Clouded Future : Sloppy Handling of Loan Papers Hurts Consumers
Jorge Cortez has a problem. He paid off his home loan more than a year ago, but the lender never notified the proper authorities. The debt still “clouds” the title to his Montebello residence.
Now, attempting to refinance to get cash out of his home equity, he has just two options: He can hire an attorney and legally force the former lender to clear title. Or, Cortez can buy a “lost document” bond for $3,000. Until the problem is solved, he can neither refinance nor sell his home.
Because of the continuing refinancing boom, millions of people across the country may be in the same unfortunate predicament--and not even know it.
Real estate experts maintain that somewhere between 5% and 30% of the nation’s property owners are now suffering with a “cloud” on their real estate titles because paid-off and refinanced loans have never been cleared through a simple clerical transaction called a “reconveyance.” Until such clouds are cleared from your real estate title, you can neither refinance nor sell your property, experts say.
While no one agrees on the exact numbers, everyone acknowledges that the problem is far worse today than it was only a few years ago, when roughly 1% of homeowners might suffer with a clouded title.
“In the old days we used to see a (reconveyance) problem in one out of every 60 or 70 deals. Now it happens all the time,” says Danny Alvarez of Old Republic Title, a Southland title insurer.
Reconveyance problems are “prevalent,” says Richard Klarin, vice president and regional counsel in the Rosemead office of Chicago Title, a major title insurer.
Unfinished reconveyances are yet another consumer headache brought about by the now-2-year-old refinancing boom, experts say. While low interest rates have allowed many homeowners to save substantial amounts by refinancing, they’ve also caused a crush of business at banks, thrifts and mortgage banking concerns, resulting in lengthy delays and errors. Lenders, trustees and title insurers are simply swamped by refinance requests, so the paperwork required to properly clear title gets shoved aside and often remains uncompleted indefinitely.
The problem is similar to that of an inaccurate credit report that lists paid-off loans as past due. However, this credit report--the title--is on your real estate rather than you. And, in extreme instances, the real estate’s bad title can pass from one owner to the next.
However, few property owners know they’ve got a problem until they attempt to take out a loan or sell. By then, they may have lost contact with the lender, which makes clearing title complicated and costly.
The issue is all the more annoying for two reasons: Every state in the nation has some law that requires lenders to clear old loans off customer records in a timely fashion. The laws, most of which were passed in the late 1980s and early 1990s, were spurred by the refinancing boom in the mid-1980s that resulted in many of the same problems homeowners are having today.
But the laws are largely not enforced. Most experts maintain that the only way to get recalcitrant lenders to follow the law is to threaten suit. If the lender has gone out of business or can’t be found, homeowners are told to buy a bond that can cost several thousand dollars.
Worse yet, most homeowners have already paid a fee to reconvey title. With few exceptions, anyone who refinances a mortgage pays a “recording” fee ranging from $50 to $75 to clear previous loans off the title. Some companies simply pocket the cash and leave the homeowner in the lurch.
While it’s clear there’s a problem, it’s difficult to say who’s to blame. Some title insurers blame lenders, who worry more about generating new business than taking care of past and present customers. Some lenders blame trustees, who fail to get the paperwork done on time. And trustees often blame title insurers, who are also sometimes entrusted with the job. And all three groups gripe about state regulators, who passed a law but never set up a structure to enforce it.
However, what it means for consumers is clear: An old loan may come back to haunt you years after it’s been paid off. The headaches that can result range from minor inconvenience--such as a short delay in completing a refinance or sale--to a serious problem similar to what’s happening to Cortez. In some cases, unjustly clouded titles have killed sales or caused borrowers to pay more for their loans, experts say.
Roger Mozilo, executive vice president at Countrywide Funding, a Pasadena-based mortgage lender, says he’s dealt with the problem firsthand. When he sold his previous home, the deal was delayed for two weeks because an old second mortgage had never been cleared from his property’s title. It was “a nuisance” but not a big problem because Mozilo had saved all the documents necessary to prove the loan had been paid off.
Those who don’t save these documents--such as the mortgage papers and canceled checks--could find their real estate transactions postponed for months, he notes. Frequently these delays will cause consumers to lose rate guarantees from their lenders. (Once a loan application is accepted, most lenders will “lock in” the agreed-upon loan rate for 30 to 45 days while escrow closes. If escrow is delayed, the lock-in is lost. If interest rates have risen in the interim, you end up paying more.)
How can you tell if you’ve got an undetected reconveyance problem? Call your title insurer and ask if there are any uncleared liens on your property.
If loans that were paid off more than two months ago still show up as pending, you need to contact the lender and demand that they “reconvey” the property and send you proof. That proof should be a formal document from the county recorder’s office, complete with an official seal and a document number. The document number is essentially a file number that can help you locate the reconveyance document again if you ever need to.
Also be sure to give them a deadline. A reasonable one, says Mozilo, is 10 days.
Policing Your Title
If you’re refinancing your home, you may need to play watchdog to make sure your trust deed is properly cleared of old loans. Despite a plethora of state laws requiring prompt “reconveyance” of real estate titles, many lenders are so far behind that they may never catch up, industry experts say. The best way to go about policing your title will depend on where you live and whom you owe.
* If you’re paying off a loan to a large bank, thrift or insurer, simply request a copy of the reconveyance document when you send your final check. If you haven’t heard from them in 30 days, check again. California Civil Code Section 2941 requires the lender to do the reconveyance within a month. If it’s not complete in two months, you can take the matter into your own hands and either reconvey the title yourself or hire a company to do it. If you take this step, the lender owes you money. The code says you can collect your costs plus $300 if the lender didn’t perform. While time frames and penalties vary from state to state, most require that reconveyances be completed within three months. If you’re uncertain about your rights, ask your title insurer.
* If you’re paying off an individual--perhaps when you bought your home, the seller took back a second on the property--handle the reconveyance yourself. That’s because private transactions are the least likely to be recorded properly and the most troublesome if there’s a problem later. At the time you hand the individual your final check, demand that the payee sign the trust deed and check the box on the back of the form that requests the reconveyance. Then take the signed trust deed and the loan documents to the trustee who was hired when you bought the real estate. For a fee that usually ranges between $10 and $65, the trustee will type up the reconveyance papers. Take all the paperwork to the county recorder’s office to have the loan cleared from your real estate title.
Los Angeles Times
