Picture this: You’ve sold your home, the buyer has loan approval, everything looks fine. Then, a week before turning over the keys, you’re told there’s a “cloud” on the title. Escrow can’t close until a $20,000 lien is cleared.
You’re stunned. You paid off that $20,000 second trust deed years ago and you have receipts to prove it.
What went wrong?
To clear a paid-off loan that is secured by real estate, the lender must turn over the original note and trust deed to the borrower or the trustee for “reconveyance” and filing with the county recorder. The reconveyance lets the world know that the borrower has satisfied the debt.
So even though the $20,000 debt was paid off, the county recorder was never notified, and the lien remained on the public record.
While this case is hypothetical, unreconveyed, or “open,’ trust deeds are a very real problem for home buyers and sellers, especially in the Southland, where the real estate market has always been active.
Experts estimate that 1 million to 2 million paid-off trust deeds remain unreconveyed in California. It’s not uncommon for a property to have several open trust deeds on the title--in some cases as many as 12 or more--without the owner ever realizing it, industry sources say.
Open trust deeds exist because of ignorance, procrastination and, not infrequently, through negligence on the part of lenders and trustees who don’t make enough money on a reconveyance (typically $65 for preparing and recording) to bother with the follow-through, title experts noted.
Open trust deeds can be resolved but may become complicated with the passage of time, said Gwen Rutkowski of Golden Bear Escrow in Los Angeles.
Solutions range from a relatively simple substitution of trustee to a costly last-resort measure known as a quiet title action that requires a judge’s decision. These procedures can be time-consuming and complex, she added.
Legislation introduced in 1989 has established tighter controls that are expected to ease the problem in the future.
Under the new rules, when the borrower has made his last payment on a real estate-secured loan, the lender is legally required to take the first steps toward recording cancellation of that debt. The lender has 30 days to deliver a signed request for reconveyance with the note and the trust deed to the borrower or to the trustee, who must then prepare and record the deed of reconveyance.
Failure to do so on the part of the lender can result in a penalty of $300. If the lender willfully fails to initiate the reconveyance, he is guilty of a misdemeanor punishable by fine or imprisonment in county jail. A borrower who believes his reconveyance was not handled promptly can file a complaint against the lender with the city attorney’s office.
Mike and Kathleen Venema, a couple in their 30s, admit that they were unsophisticated in matters of real estate when they bought their home in the Los Feliz area two years ago, without the services of a realtor.
“We didn’t bother to question the $1,000 tacked on to the escrow fees. We simply took it for granted that it was part of normal closing costs,” said Kathleen Venema.
“Last year when we decided to take out a $100,000 loan to build a swimming pool and other improvements to our home, we discovered that the additional $1,000 escrow fee had been used to purchase letters of indemnity on 14 open deeds of trust on our property, dating back to 1964,” explained Mike Venema. Indemnity letters guarantee that one party will pay another for any loss or damage suffered as a result of misinformation.
“An open deed of trust is like a nightmare that comes back to haunt you,” he said. “And we were told that unless we could clear the open trust deeds from the title, we would have to get new letters of indemnity each time a new loan was taken on the property.”
The Venemas had no idea what to do next ". . . until we found someone who dealt in problem reconveyances and through an in-depth computer search the firm was able to clear the open reconveyances within a week.”
California is a deed of trust state that requires a three-party agreement to be drawn between a beneficiary (the lender), a trustor (the borrower) and a trustee any time a loan is made secured by real estate.
Anyone, except the borrower, may be a trustee (including the lender), although the majority of trustees chosen are independent organizations such as a bank, an escrow or title company. The trustee charges a set fee and is empowered to foreclose on a property, should the borrower default on the loan payment.
If a trustee dies or goes out of business, there is a provision in the law that allows for a successor trustee or for the lender to substitute himself as trustee.
There is usually some legal provision that can be used to resolve an open deed of trust, but for the home buyer or seller, the discovery of a questionable title can cause a great deal of apprehension and frustration. The problem can continue unresolved without expert assistance.
Jeff and Betty Talman became anxious when a “cloud” was discovered on the title to their home in Calabasas, which they had put on the market after he accepted a job offer in Colorado.
“We were given only 90 days in which to sell the house or accept a company buyout,” Talman said.
“We bought it in 1986 and on two occasions had taken second-trust deeds on the property. Both loans were paid off in full, but when the house was in escrow and we got ready to pay off the new second trust deed, we were told that the lender of the original loan had never put through a reconveyance. It was something that simply got by us,” Talman said.
“Time was of the essence. We needed to contact the first lender but she refused to cooperate because of a falling out we had had years before. Then we knew we had to get the help of an expert. The agent we hired knew the law and got the lender to submit the necessary documents for reconveyance.”
