute a new foreclosure would have little incentive to do so. Those people who have been wrongly foreclosed on, who may have standing to file a quiet title action, have likely moved on and probably have little interest in getting involved. Yet, those who have purchased foreclosed properties with defective title may have trouble obtaining title insurance or selling their homes.

We may have to wait for the next big Ohio Supreme Court case to provide us with the answer.

Though it has created a lot of uncertainty, the Schwartzwald case is certainly a landmark case in Ohio. Attorney Andrew M. Engel, who represented Schwartzwald and Wallace, deserves kudos. 2012 was a great year for him and he has provided homeowners with a great, and much needed, defense in foreclosure actions.

Foreclosures in Ohio After Schwartzwald

rfranco@sourceoftitle.com (Robert A. Franco) — Mon, 31 Dec 2012 13:02:11 EST

On October 31, 2012, the Ohio Supreme Court decided Federal Home Loan Mortgage Corporation v. Schwartzwald, finally answering the question: Can the lack of standing or a real party in interest defect in a foreclosure be cured by the assignment of the mortgage prior to judgment? Until Schwartzwald, there was a split on this issue among the courts of appeal. According to the Ohio Supreme Court, "a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest." What does this mean for the many foreclosures that have not followed this rule of law and what do title examiners need to look for when reviewing foreclosures in the chain of title?

The Schwartzwalds purchased a home in November 2006 with a mortgage from Legacy Mortgage in the amount of $251,250. Legacy then endorsed the note to Wells Fargo, and assigned it the mortgage. After falling on hard times in 2008, the Schwartzwalds moved to Indiana to find employment and eventually defaulted on their mortgage in January 2009.

In March 2009, the Schwartzwalds and Wells Fargo were negotiating a short sale. In April 2009 the Schwartzwalds entered into a contract to sell the home, with a closing date in June 2009. Despite the negotiations with Wells Fargo, on April 15, 2009 Federal Home Loan Mortgage Corporation (Freddie Mac) filed a foreclosure action. Freddie Mac's complaint attached a copy of the mortgage to Legacy and alleged that "a copy of the note is currently unavailable."

Wells Fargo apparently told the Schwartzwalds that this was "standard procedure" and "don't worry about it because we are doing a short sale." Unfortunately, due to delays in the process, the short-sale buyer rescinded their offer.

On May 15, 2009, a month after the complaint was filed, Wells Fargo assigned the note and mortgage to Freddie Mac, and a copy of the assignment was filed with the Court on June 17, 2009. Both the Schwartzwalds and Freddie Mac moved for summary judgment. The Schwartzwalds asserted that Freddie Mac lacked standing to foreclose on their property.

The trial court entered summary judgment in favor of Freddie Mac and ordered the property to be sold. On appeal, the Second District Court of Appeals affirmed the decision finding that Freddie Mac "had established its right to enforce the promissory note as a nonholder in possession, because assignment of the mortgage effected a transfer of the note it secured." The court further explained that standing is not a jurisdictional prerequisite and that a lack of standing may be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A). Thus, the court concluded that although Federal Home Loan lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and transfer of the note prior to entry of judgment.

The court of appeals certified that its decision conflicted with other courts of appeals cases that held "that a lack of standing cannot be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A)." The Ohio Supreme Court accepted the discretionary appeal.

The Ohio Supreme Court recognized that "standing is a jurisdictional requirement." Because standing to sue is required to invoke the jurisdiction of the common pleas court, "standing is to be determined as of the commencement of suit." Because Freddie Mac "failed to establish an interest in the note or mortgage at the time it filed suit, it had no standing to invoke the jurisdiction of the common pleas court."

The Court then explained the "real party in interest" requirement. Civil Rule 17(A) requires that a complaint be brought in the name of the real party in interest. This is to "enable the defendant to avail himself of evidence and defenses that the defendant has against the real party in interest, and to assure him finality of the judgment, and that he will be protected against another suit brought by the real party at interest on the same matter."

According to the Court, "a common pleas court cannot substitute a real party in interest for another party if no party with standing has invoked its jurisdiction in the first instance... a litigant cannot pursuant to Civ.R. 17(A) cure the lack of standing after commencement of the action by obtaining an interest in the subject of the litigation and substituting itself as the real party in interest."

The case was reversed and dismissed!

Several court of appeals decisions post-Schwartzwald have followed or attempted to distinguish that ruling. For example, the Eighth District, in CitiMortgage v. Patterson, focused on the word "or" in the holding - "it failed to establish an interest in the note or mortgage at the time it filed suit." That court held that Schwartzwald "stands for the proposition that a party may establish its interest in the suit, and therefore have standing to invoke the jurisdiction of the court when, at the time it files its complaint of foreclosure, it either (1) has had a mortgage assigned or (2) is the holder of the note." It reinstated a foreclosure judgment where the lender attached a copy of the allonge to the note to its complaint, but the mortgage was not assigned until after the complaint was filed.

The Schwartzwald case is troubling for title insurers. First, state and federal courts have held that a lack of standing, being a jurisdictional defect, renders any judgment not just voidable, but void. A foreclosure sale premised on a void judgment would have to be set aside. Second, there is nothing in the decision that limits the Schwartzwald ruling to be prospective in nature. What becomes of all of the foreclosures that have already gone to sale based on a potentially void judgment?

Some underwriters have already issued bulletins requiring exceptions on title policies where foreclosures in the chain of title do not demonstrate that the foreclosing lender held the note and mortgage at the time the complaint was filed. How far back in the chain the examiner must carefully review foreclosures for this problem is uncertain.

Although subject matter jurisdiction can be raised at any time and cannot be waived, at least one court of appeal has explained that "although adverse parties may not confer jurisdiction upon a court by mutual consent, where none would otherwise exist, they may stipulate to the truth of facts that are sufficient to confer jurisdiction... In this way a party can be estopped from challenging either the facts which establish jurisdiction, or the facts which defeat jurisdiction."

Thus, if sufficient facts were alleged in the complaint to establish jurisdiction, whether those facts are true or not may not matter. As a practical matter, a party may be estopped from relitigating those facts to set aside a judgment. **

** [UPDATE: See More on Schwartzwald: Ohio Supreme Court Reverses Another Foreclosure.]

Examiners should also be cautious when relying on back-title, or when updating a prior policy. It is unlikely that the prior examiner was looking for this particular issue and a more in depth search would be prudent.

Until the courts have further reviewed this matter in light of Schwartzwald, title examiners will need to be extra cautious in reviewing not only pending foreclosures, but any prior foreclosure in the chain of title. Undoubtedly, underwriters will be providing additional guidance to be disseminated to their agents and examiners as further developments occur.

