May 18, 2017
Secrets of The Title Insurance Industry
The New York State Department of Financial Services has proposed two new regulations for the title insurance industry. Premiums for title insurance in New York State are set by regulators, so title insurance companies cannot compete on price. Instead, they compete on service. “Service” has been interpreted widely to include all sorts of gifts — fancy meals, hard-to-get tickets, even vacations. The real customers of title companies are the industry’s repeat players — often lawyers and lenders who recommend the title company — and they get these goodies. The people paying for title insurance — owners and borrowers — ultimately pay for these “marketing” costs without getting the benefit of them.
The first regulation is intended to get rid of these marketing costs (or kickbacks, if you prefer). This proposed regulation makes explicit that those costs cannot be passed on to the party ultimately paying for the title insurance. The proposed regulation reads, in part,
(a) As used in this section:
(1) Compensation means any fee, commission or thing of value.
(2) Licensee means an insurance agent, title insurance agent, insurance broker, insurance consultant, or life settlement broker.
(b) Insurance Law section 2119 authorizes a licensee to receive compensation provided that the licensee has obtained a written memorandum signed by the party to be charged, in accordance with such section.
(c) A licensee shall not charge or collect compensation without such a memorandum, nor shall any such licensee charge or receive compensation except as provided in Insurance Law section 2119.
(d) The memorandum shall include the terms and date of the agreement, and the amount of the compensation. Where compensation is permitted, to the extent practical, the licensee shall obtain the written memorandum prior to rendering the services. The licensee shall not stipulate, charge or accept any compensation if the licensee has not fully disclosed the amount or nature of the compensation or the basis for determining the amount of the compensation prior to the service being rendered. (5-6)
The second regulation is intended to ensure that title insurance affiliates function independently from each other.
While these proposed regulations are a step in the right direction, I wonder how effective they will be, given that title companies cannot compete on price. Maybe it would be better to let them do just that, as some other states do . . .
These are mighty technical proposed regulations, but they will have a big impact on consumers. Have no doubt that industry insiders will comment on these regs. Those concerned with the interests of consumers should do so as well.
The Department of Financial Services is accepting comments on these two proposed regulations through June 19th, 2017.
May 18, 2017 | Permalink | No Comments
May 16, 2017
Manafort’s Mystery Mortgage
NBC News quoted me in Manafort Got $3.5M Mystery Mortgage, Paid No Tax. It opens,
Former Trump campaign manager Paul Manafort took out a $3.5 million mortgage through a shell company just after leaving the campaign, but the mortgage document that explains how he would pay it back was never filed — and Manafort’s company never paid $36,000 in taxes that would be due on the loan.
In addition, despite telling NBC News previously that all his real estate transactions are transparent and include his name and signature, Manafort’s name and signature do not appear on any of the loan documents that are publicly available. A Manafort spokesperson said the $3.5 million loan was repaid in December, but also said paperwork showing the repayment was not filed until he was asked about the loan by NBC News.
News of the missing documents comes as New York Attorney General Eric Schneiderman is taking a “preliminary look” at Manafort’s real estate transactions, according to a source familiar with the matter.
On August 19, 2016, Manafort left the Trump campaign amid media reports about his previous work for a pro-Russian political party in Ukraine, including allegations he received millions of dollars in payments.
That same day, Manafort created a holding company called Summerbreeze LLC. Several weeks later, a document called a UCC filed with the state of New York shows that Summerbreeze took out a $3.5 million loan on Manafort’s home in the tony beach enclave of Bridgehampton.
Manafort’s name does not appear on the UCC filing, but Summerbreeze LLC gives his Florida address as a contact, and lists his Bridgehampton home as collateral.
A review of New York state and Suffolk County records shows the loan was made by S C 3, a subsidiary of Spruce Capital, which was co-founded by Joshua Crane, who has partnered with Donald Trump on real estate deals. Spruce is also partially funded by Ukrainian-American real-estate magnate Alexander Rovt, who tried to donate $10,000 to Trump’s presidential campaign on Election Day but had all but the legal maximum of $2,700 returned.
The mortgage notice for the loan, however, was never entered into government records by the lender. A mortgage notice normally names the lender, and gives the interest rate, the frequency with which payments must be made, and the length of the mortgage.
Real estate experts contacted by NBC News called the omission “highly unusual,” though not illegal.
David Reiss, a professor at Brooklyn Law School who specializes in real estate law, said, “It would be totally ill-advised to not record the loan on the property that is being secured. … Recording the mortgage on the property protects the lender.” Without it, there’s no public record that the borrower owes money.
May 16, 2017 | Permalink | No Comments
Buying a Foreclosure or Short Sale
DailyWorth quoted me in Should I Buy a Foreclosure or Short Sale? It reads, in part,
I’m looking to buy a new home, and I’ve noticed that there are a couple of “short sale” and foreclosed homes in the area where I’m interested in living. These homes are priced substantially lower than others, and I’m wondering what the catch is. I’ve heard that short sales or foreclosures often need repairs. What else do I need to know to decide whether to invest in one of these properties?