As a general rule, a reputable lender will follow through with the deed of reconveyance, but even they can be negligent, industry sources admit.
To ensure that title matters are properly carried out, the inexperienced home buyer should deal only with a reputable real estate broker and should ask questions about the status of the property’s title. If the property loan is taken with a private lender, the borrower should consult a real estate attorney for a review of the title profile.
James and Miyoshi La Fourche of Carson felt confident about the title on their property when they decided to refinance their home earlier this year.
“We had built a nice equity in the house and it seemed like a good idea to borrow on the house to take advantage of the lower interest rates and to consolidate some debts,” said Miyoshi La Fourche, an administrative assistant for the Department of Water & Power.
“What we didn’t know was that the second trust deed we had paid off in 1986 had never been reconveyed. The fact that the lien remained on public record caused all kinds of delays.
“What made matters worse was that the lender was out of the country and could not be contacted. We didn’t know what to do,” she said.
In an effort to expedite the case, the La Fourches were referred to Title Recon Tracking by United Title Co., the underwriters of the title policy on the new loan.
TRT, a Burbank-based firm, functions as private trustee for mortgage companies, banks and individuals and as agent for title companies to ensure that clients’ paid-off loans are reconveyed.
“We first contacted the escrow company that had handled the La Fourches’ payoff,” said TRT’s Darrell Colon, “but found that the employee responsible for handling the reconveyance on their deed of trust had died. Neither the documents or any record of reconveyance could be found.
“The next step was to wait until the lender returned from his trip and to have him sign a substitution of trustee, which simply means that the lender appoints himself as trustee in lieu of the former trustee,” Colon said. “That is all it took to clear the title.”
A more complicated situation was encountered by Deborah Jones of Century 21 Escrow in Inglewood where a homeowner had died and the property went into probate and was being sold.
“The family records showed that all debts on the property had been paid, but after a title search, not one but two unpaid mortgages popped up,” Jones said.
“We had already sent a demand for reconveyance to both parties listed on the trust deeds. We tried certified mail, had the administrator of the estate check addresses and knock on neighbors’ doors to try to locate the previous owners but neither could be found. When we tried to contact the finance company chosen as trustee, it no longer existed. At this point, we felt we needed further expertise,” Jones said.
TRT was called in to get additional evidence and to get a bonding agency to agree to issue a bond that would back the family’s assertions of full property ownership. A bond agreement insures against loss by acts or defaults of a third party.
The case was resolved within two weeks at a total cost to Jones’ client of less than $300, she said.
“People come to us with problems that no one wants to spend the time or energy to solve,” said TRT President Bill Bowen, who founded the company in 1989 with his wife, Ruth.
“There has always been very little profit in reconveyances for banks, title companies, escrows and trustees,” he said. “Our cost for solving a reconveyance runs between $10 and $65.” The Bowens, who rely on volume and a custom-designed computer network, average about 10,000 orders a month for reconveyances and title tracking.
Before dismissing all these unresolved reconveyances as someone else’s bad luck, Bowen said, people should realize that it is not uncommon for a property in Southern California to have open trust deeds on the title.
By the mid-1980s the problem of open trust deeds had reached epidemic proportions, especially in Los Angeles County, “where an incredible amount of real estate transactions occurred,” said Gary B. Beeny, president of North American Title and one of the authors of the new legislation on reconveyances.
Beeny, who recently completed his tenure as president of the California Land Title Assn., said “the bill was a much-needed safety valve.”
Now 2 years old, the bill is a welcome addendum to the law, said one veteran realtor, although he would like to see a few changes in wording that would tighten the law’s effectiveness.
“For example, when an out-of-town lender puts a real estate loan for collection with an agent, the agent couldn’t care less whether the borrower gets the title reconveyed or not after the payoff. The borrower, on the other hand, may be satisfied simply to have a receipt for that final payment,” said Ed Carroll, president of Hollywood Realty. “Meanwhile, no one is handling the reconveyance.
“A simple way to ensure that proper reconveyance is carried out is to have a reminder stamped boldly in red across the face of every deed of trust with follow-through instructions that this document must be surrendered on final payment to the borrower and that the borrower must deliver said documents to trustee.”
In the five years that Kirk Nicholson has headed the Los Angeles Regional Foreclosure Center for Ticor Title (now Ticor/Chicago) his office has handled about 54,000 reconveyances, which were either “very smooth or very taxing” to resolve.
He has a final word of advice:
“Don’t ever lose track of your note and deed of trust, and for God’s sake, don’t ever burn your mortgage.”