10th Anniversary Retrospective

rfranco@sourceoftitle.com (Robert A. Franco) — Mon, 22 Oct 2012 17:11:47 EST

A couple of months ago, I noticed that Source of Title was approaching its 10th anniversary. The very first company to register on Source of Title did so on September 30, 2002. I still have a hard time believing that it has been 10 years already. As such I thought I would spend a little time blogging about where we started, where we are, and how we got here. Also, a few of the things we have done that worked out well... and a few that didn't.

If you are curious, let me explain how Source of Title got started. I began in the business in 1993 as an abstractor. In 2002, I was managing a small abstracting company, with about six full-time abstractors, covering six counties. I was also a licensed title agent, writing a few policies here and there. The abstracting business definitely dominated.

In early summer 2002, I got a few calls from good clients asking for referrals for adjacent counties that we didn't cover. I really didn't know anybody personally and I wasn't able to help them. I finally thought, "if these clients are having trouble finding abstractors in those counties, there must be clients that are having trouble finding us in the counties we service." Surely, the Internet was the answer!

I was always a bit of geeky-computer guy - when I was a kid, I learned to program in three different languages. But, oh had the technology come a long way since then. So, I went to Barnes and Noble and bought a bunch of books. I learned to create Web pages, in ASP and HTML, and I figured out how to link them to a database; I used Microsoft Access for the first version of the site. After spending the entire summer locked in my office, I had a very rudimentary site up and running. It was simple - it allowed anyone to register and list their company, and allowed other people to search the site by county and state to find their abstractors (as well as other title professionals). Since we started tracking the stats, our directory has been search more than 1.2 million times!

If you remember, the site was very crude (and quite frankly, a little on the ugly side), but it worked. We then spent thousands of dollars marketing the site, making it available for free. Thankfully, at the time, abstracting was a booming business and I was able to invest our profits in this new Web site. The growth was amazing, and I received a lot of wonderful emails thanking me for helping independent abstractors get work. I was thrilled with the response we got.

But, it was apparent that my skills as a Web developer were very limited and I was not really able take the site where it needed to go. Thankfully, Slade came on board to lend a hand. Slade is responsible for taking Source of Title to the next level and making it what it is today. He beefed it up with ASP.NET and ditched Microsoft Access for the more robust MySQL database. By mid-2003, Slade had completely revamped Source of Title (it was no longer the eye-soar I created). The first new feature he added was the forums, to make it more interactive.

The forums launched with the first post on May 6, 2003. To date, forum has had more than 42,000 posts! No doubt the most activity the forums had was in 2004 when the discussion about forming a national association for abstractors was first raised. The debates were very heated, but eventually led to the creation of NALTEA. This was a huge milestone for Source of Title - we had created something that had never existed before, abstractors across the country communicating with other like-minded abstractors.

But, we didn't stop there. We wanted to do more, and we did. In late 2004, we hired Jarrod, a journalist, to develop news specifically targeted to the title industry. Jarrod is no longer a part of the Source of Title team, but his contributions were definitely transformative. Since then, Source of Title has published more than 7,000 articles.

The next major addition to the site came in 2007, when I started blogging. Unlike the news we publish, the blog gave me a chance to really express my opinion about the title industry. I enjoyed it, and eventually we opened the blogs up to all of our registered users. We have tried to give everyone a voice in an industry that was often overlooked and ignored. It was nice to see our users participating and there have been a lot of talented people who have blogged on our site. Many very interesting discussions started on Source of Title, and some of them got noticed beyond our little niche market. For example, a series of blogs I wrote on private transfer fees was noticed by the Washington Post, who interviewed me for an article.

But, with all the successes we have had, there have been some stumbling blocks along the way. Around 2005, the hosting company we used went out of business and they sold our account to another local company. The new host was terrible - our site went down way too often, and we had no control over it. Our solution was simple - more books from Barnes and Noble. Slade and I learned to host our own servers. We purchased servers, procured a dedicated T-1 line, and moved our hosting in-house. Our "up-time" has been much more consistent and reliable ever since. We host our own Web servers, email servers, DNS servers, etc. It is not easy, but at least we have more control and it has worked out very well for us.

Of course, not everything we tried worked out quite as well. Here are a few of our failures:

Online Ordering Portal: I had a vision of creating a portal on Source of Title that all abstractors would be able to use to communicate with their clients - rather than fax and email, it would allow orders to be placed through Source of Title, uploaded and returned through Source of Title, and track the order and communication between the abstractor and their client. We worked with a couple of different partners, but never quite made it through the development stage. Differences of opinion, and frankly, a general lack of interest from potential users deterred us from ever completing the project. The goal was lofty, rather than have a system dictated by clients, we envisioned an open system that everyone could use to create a standard before client could begin to require the use of their own proprietary systems. Unfortunately, the cost and resistance we ran into caused this one to fizzle out.

Weekly Video Update: For those of you who don't remember this one... I'm glad! I enjoyed tinkering with technology, so we began shooting and developing short video updates highlighting our weekly news. It was a fun project; it is amazing what you can do with the right video editing software. We even erected a green-screen in the office to shoot the footage. But, on the downside, it took several hours to produce a 3 minute clip for online streaming. Around this time, I started law school and just didn't have the time anymore. Besides, who wants to watch my ugly mug reading from a teleprompter!

Bulletin Service: We created a new service which allows our users with company listings to add announcements, and we automatically email a daily summary of bulletins to anyone who subscribed to the bulletins for that company. The idea was that you could make announcements through this service and if your clients subscribed, you would not have to call, fax, or email all of your clients individually with the same information. For example, if your county raised copy fees or decided to close down on Fridays due to budget cuts, you could create a bulletin to let your clients know. In addition to sending the announcements to those subscribed to your bulletins, we link them to your director listing, as well. Unfortunately, though this is still a free service, it is not widely utilized - so it does not go under our list of successes.

I think we have come a long way since 2002. And for the most part, I consider what we have created to be a great accomplishment. We have filled a void in the market by giving the title industry, particularly the abstractors, a place to gather, share, and learn. We have consistently tried to be innovating with our approach, and though not everything has worked, we never stopped trying.

If you have any specific memories you have from Source of Title, please comment and share them with us. Let us know what you think of Source of Title, both the good and the bad.