Purchasing a home through a short sale or a foreclosure process can be a way to get a good deal on a property. But it isn’t for the faint of heart. Both processes are likely to be more complicated than purchasing a home on the open market.
First, make sure you understand the differences between these categories. Both are used when a property owner is in financial distress and can no longer afford mortgage payments.
In a short sale, the proceeds from the sale will fall short of the debt owed on the property. Such a sale can only occur if the mortgage holder (usually a bank) has agreed to accept less than the amount owed on the loan.
In a foreclosure, on the other hand, the mortgage holder has repossessed the property and is trying to recoup its losses by selling the house for the amount still owed on the loan. That amount is typically still less than the market value of the home.
Here are some of the common issues you may encounter when buying a foreclosure or short sale.
Short sales can also take months to get lender approval. “The seller’s bank can make things very difficult, making the borrower jump through many hoops — hoops that can take a long time to navigate,” warns David Reiss, a professor of law at Brooklyn Law School who writes and teaches about real estate.
And in the end, the bank may respond with a counteroffer that doesn’t meet your budget or terms. “So you might wait for a long time only to be disappointed,” says Sep Niakan, owner of Condo Black Book, a leading condo search website in Miami and broker of HB Roswell Realty.
“While you may get a good price, you will be paying for the house with uncertainty, delay, and frustration,” Reiss says. “You’ll need to determine for yourself whether it is worth it.”
May 15, 2017 | Permalink | No Comments
May 12, 2017
AIG Suit Strengthens Government Powers
Law360 quoted me in Greenberg’s AIG Loss Strengthens Gov’t’s Crisis Powers (behind a paywall). It reads, in part,
The Federal Circuit’s decision reversing Maurice R. “Hank” Greenberg’s win in his campaign against the U.S. government over its bailout of American International Group Inc. was the latest in a string of defeats for investors challenging financial crisis bailouts, and could further strengthen the government’s hand in future crises, experts say.
The Federal Circuit on Tuesday rejected claims by Greenberg, AIG’s former chief executive, and his current company, Starr International Co. Inc., that the government engaged in an unconstitutional taking of property when it demanded and received 80 percent of the giant insurance company’s stock in exchange for an $85 billion bailout in September 2008.
Although the appellate panel overturned a lower court ruling by rejecting Greenberg’s standing to sue, it came in the wake of a series of rulings against shareholders in Fannie Mae and Freddie Mac. Those shareholders are seeking to overturn a President Barack Obama-era move to sweep profits from the bailed out mortgage giants back to the U.S. Department of the Treasury rather than into shareholder dividends, cases courts have repeatedly rejected.
Those wins mean that courts are giving the government wide latitude to respond to a financial crisis, even if some shareholders are harmed, said David Reiss, a professor at Brooklyn Law School.
“There’s now a lot of judges who have come down to effectively say, ‘The government had very broad authority to address the financial crisis, and we’re not going to second-guess that,'” he said.
Greenberg’s campaign against the Federal Reserve, the Treasury Department and other arms of the U.S. government stems from the effort to bail out AIG in 2008 after it was brought to the brink of insolvency due to the failure of credit default swaps held by its structured finance unit.
In exchange for the $85 billion loan that the Federal Reserve Bank of New York ultimately extended, AIG and its board agreed to hand over nearly 80 percent of its equity and fire its top executives.
Greenberg, who left AIG in 2005 under a cloud, and his current firm Starr International were the largest shareholders in the world’s largest insurer, and argued in a 2011 lawsuit that the government had engaged in an illegal taking of shareholder property.
Federal Claims Judge Thomas C. Wheeler agreed with at least part of Greenberg’s argument in a June 2015 decision, saying that the Fed had placed unduly tough terms on AIG in exchange for the bailout loan, with those terms exceeding the central bank’s authority under Section 13(3) of the Bank Holding Company Act.
However, Judge Wheeler did not award any damages to Greenberg and shareholders in the class action, arguing that their shares would have been worth nothing without the government’s action.
Both Greenberg and the government appealed, and the Federal Circuit on Tuesday reversed Judge Wheeler’s holding on the question of whether the government exceeded its authority by placing tough terms on the bailout.
However, the opinion did not focus on the government’s actions but on the question of standing. Greenberg and his company did not have it, so the rest of his argument was moot, the panel said.
* * *
While the Federal Circuit did not address the substance of Greenberg’s claims, the U.S. Supreme Court might.
Greenberg and Starr said Tuesday they plan to take their case to the U.S. Supreme Court. If the high court takes up the case, despite a lack of a circuit split on the issue of lawsuits over financial crisis-era bailouts, they could set the terms under which the government acts in a future financial crisis.
But even without a Supreme Court ruling in their favor, the government should feel that it is on stronger legal ground during a financial crisis with its two wins at the appellate court level, Reiss said.
“Companies who are looking to reverse government actions at the height of the financial crisis … are having a really tough row to hoe,” he said.
