The Effects of Sub-Prime Market Woes

The trauma in the “sub-prime” mortgage market has obviously spilled over into the “prime” mortgage markets. The demise of a number of “sub-prime” lenders has had a domino effect, threatening the viability of some of our nation’s largest and formerly most successful lenders. Unfortunately, as a result of the mortgage problems, there has also been a dramatic change in real estate settlement procedures.

Until the recent “crisis,” the standard procedure in our area was for funds to be disbursed to all proper parties at settlement, rather than awaiting the formal recordation of documents in the Land Records of the pertinent jurisdiction. Disbursing at the table was made possible because most Title Insurance Underwriters agreed to insure “the gap.” Insuring the “gap” means that the title insurance company would protect the mortgage lender as well as the purchaser from any lien or title defect that occurred between the time of settlement and recordation of the deed and /or deed of trust.

The inability of some Lenders to provide good funds at settlement has led some Title Insurance Underwriters to impose a dramatic change to the disbursement procedures of settlement attorneys. Previously, when a lender advised the title company that loan proceeds had been or were in the process of being wired to the title company, it was assumed that funds would arrive soon, and settlement and disbursement of all funds could occur. Due to the changes in the marketplace, title underwriters have now issued formal instructions that no funds are to be disbursed until the actual receipt of “good funds” into the escrow account.

Consequently, real estate agents should be aware that title companies should no longer disburse any funds to the sellers or the Realtors until the receipt of proper loan funds. Proper funds include received wires, or other cleared funds. Technically, even a certified check from the lender is suspect, since a stop payment order could be issued on a certified or bank check. Because of these changes, real estate agents need to use great caution when scheduling “back to back” settlements. If the funds are not in the account for the first closing, then disbursement at the first closing may not occur. Accordingly, the next settlement may then be delayed.

Even in the case of a sale not involving a subsequent purchase, the sellers normally expect immediate disbursement, which may not occur without the receipt of good funds. Selling agents should be in touch with the Buyer’s Lender to make sure that good funds are delivered to the settlement attorney prior to settlement. Listing Agents should warn their Seller of the potential for delayed disbursement of proceeds. As long as the parties are made aware of this situation, efforts can be made to anticipate and avoid the inevitable problems. Although this is not likely to be a consistent problem, the parties need to be aware of the potential for delays in a small number of situations.