Best,
Robert A. Franco
SOURCE OF TITLE

NAILTA's 5th Annual Conference

rfranco@sourceoftitle.com (Robert A. Franco) — Thu, 16 Aug 2012 10:29:26 EST

The National Association of Independent Land Title Agents is having their 5th Annual Conference in Baltimore, MD, on September 30 - October 2, 2012. If you are an independent agent, who has been impacted by affiliated business arrangements, you have probably asked yourself "why isn't somebody doing anything about this?" Well, "somebody" is - NAILTA and several other state associations of independent title agents have been formed to represent people like you. If you want to know more, go to the NAILTA conference and get involved.

If you aren't familiar with NAILTA, here is how they describe the association:

The National Association of Independent Land Title Agents (NAILTA) is a non-profit trade association that represents the interests of independent title insurance agents and independent real estate settlement professionals from across the United States. It was created by independent real estate settlement professionals to further the agenda of small business owners from within the title insurance, abstracting, surveying, and real estate community who lack representation at local, state and national levels.

NAILTA seeks to:

Restore transparency and credibility to the land title process and preserve an objective and impartial role at the closing table to improve the consumer experience.

Address the proliferation of controlled business arrangements and eliminate conflicts of interest between title agents and their referral sources, as well as, between all real estate settlement service providers and their sources of business.

Establish a minimum search standard for title examinations to restore faith in the system of land title.

Knit together common interests and concerns from across the country and across the entire spectrum of real estate settlement service providers to successfully advocate for independent agents and their like-minded partners in the real estate settlement service community in order to effect positive change on the title industry.

Currently, Ohio, Indiana, New Jersey and Louisiana have state associations for independent title agents - members of these fine organizations are automatically enrolled as members of NAILTA. If you are in another state, you can join NAILTA directly for as little as $125 per year as a title agent.

I cannot provide you with a full list of all of the activities these organizations have been involved in, but they have been advocating the interests of independent agents through lobbying efforts and providing amicus briefs to courts addressing RESPA issues. Trust me, they are worthy of your support!

But more to the point of this blog - the agenda for the conference looks excellent. The keynote speaker is Dr. Ted C. Jones, PhD., Senior Vice President and Chief Economist, Stewart Title Guarantee Company. He will be followed by Benjamin K. Olsen, Esq., Managing Counsel, Consumer Financial Protections Bureau (CFPB), and Stephen A. Hester, Jr., former Director of Title Insurance, Texas Department of Insurance.

There will also be several breakout sessions, some with CE/CLE opportunities (pending approval, in certain states). Choices will include "Understanding & Preventing Escrow Account Fraud," "The State of State Independent Title Associations," "Common Claims Traps for Title Agents," "Protecting the Value of Property Records," "Notary Law and Process; What Document Preparers Should Know," "Title Insurance from the Regulator Perspective," "Analyzing Current RESPA Litigation and Beyond," and others.

This looks like a top-notch conference agenda and I want to personally encourage you to attend. If you are interested in keeping up with important industry developments, I don't think you will be disappointed. Aside from that - you will get the opportunity to meet other title professionals with similar concerns about our industry and show your support for the independent title agent movement.

It sure would be nice to pack this conference and send a strong message to the industry that independent title agents aren't going to roll over and let the affiliated businesses have their way with the title business and consumers. It is important for the integrity of the industry to have independent settlement agents.

So, go to Baltimore. Have a good time. Learn a thing or two and, show your support for independent title agents.

CLICK HERE FOR CONFERENCE AND REGISTRATION INFORMATION.

We Need New Policies or Laws for Computer Indexing

rfranco@sourceoftitle.com (Robert A. Franco) — Tue, 14 Aug 2012 10:50:11 EST

I had the pleasure of attending the Ohio Association of Independent Title Agent's conference yesterday. The OAITA is a great organization and they provided some excellent discussion at this year's conference. One particular speaker gave me an opportunity to ask a question that has been on my mind for quite some time; the speaker was Rick Campbell, President of the Ohio Recorders Association and Stark County Recorder. I asked him if there was a state-wide policy of noting in the index when corrections were made.

This is a particularly important issue for title abstractors. Although the indexing procedures are very strong - sometimes requiring two different people to index the same document - mistakes still happen. While some recorders make notations in the index when they make corrections, others do not. This means that if you get that dreaded call that you "missed something," when you recheck the records you may not be able to tell that there was a change. You, and your client, will wonder how on Earth you missed it. You could end up facing a claim on your Errors and Omissions policy for something that was not really your fault.

This was never a problem with the book indices because changes made in ink were always plainly obvious. Now the change is electronic, there may not be any apparent record that anything was ever different from what now appears in the index. Mr. Campbell understood why this was a concern, but he said there was no official policy on how to handle this issue among the recorders. He said that the recorders are bound to follow the Ohio Revised Code and that the Recorders Association cannot tell recorders what to do. As he explained it, each recorder is responsible for following the law with guidance from their county prosecutor.

As abstractors we want the index corrected when mistakes are found - it is important to maintain the integrity of the public records. However, with no real system in place to protect abstractors when the index is changed, many are hesitant to point out indexing errors when they find them.

The solution seems simple enough, a notation in the public index should be required whenever a change is made. But the Ohio Revised Code does not address procedures for correcting mistakes in the index. Perhaps it should.

Mr. Campbell noted that the Recorders Association was working on updating the laws relating to county recorders - simple things like making the statutes gender-neutral and changing the outdated references to "alphabetical index," to account for electronic indexing. This might be a good opportunity for someone to lobby for changes to create a proper procedure for notating changes made to correct indexing errors.

We all know that mistakes happen and this really isn't about casting blame, but more accurately preventing an innocent party from being held liable when changes are made. To use a buzz-word we are all familiar with, it is about transparency.

There were many more interesting topics discussed at the OAITA conference. They provided 3 hours of CE/CLE credits on Escrow Accounting Practices and Procedures, Ohio Real Property Case Law Update, and Identifying Mortgage Fraud. There was also an interesting presentation on Ohio Notary Requirements for Real Estate Transactions. It was a very informative conference and I'm glad I went - "thank you" to the OAITA for putting the event together!

Obama vs. Romney: Who holds the edge on housing policy?

rfranco@sourceoftitle.com (Robert A. Franco) — Tue, 17 Jul 2012 14:05:57 EST

We are all in the housing industry - to some extent, our future is dependent on a strong and stable housing market. I saw an article indicating that Realtors favor Mitt Romney in the upcoming election and I began to wonder what plans each candidate had for restoring our housing market. So, while I have done some research to see what has been reported on each candidates' position on housing, I am curious to know what you think. Based solely on their expressed views of the housing market, and leaving general partisan sentiments aside, who do you favor and why?