May 12, 2017 | Permalink | No Comments
May 11, 2017
The Lowdown on Blockchain & Real Estate
There is a lot of hype out there about the impact that blockchain technology will have on the real estate industry. There is no doubt that blockchain will be revolutionary over the long term, but its impact in the short term is much more limited. Spencer Compton and Diane Schottenstein have written an article for Law360 (unfortunately, behind a paywall), How Blockchain Can Be Applied To Real Estate Law, that provides a nice overview of where blockchain stands today in the real estate industry. It opens,
Real estate transactions are steeped in traditions that have hardly changed over hundreds of years. Today, as computer-based property recording systems are prevalent in our cities but roll out at a snail’s pace in rural areas (often hindered by strained municipal budgets), and e-signatures are little used (due to legitimate fears of fraud), arguably the real estate closing process has lagged in its use of computer aided technology. Yet other aspects of real estate ownership have been transformed by the internet: smart home technology to remotely control heating and lighting and monitor security; Airbnb which increases the value of real estate ownership and disrupts the hotel industry; and the real estate brokerage community’s design/photographic/communication technology to list and virtually show properties. Now add to our brave new world blockchain, a cloud-based decentralized ledger system that could offer speed, economy and improved security for real estate transactions. Will the real estate transaction industry avoid or embrace it?
What is blockchain?
Blockchain is best-known as the technology behind bitcoin, however bitcoin is not blockchain. Bitcoin is an implementation of blockchain technology. Blockchain is a data structure that allows for a digital ledger of transactions to be shared among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority such as a bank or trade association. Using algorithms, the system can verify if a transaction will be approved and added to the blockchain and once it is on the blockchain it is extremely difficult to change or remove that transaction. A blockchain can be an open system or a system restricted to permissive users. There can be private blockchains (for ownership records or business transactions, for instance) and public blockchains (for public municipal data, real estate records etc.). Funds can be transferred by wires automatically authorized by the blockchain or via bitcoin or other virtual currency. Transparent, secure, frictionless payment is touted as one of blockchain’s many benefits.
The article goes on to answer the following questions:
- How does a blockchain differ from a record kept by a financing institution or a government agency?
- How is a blockchain transaction more secure than any other transaction?
- How widely is blockchain used?
- How blockchain is being used to record real property instruments?
- How might blockchain affect the role of title insurance companies?
If the impact of blockchain on the real estate industry has mystified you, this primer will give you an overview of where things stand today and maybe tomorrow too.
May 11, 2017 | Permalink | No Comments
May 17, 2017
Assessing RESPA
By David Reiss
The Consumer Financial Protection Bureau issued a Request for Information Regarding 2013 Real Estate Settlement Procedures Act Servicing Rule Assessment. The Bureau
is conducting an assessment of the Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), as amended prior to January 10, 2014, in accordance with section 1022(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Bureau is requesting public comment on its plans for assessing this rule as well as certain recommendations and information that may be useful in conducting the planned assessment. (82 F.R. 21952)
This is certainly a pretty obscure initiative, albeit one required by the Dodd-Frank Act. But it is worth determining what is at stake in it. The Request includes some additional background:
Congress established the Bureau in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).1 In the Dodd-Frank Act, Congress generally consolidated in the Bureau the rulemaking authority for Federal consumer financial laws previously vested in certain other Federal agencies. Congress also provided the Bureau with the authority to, among other things, prescribe rules as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws and to prevent evasions thereof. Since 2011, the Bureau has issued a number of rules adopted under Federal consumer financial law.
Section 1022(d) of the Dodd-Frank Act requires the Bureau to conduct an assessment of each significant rule or order adopted by the Bureau under Federal consumer financial law. The Bureau must publish a report of the assessment not later than five years after the effective date of such rule or order. The assessment must address, among other relevant factors, the rule’s effectiveness in meeting the purposes and objectives of title X of the Dodd-Frank Act and the specific goals stated by the Bureau. The assessment must reflect available evidence and any data that the Bureau reasonably may collect. Before publishing a report of its assessment, the Bureau must invite public comment on recommendations for modifying, expanding, or eliminating the significant rule or order.
In January 2013, the Bureau issued the ‘‘Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X)’’ (2013 RESPA Servicing Final Rule). The Bureau amended the 2013 RESPA Servicing Final Rule on several occasions before it took effect on January 10, 2014. As discussed further below, the Bureau has determined that the 2013 RESPA Servicing Final Rule and all the amendments related to it that the Bureau made that took effect on January 10, 2014 collectively make up a significant rule for purposes of section 1022(d). The Bureau will conduct an assessment of the 2013 RESPA Servicing Final Rule as so amended, which this document refers to as the ‘‘2013 RESPA Servicing Rule.’’ In this document, the Bureau is requesting public comment on the issues identified below regarding the 2013 RESPA Servicing Rule. (Id., footnotes omitted)
The Bureau will be evaluating servicer activities such as responses to loss mitigation applications and borrower notices of error. It will also be evaluating fees and charges; the exercise of rights by consumers under the rule; and delinquency outcomes.
The Bureau is requesting comment on some technical subjects relating to the assessment plan itself. But if you think you have something to add, you should submit comments by July 10th here.
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May 17, 2017 | Permalink | No Comments