In searching for their positions on housing, it became evident that much of the information I was finding was not coming from the candidate, but their opponent. I guess you have to take everything you read with a grain of salt, and try to filter out the author's personal feelings and political agenda.

I did find one recent article by Patrick Duffy, a self-proclaimed "political Independent" with "no abiding loyalty to either party." He wrote The 2012 Presidential Candidates on Housing Policy: Barack Obama versus GOP presumptive nominee Mitt Romney on housing policies.

Here is his take on Mitt Romney's housing position:

For Mitt Romney, while there is nothing on his campaign website which specifically addresses housing, he seems to rely more on the private market to sort things out. According to Glenn Hubbard, and economic adviser to Romney, the domination of housing finance by government entities such as the FHA, Freddie Mac and Fannie Mae is simply not sustainable and must be phased out in favor of private lenders.
At a recent campaign event in Florida, Romney also reportedly mused about getting rid of agencies such as the Department of Housing and Urban Development (HUD) as part of his plans to simplify the federal government. As for foreclosures, he prefers to let the free market let prices hit 'rock bottom' as opposed to government policies which would seek to make such declines more orderly.

And, his take on President Obama's position:

President Obama, on the other hand, seems to believe that continued intervention by the federal government - at least in the short to medium run - is essential to providing adequate mortgage capital and even to help underwater borrowers refinance, with restrictions, to today's historically low rates. He probably doesn't have much choice: given that his previous attempts to bolster the housing market haven't worked at even close to the scale that is necessary - with less than 20 percent of homeowners eligible for loan modifications - if government intervention is to work at all, the policies must be more aggressive.
More recently, Obama seems to have absorbed this criticism, unveiling more than a half dozen plans to encourage refinancing, to reduce the overhang of debts owed by underwater homeowners, and to expand existing aid programs even to borrowers who were speculators or simply took on too much debt. These latest moves seem as much practical as they are political, since the previous obsession with refusing to help those who made financial mistakes has really acted as a structural break on the economic rebound.

Interestingly, my first stop in my research was Mitt Romney's official Web site. I wanted to see what his housing policy was all about to better understand why Realtors seemed to prefer him over the President. I noticed the same thing Duffy pointed out - there was nothing there specifically addressing housing policy. I really thought that was strange, given the prominence of the "mortgage meltdown" and the "housing crisis" over the past few years.

However, my second destination took me to President Obama's official Web site, and there was nothing there specifically devoted to housing policy issues.

It appears that neither candidate really wants to highlight their plans to improve our housing situation. It makes you really wonder what we may be in store for... regardless of the outcome of the election.

A specific Google search for "housing" on each candidates' site confirms that it is a hot issue. On Romney's site, "housing" comes up several times, mostly criticizing the President's handling of the housing crisis. There is not much about his plans to fix it. On Obama's site, there are several digs on Romney for thinking "he can fix housing by doing nothing," and several press releases about what he has done to assist struggling homeowners. Still not much about his plans for the future with regard to housing.

CNN reported that Romney said he "would eliminate or limit for high-earners the mortgage interest deduction for second homes, and likely would do the same for the state income tax deduction and state property tax deduction." That seems contrary the National Association of Realtors position favoring the mortgage interest deduction.

Romney, as reported by Fox News, also said "As to what to do for the housing industry specifically and are there things that you can do to encourage housing: One is, don't try to stop the foreclosure process. Let it run its course and hit the bottom."

President Obama, on the other hand, has continued to expand foreclosure prevention programs, according to CNN. Obama has stated that "It is wrong for anyone to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit rock bottom. I refuse to accept that and so do the American people." He also outlined what he called a "Homeowners Bill of Rights," or, "one straightforward set of commonsense rules of the road that every family knows they can count on when they're shopping for a mortgage."

So, there you have it. In a nutshell, Romney advocates for letting the private market take its course and get government out of the way. But, can we afford to see what "rock bottom" looks like?

Obama advocates for an expansion of government involvement to help people stay in their homes. But, can we afford to continue to spend money on programs that have not produced the improvement we expected?

Let me know what you think - what kind of housing policy do we need and who is the best candidate to deliver it? Please try to keep liberal vs. conservative rhetoric to a minimum. Just give you your view on housing policy, and which candidate so far has best convinced you that they have an understanding of our current situation.

Work From Home as a Title Abstractor!

rfranco@sourceoftitle.com (Robert A. Franco) — Tue, 12 Jun 2012 10:05:55 EST

I guess it really isn't anything new... with online records becoming so prevalent, many title abstractors have traded their traditionally casual attire for silk jammies. Though online access varies from county to county, I have always been of the impression that you really can't do a thorough search from the comforts of your living room. First, it is rare that all of the records you need are available online. And, second, the "official records" are usually on found in the county courthouses. Nonetheless, ads are popping up offering "work from home" positions for title abstractors.

A few of the counties we work in have the county recorder's records available online. Still, they don't have them all. The reliability of the online records is also questionable. Here is a typical disclaimer:

We have tried to ensure that the information contained in this electronic search system is accurate. The Recorder's Offices make no warranty or guarantee concerning the accuracy or reliability of the content at this site or at other sites to which we link. Assessing accuracy and reliability of information is the responsibility of the user. The user is advised to search on all possible spelling variations of proper names, in order to maximize search results. The Ohio County Recorder's Offices shall not be liable for errors contained herein or for any damages in connection with the use of the information contained herein.

Online information is a good resource for some tasks. But, in my opinion, it is not sufficient for actually conducted a thorough title search. Some abstractors have told me in the past that they have discovered different results with the same search conducted online and at the courthouse. As the above disclaimer points out, you are responsible for errors if you rely on the online records.

And, if you need to get a map to scale you won't find that online. The Auditor's offices all have their records accessible online, but they aren't updated as frequently as the records maintained in their office. Clerks of court offices are hit and miss... some are online, some aren't. Even if they are, most do not provide access to documents so you can only review the docket. What is actually written on those documents and signed by the judge can have a huge impact on what you should be reporting - how can you accurately report the status of title without access to those documents?

I wonder if E&O insurance would cover a claim resulting from an online search, where the official records at the courthouse were more accurate. If the online records are "just as good," why is there a warning and disclaimer on the Web sites?

In my mind... you can't really do a title search online - at least not one I would be willing to be liable for. When I was a title agent, I would never have issued a policy based on an online search. Now that I am practicing law, I never make decisions or recommendations to my clients based on such a search. I still want someone physically going to the courthouse and checking the "official records" before I do anything.

But... while browsing the Internet this morning, I found several ads seeking applicants for "Remote Title Abstractor" positions. Here are a couple:

Search and examine real estate deeds, mortgages, easements, judgments and tax assessments to establish chain of title. Work from home... Train on-site, then work from home.
Required:
High school diploma
Six months title search or examination experience
Microsoft Office, Internet Explorer
Location: remote

Compensation: TBD

And,

Work from home... as a Title Abstractor, Landman. Candidate will executing an examination of various property. Candidate will review and examine various property materials for accuracy and applicability and identify any restrictions that would limit the use of the property.

Requirements:

High School Diploma or equivalent

2+ years experience in title abstracting or review work

Proficient in Microsoft Office

Compensation: $12 to $15/hr

There were several similar ads for positions in various states, including Pennsylvania, Maryland, Michigan, New York, Louisiana, and Oklahoma. The requirements all seemed to require a high school diploma and six months to two years of experience. Seems like a relatively easy job to obtain.

I don't think this is a good trend for our industry. There is a lot riding on that title search and I cringe to think that they are being conducted like this... online by someone with very few qualifications. The fact they are "work from home" positions leads me to believe that there is very supervision going on.

I have said it many times before, and I will say it again. The title search is the foundation upon which all title policies are issued, and it is shocking that every other participant the process is required to be licensed, except the person doing that search. Realtors, mortgage brokers, appraisers, surveyors, title agents, and attorneys are all required to be licensed... but not the title abstractor. Think about this... an attorney has to be licensed to do something as simple as preparing a deed, yet the person who is charged with providing the information to ensure marketable title isn't.

Inverse Foreclsoure?

rfranco@sourceoftitle.com (Robert A. Franco) — Wed, 09 May 2012 15:50:09 EST

I have seen two very odd situations recently... where the lenders didn't complete foreclosures. Both owners are stuck with properties, still subject to the liens, and they can't sell them. It seems like the homeowners should have some remedy. Perhaps what they need is a right to force a foreclosure - an inverse foreclosure where the homeowner initiates the process.

In the first situation, the homeowner inherited the property from her deceased father in 2008. The property was conveyed to her and the estate was closed. She contacted a Realtor to list it for sale and a buyer was found. The title company discovered that there were two open mortgages of record. No payments have been made in over 4 years, but neither lender attempted to foreclose.

The first mortgage was a business loan to the decedent's wife. The decedent offered his home as additional collateral for the loan. Sometime before his death, the wife's business failed and the lender foreclosed on the business property, but not this one. The two divorced and the ex-wife is out of the picture now.

When the title company called for a payoff, the lender indicated that they had charged-off the remaining balance. However, they didn't release the lien. They are currently investigating the matter.

The second mortgagee has never attempted foreclosure, either; probably because they appear to be in second place and wouldn't get paid from the proceeds.

Most likely, if this property is going to be sold, both will want to be paid something and it will probably be more than the property is worth at this point. This one is stuck in limbo, waiting for the first lender to provide a payoff, or release their lien. This may turn into a short sale, if everyone can agree.

In the second situation, the homeowner filed for bankruptcy. The lender filed a foreclosure and got a default judgment. They took it all the way to sheriff's sale. Unfortunately, it didn't sell for "lack of bidders." Rather than try again, the lender simply dismissed the case. This was also in 2008.

The home had been vandalized and is practically worthless. After re-establishing her credit, this homeowner tried to buy another house. The new lender turned her down - not because her credit was not good enough, but because she still owns this house. They informed her that they won't be able to loan her money until at least 3 years after this house is sold.

She was shocked to learn that she still owned it. She was served with a copy of the decree of foreclosure, and assumed it was all over with, 4 years ago. Nobody told her that the home didn't sell, or that the case had simply been dismissed, leaving her with title to the house that she thought she lost a long time ago.

When she called the lender, they told her to sell it... but, of course, they didn't release their lien, either.

In both of these cases, the homeowners do not want the houses. And, they cannot sell them. What is the owner to do when the lenders do not foreclose... even after several years of no payments?

I think there should be an inverse foreclosure process that would allow the owners to initiate the foreclosure. I envision a statutory inverse foreclosure statute that would allow the owner to recover the costs incurred in bringing the foreclosure, including their attorney fees, from the proceeds of the sale before the lenders are paid on their liens.

It is strange to think that a homeowner would want to foreclose on themselves. However, these properties both need to be sold free and clear of liens. A foreclosure is the best way to do it. Unfortunately, if the lenders won't foreclose the owners don't have many options to get rid of the properties and move on with their lives.

I can think of a couple of other ways to handle the situation. But the alternatives seem to have other drawbacks. I thought I would open this up for discussion. There is more than one way to skin a cat... as they say. Anyone have any ideas, while I wait for the legislature to pass new laws allowing the homeowner to foreclose on their own property?

Hypothetical: Life Estates

rfranco@sourceoftitle.com (Robert A. Franco) — Sat, 05 May 2012 15:01:31 EST

This site is dedicated to title issues, and particularly title searching. Because I believe it is important to discuss issues that come up in the course of a title search, I have posted some hypothetical questions in the past that were inspired by actual searches. We have discussed recording statutes and survivorship tenancy. Most recently, I posted a hypothetical on life estates in the forums.

This hypothetical is based on a fact pattern from an actual title search. My first thought was "the client will certainly call me with questions on this one," so I thought it would make for a good discussion here.

Here is what the title search showed:

Alan owns a parcel of real estate. He conveys it to Betty and Carla reserving a life estate for himself. Betty, as duly appointed attorney-in-fact for Alan, conveys his life estate to the Family Trust.

The question, then, is how is title to the real estate vested? Obviously a trust does not have a "life," so can a trust even hold a life estate interest? And, why would anyone convey a life estate to a trust?

It is helpful to break this down to understand it better. Alan initially held title in severalty. After the first conveyance, Betty and Carla held title as tenants in common, subject to the life estate of Alan. Alan has a present possessory interest, the life estate, and Betty and Carla have a future interest, the remainder.

After the conveyance of the life estate to the trust, Betty and Carla still hold title as tenants in common. But now it is subject to the life estate pur autre vie of the Family Trust for the life of Alan. Betty and Carla's future interest remains unchanged; their right to possession is still subject to the life of Alan. The only difference is that the right of possession is now held by the Trust, also measured by the life of Alan.

A life estate pur autre vie is a life estate that is measured by the life of another, rather than life of the person entitled to possession.

So, why would anyone convey a life estate to a trust? We can only speculate why this happened in this particular instance, but there could have been a good reason for it.

Assume that several years ago, Alan did some Medicaid planning. His purpose was to get assets out of his name so he may qualify for Medicaid in the future without losing everything he acquired during his lifetime. He deeded his real estate to his two daughters, but reserved a life estate so he could live in his home for the rest of his life.

Years later, after the look back period, assume that Alan needed to apply for Medicaid to provide care. He would have most likely have been denied because he still owns a substantial asset, the life estate. Medicaid would likely require Alan to sell his life estate interest and use those funds for his care before they would begin paying benefits. The obvious problem is - who would buy a life estate that is only good for Alan's life, knowing he could pass away at any time? Medicaid would value the life estate based on actuarial tables using his life expectancy, but in the real world such an interest is practically impossible to sell.

Fortunately, the Family Trust has substantial assets. Assuming that the trust is exempt from Medicaid, perhaps it is an irrevocable trust created by Alan's very wealthy late wife, the trust could buy the life estate from Alan for fair market value. Alan can use the money to pay for his care, and after the appropriate spend-down, Medicaid will provide benefits. And, the trust has the right of possession, so it can rent the home to recoup some of the cost of purchasing the life estate.

Or, maybe the life estate was conveyed to the trust before Alan needed Medicaid benefits. If he makes it through the look back period without requiring benefits, the life estate will not be a counted resource. This can be risky, however, because if Alan doesn't make it through the look back period he will face a period of ineligibility for the improper transfer.

The point is that we aren't always privy to the facts that motivated the real estate transactions we find on our searches. Sometimes they make us scratch our heads and wonder "why would anyone do this?" But, regardless of the reason we must determine what affect these conveyances have on title.

Can A Trust Hold Title In Ohio?

rfranco@sourceoftitle.com (Robert A. Franco) — Thu, 23 Feb 2012 16:00:23 EST

Generally speaking, a trust is not a legal entity and it may not hold title to real property, with a couple of exceptions for specific types of trusts. Rather, it is the trustee who holds title for the benefit of the beneficiaries of the trust. For example, the proper grantee on a deed funding a trust with real property is "Jon Smith, Trustee of The Jon Smith Trust." A deed to "The Jon Smith Trust" is a void ab initio because the trust is a non-entity. Unfortunately, there are many deeds of record purporting to convey the property to the trust, with no mention of the trustee. Ohio has recently passed a bill that will allow for such defects to be cured.

In the past, many practitioners would consider such deeds a nullity. If the grantor was still alive, the deed could be corrected and re-filed. But, after the grantor has passed it is more difficult. One common practice was to include the property in the estate of the grantor, and it would then pass according to the terms of his will. If he had a pour-over will, leaving the property to the trust, the same end result would be obtained. However, if the trust was not the beneficiary under the will, the results could be very different and not what the grantor had intended.

Some practitioners would attempt to cure the defective deed by filing a memorandum of trust, identifying the trustee, and an affidavit of facts to correct an error in the name on the deed. However, because the deed is considered void ab initio, as if it never was, it is not entirely clear that this is a proper cure.

The Ohio legislature has recently passed S.B. 117, which was signed by the governor on December 21, 2011 and will become effective on March 22, 2012. It makes a significant change to O.R.C. § 5301.071, which provides:

No instrument conveying real property, or any interest in real property, and of record in the office of the county recorder of the county within this state in which that real property is situated shall be considered defective nor shall the validity of that conveyance be affected because of any of the following:
* * *
(E)(1) The grantor or grantee of the instrument is a trust rather than the trustee or trustees of the trust if the trust named as grantor or grantee has been duly created under the laws of the state of its existence at the time of the conveyance and a memorandum of trust that complies with section 5301.255 of the Revised Code and contains a description of the real property conveyed by that instrument is recorded in the office of the county recorder in which the instrument of conveyance is recorded. Upon compliance with division (E)(1) of this section, a conveyance to a trust shall be considered to be a conveyance to the trustee or trustees of the trust in furtherance of the manifest intention of the parties.
(2) Except as otherwise provided in division (E)(2) of this section, division (E)(1) of this section shall be given retroactive effect to the fullest extent permitted under section 28 of Article II, Ohio Constitution. Division (E) of this section shall not be given retroactive or curative effect if to do so would invalidate or supersede any instrument that conveys real property, or any interest in the real property, recorded in the office of the county recorder in which that real property is situated prior to the date of recording of a curative memorandum of trust or the effective date of this section, whichever event occurs later.

This essentially confirms that an incorrect deed to a trust is a valid conveyance to the trustee, so long as two conditions are met. First, the trust must have been duly created at the time of the conveyance. And, second, a proper memorandum of trust, with a legal description of the property, is recorded in the county where the deed was recorded.

This curative section is retroactive, however, it will not have retroactive effect if another conveyance has been recorded prior to the recording of the memorandum of trust. This is important for the following reason:

Assume that Jon Smith conveys title to his real property to "The Jon Smith Trust" and the beneficiaries of the trust are his children from his first marriage. Jon Smith dies and his will leaves everything to his second wife. His intent was clearly to leave his real property to his children in trust, and everything else to his wife.
However, when the defective deed is discovered, the real property is included in his probate estate and passed to his wife with a properly recorded Certificate of Transfer.
The trustee now wants to rely on the newly enacted Ohio statute to file a memorandum of trust and validate the conveyance to the trustee, thereby intending to supersede the certificate of transfer.

O.R.C. § 5301.071(E)(2) would not permit the trustee to file a memorandum of trust and essentially claim that the defective deed was valid to reclaim the real property for the trust beneficiaries, because there has already been a conveyance which would be invalidated.

This new law will make it easier to cure a common title problem so that the results conform to what the grantor most likely intended - the trustee to hold title to the property. This is certainly great news for those who have mistakenly prepared the deed to the trust.

One question comes to mind, however. Is it now possible to create an intentionally defective deed to a trust as an estate planning tool? In the past, nobody intentionally created a defective deed. This new statute was intended to cure a defect that has quite obviously always been created by mistake. But, by expressly providing a way to retroactively cure this defect, is there now an option to "wait and see" to provide more flexibility in estate planning? Consider this hypothetical:

Jon Smith intentionally deeds his property to "The Jon Smith Trust." After Jon Smith passes, his heirs, who may very well be the same trust beneficiaries, realize that it has been a long time since the trust has been reviewed and updated. They do not like the trust terms and would rather take title through probate and own it outright, than be burdened by the trust terms. Could they decide NOT to file the memorandum of trust and instead include the property in the estate of Jon Smith?

The new statute will only give retroactive effect to the defective deed if a memorandum of trust is filed before another conveyance that would be invalidated or superseded. So, logically, if a certificate of transfer is obtained and recorded before a memorandum of trust is filed, the defective deed cannot be cured and the certificate of transfer would be a valid conveyance. The result is that the heirs would hold title outright.

Of course, if the heirs decide the trust is more beneficial or convenient, they could simply file the memorandum of trust to retroactively cure the defect and the trustee would hold title to the real estate.

It is less clear whether this strategy, which is arguably "too cute by half," would work to obtain tax advantages or whether it could be useful in Medicaid planning. My guess is that a taxing entity or the administrator of the Medicaid Recovery Program would not consider the conveyance effective until the memorandum of trust is filed. Of course, a savvy practitioner would argue that the statute provides for retroactive effect and that the conveyance should be respected for all purposes as of the time the defective deed was recorded.

What about creditor's rights? Suppose Jon Smith has a son with money problems. The trust provides a spend-thrift provision to protect the trust assets from the son's creditors. If Jon Smith's real property passes to the son through probate, it would be available to satisfy his debts. In the hypothetical above, the heirs could wait and see if Jon Smith's son still has creditors knocking on his door to decide whether to cure the defective deed, or pass the property through probate. Should this be an option? Would retroactive effect be given to the defective deed even though it would prejudice the rights of the creditors?

Either way, we will likely see litigation when the issue arises, whether the defective deed was a "mistake" or part of an "intentional" planning strategy. The result may be that the conveyance is not retroactive for all purposes. For example, a conveyance made for Medicaid planning purposes to "The Jon Smith Irrevocable Trust" may not start the clock running on the five year look-back period because the grantor could still sell the property by deeding it to a third party before he files the memorandum of trust to cure the defective deed. Arguably, if the grantor still has control over the property the clock should not begin to run on the look-back period. But, if the defect in the deed was an "honest mistake" it would seem that the legislature's intent that the cure is retroactive should be respected.

Because of the uncertainty, it is still good practice to get it right - deed to the trustee, NOT the trust. In light of the difficulty in proving an "honest mistake" and the real potential for abuse, the retroactive effect may not be respected for all purposes. Only time, and expensive litigation, will tell.

Is That Mortgage Open-Ended?

rfranco@sourceoftitle.com (Robert A. Franco) — Tue, 27 Dec 2011 13:28:15 EST

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?"

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?

Last Week I Wrote-off Approximately $7,000 In Bad Debt.

rfranco@sourceoftitle.com (Robert A. Franco) — Wed, 21 Dec 2011 10:32:43 EST

I have always resisted writing-off bad debt. I know that we have been carrying balances on customer accounts that is uncollectable. But my theory was that if those customers ever called to ask us to do their work again, I wanted to be able to tell them to pay their balance first. So, I just kept it on the books as a reminder. Finally, though, to get a fresh start in 2012, I decided to clean up all of those accounts... some dating back to 2004. I learned a few things, or at least confirmed what I already knew, that I thought would be worth sharing.

First, for the accounting purist out there, let me acknowledge that I am not using the term "write-off" with its precise technical meaning. Like many small businesses, I use the cash-method of accounting. This means that the income is not counted until the payment is received. And, since these payments were never received, there is really nothing to "write-off" (and no deduction on my taxes for these uncollected bills). What I mean by write-off, instead, is that I zeroed out the balances with a notation that it was never collected; just to clean up my books.

The first interesting thing I notices was that collections problems really began in 2004. And, there were a lot of them. This is around the time we really started to notice clients doing things like making partial payments - they would pay the search fee, for example, but not the additional copy charges. It was clear from my review of our files that from 1993 (when I started) to 2004, clients paid our invoices in-full. I'm not really sure why this ever changed. It seems simple enough - we send and invoice and the client pays it. That worked fine for years, but for some reason in 2004, that all changed. It continues to be a problem today, but we keep a much closer eye on it.

The next thing I noticed was that we had added a lot of new clients since 2004. And, it was clear that we had the same problems many others have complained about on the forums - fly-by-night vendor managers who ordered searches for two or three months and then disappeared without paying the bill. Rather than well-established title companies, our clientele had suddenly changed to lots of little vendor management companies. These losses were typically smaller, but there were more of them than I care to mention.

I have said it before, and I will say it again. There are some good vendor management companies out there, but the majority of them are underfunded ( of the we-can't-pay-you-until-our-client-pays-us variety) and they are constantly the ones that seem to have trouble paying their bills on time. Just to be clear, it is not my job to extend lengthy credit terms to you because you can't seem to collect from your clients! Here is my suggestion to them - give me your clients and I will do the work for them directly; let it be my responsibility to collect from them if you cannot handle your business. I have no desire to work for a second rate middle-man who cannot manage his affairs.

The write-offs associated with these vendor management companies mainly fell into two categories: (1) they constantly underpaid their invoices, leaving a balance that never got paid, or (2) they ordered searches that they clearly never had any intention of paying for. My clear conclusion was that vendor management companies have been a terrible thing for independent abstractors!

The last category of write-offs was of a more traditional nature, defalcations. I noticed a couple of well established title companies that have simply gone under (with notoriety). This has always been a risk for independent title abstractors, but has become more common lately than it used to be. Though these are more rare than the typical deadbeat clients, when this happens the balance is usually much larger. And, it really hurts the bottom line. It is particularly more painful now because business is so slow and it is hard to absorb such large losses.

In the end, there is about $7,000 worth of work we have done that we will never see. It could be much worse, I guess. We have always tried to cut clients off before balances got too large for us handle. But, I am still a little angry that things had to change this way. We have always tried to operate in a very professional manner and we do expect the same from our clients, both large and small. Unfortunately, you just cannot count on all of them living up to your expectations these days.

So, what do I plan to do about this? I'm not really sure. Clearly, there is nothing I can do about this $7,000; it is already gone. But, I do plan to take control of the situation in 2012 so it doesn't happen again. I am considering requiring new clients to sign contracts - something I never really felt was necessary in the past. I may require some new clients to sign personal guarantees, so there is a real, live person I can collect from if the "company" goes defunct. I am also considering new clients to submit a deposit, refundable after a certain number of months of on-time, in-full payments. Do I expect that to be well-received? No.

Part of the problem with insisting that clients take responsibility for paying us on our terms, is that it is certainly not "the norm" in this business. It is too easy for them to find someone else to do the work who will not take these kinds of steps to protect themselves. Others will simple take the work... then complain when they don't get paid. That makes it very difficult for any of us to insist on reasonable controls over our accounts receivable.

But, maybe it is better to give up those clients than to get stuck again. Sure, I may lose out of the opportunity to add a good client who doesn't want to jump through those hoops to order a search. It might be worth it to filter out all of the deadbeats who will be more hassle than they are worth, and who will ultimately leave me with a large outstanding balance.

The industry will turn around eventually and work will pick up again. As I rebuild our abstracting business, I want to do it with good, reliable clients. I do not want clients that cannot pay us on-time (Net30). I do not want clients that will not pay our invoices in-full. I do not want clients that plan on running up a bill and switching to a different abstractor when our bills are due. Maybe this is the only way.

My game plan for 2012 is to start running my business and stop letting clients tell me how to do it.

Bevilacqua Court Got It Wrong

rfranco@sourceoftitle.com (Robert A. Franco) — Mon, 24 Oct 2011 09:38:07 EST

The recently decided Bevilacqua case in Massachusetts held that a buyer who received a defective deed from a foreclosing bank did not have standing to bring a "try title" action to clear his title. Though this a Supreme Judicial Court opinion, and it is now the law in Massachusetts, I don't think the Court got it right.

Essentially, Bevilacqua acquired title, post-foreclosure, from U.S. Bank. Unfortunately, it was MERS mortgage and MERS had not yet assigned the mortgage to U.S. Bank. Thus, U.S. Bank was not "the mortgagee, or his executors, administrators, successors or assigns," and it had no authority to deed the property to Bevilacqua.

Bevilacqua recognized that because of this defect in the foreclosure proceeding, the prior owner, Pablo Rodriguez, may still have an interest in the property. To clear his title, Bevilacqua filed a try title action. This would have required Rodriguez to bring his claim of an interest in the property, or be forever barred from claiming any interest in the future.

The Massachusetts law provides, in relevant part:

If the record title of land is clouded by an adverse claim, or by the possibility thereof, a person in possession of such land claiming an estate of freehold therein or an unexpired term of not less than ten years, and a person who by force of the covenants in a deed or otherwise may be liable in damages, if such claim should be sustained, may file a petition in the land court stating his interest, describing the land, the claims and the possible adverse claimants so far as known to him, and praying that such claimants may be summoned to show cause why they should not bring an action to try such claim.

There was no question that Bevilacqua was "a person in possession." However, the Court found that the statute also required that "a plaintiff must hold a 'record title' to the land in question" to have standing to bring a try title action. Though the Court admitted that there was very little precedent for it to rely on, it found support in two cases from 1894 and 1901.

The 1894 case of Arnold v Reed had held that mere possession was not sufficient and "title appearing 'on the record' was also necessary." Here, Bevilacqua did have a recorded deed, however the Court found that it was insufficient because "recording is not sufficient in and of itself... to render an invalid document legally sufficient."

"As a result," the Court wrote, "it is the effectiveness of a document that is controlling rather than its mere existence. The effectiveness of the quit-claim deed to Bevilacqua thus turns, in part, on the validity of his grantor's title. Accordingly, a single deed considered without reference to its chain of title is insufficient to show 'record title' as required by [the statute]."

This may make sense in the context of the Arnold case, decided more than a century ago, but it is not really consistent with the plain language of the statute, which only requires the plaintiff be to "in possession" and "claiming an estate of freehold therein." If Bevilacqua actually did have a valid deed, and held "record title" as interpreted by the Court, he would have had no need for the try title action.

The word "claiming," to me, means that the plaintiff must have at least color of title. "Color of Title" means:

"The appearance of a legally enforceable right of possession or ownership. A written instrument that purports to transfer ownership of property but, due to some defect, does not have that effect. A document purporting to pass title to land, such as a deed that is defective due to a lack of title in the grantor, passes only color of title to the grantee."

The fact that Bevilacqua paid good and valuable consideration for his interest in the property and received a deed, which although defective was recorded to provide constructive notice to all parties, should have been enough for him to be able to claim a freehold estate; he at least had color of title.

The Court's holding essentially would require that Bevilacqua be able to prove that he would prevail in the try title action before allowing him to bring it - despite the fact that nobody was contesting his title - not even Rodriguez, the prior owner.

Aside from that, however, the practical considerations also weigh in favor of holding that Bevilacqua had standing to bring a try title action. The Court found that although Bevilacqua was barred from bringing an action to try title, he would not be barred from bringing other actions regarding the title to his property. Specifically, in a footnote, the Court wrote:

Nothing contained herein is intended to limit Bevilacqua's right, if he can show himself to be mortgagee of the property, to pursue foreclosure under the appropriate statutes. The record does not disclose if Bevilacqua presently holds the promissory note secured by Rodriguez's mortgage. Whether the holder of a mortgage may foreclose the equity of redemption without also holding the note is a question that is not before us.

But, what is the practical difference in this case between a try title action and a new foreclosure? Rodriguez would still be subject to the same requirement for service in both cases, and he would be permitted the same opportunity to claim any interest he held in the property. Presumably, Rodrigeuz was properly served in both cases, and he never once appeared to defend his interest. If the only person that could claim an adverse interest in the property is not interested in asserting such a right, why are we wasting so much money, and judicial resources, trying to prevent someone from clearing the title?

It appears that the only difference is the time and cost involved. Clearly the foreclosure will take longer and cost much more... just to get to the same result. Perhaps the trial judge raised this issue on his own, merely to jab at the banks for their shoddy foreclosure practices (and for that I kind of admire him), but the effect here will not hurt the banks nearly as much as it will the innocent homeowners who acquire "bad title" and the title companies who insure them.

Fortunately, I'm in Ohio... not Massachusetts. Our "try title" equivalent, a "quiet title" action, is much more clear.

An action may be brought by a person in possession of real property, by himself or tenant, against any person who claims an interest therein adverse to him, for the purpose of determining such adverse interest. Such action may be brought also by a person out of possession, having, or claiming to have, an interest in remainder or reversion in real property, against any person who claims to have an interest therein, adverse to him, for the purpose of determining the interests of the parties therein.

The only requirement here seems to be "possession." Of course, our statute was last updated in 1973 and is much more modern that the century old statute in Massachusetts. We have all heard the expression "possession is nine-tenth of the law." There is a reason for that... if a person is in possession, and another who may claim a superior interest is not challenging that possession, perhaps that is because he doesn't want it. If that is the case... who are we to decide otherwise?