Our fellow blogger colleague “Peckhammer” will get credit for this post whether Peckhammer intended for that to happen or not. Hat tip to him/her for inspiring this post.
Regarding consumers capacity to understand loan documents, Peckhammer remarked :
“The loan documents they signed could have been reviewed by an attorney and explained if there were questions.”
Here’s the problem when looking under the hood at the transaction work flow. May I present you the true world of real estate and high finance:
The facts
- It is Friday, January 11th, at 4:00 pm, about 1hour prior to the escrow office closing.
- Escrow has been promised loan documents on a transaction since early in the week.
- By law, borrowers refinancing have a three day right of rescission (meaning 3 days, not including holidays or Sundays) after signing loan documents to cancel prior to closing.
- The wrinkle: loan documents can be time sensitive. For example, if you are refinancing, you may have an interest rate lock (a term used in the industry where a borrower is guaranteed a specific loan interest rate for a specific loan program) that may expire very soon. Therefore, the loan documents must be signed within the 3 day rescission period and the transaction must close prior to the interest rate lock expiring.
- Escrow receives loan documents at 4:30pm. What in the world?!…..says escrow staff.
- Escrow is “expected” to drop all other transaction work (escrow is very time stressed due to a lot of other things going on “under the hood” for other people) and work up the loan documents, prepare a settlement statement (HUD-1 Form for those unfamiliar which is a detailed itemization of fees and credits associated with the transaction) and schedule the clients to sign their paperwork.
- Are the clients at work? Have an evening planned? Guess who gets to call the clients with the urgent message which will more than likely put the borrowers into a, how shall I say, grumpy mood. And yes, it’s escrow’s fault; after all, escrow just pays the water bills (sacrcasm & humor on).
- To escrow, this is a frequent and absurd scenario that plays out all too commonly.
How does it impact you as a borrower?
- It is inconvenient as !#!*%!! for the borrower to be called at 5:30pm on a Friday to tell the borrower they MUST sign their loan docs or…. dominoes start falling.
- Or, worse, if this is a purchase, you have the pressure of signing because this little thing called losing earnest money is eating you up in the back of your mind, never mind the fact your belongings are in boxes and the seller is nearly moved out, and your newborn child has started crying in the office where you are trying to sign loan papers.
- Call an attorney to review your loan documents? Not going to happen.
- How can you have time to digest the loan docs when the only time you’ve seen them is when I show up with them? Remember, escrow tells you the facts, we don’t dispense legal advice or advice about how the loan will impact you financially.
- Thankfully, in a refinance transaction you have a 3-day right of rescission. For purchases, you get NOTHING. Zippo.
Solution?
- Enforce RESPA (Real Estate Settlement & Procedures Act) to include a provision for a borrower to receive loan documents 3-5 full business days prior to closing when PURCHASING. If they don’t, fine the lender. Currently, as it stands, borrowers are required to have 24hrs review of their Settlement Statement (HUD -1 Form) prior to closing. That’s a joke IMHO. In Washington State, generally, closing occurs when funds are available for disbursement and recording of documents (Deed of Trust, Statutory Warranty Deed) have been completed.
- Ask your loan officer that you would like a full week prior to closing to review loan documents and your Settlement Statement. This puts the transaction management squarely where it should be, on the “Conductor of your Orchestra:” loan officer and or agent. If the loan officer waffles at getting loan documents to escrow to prepare for you well before closing you should ask them, why not?
- Also, never forget to go shopping, even for third party providers such as escrow.
Is this scenario based upon a real transaction (s) ?
True or False. I’ll give you a hint. It starts with a “T.”
S-Crow
PS. I’ve seen rates today at 5.375% for a 30 yr fixed.
**********5.375!!!!!!!!*********
Well then it must be a great time to buy! HAA
Or at the very least refi.. Were all doing it aren’t we? I got locked at 5.50 took it and ran. 0 points. 495.00 lender fee. that it.
Shop around friends and educate yourself. There are many deals coming down the pike.
Ray Pepper
Broker
http://www.500Realty.net
“According to NAR’s most recent forecast, existing-home sales are likely to total 5.66 million in 2007, the fifth highest on record, rising to 5.70 million in 2008 and 5.91 million in 2009. Existing-home prices are likely to be down 1.9 percent to a median of $217,600 for all of 2007 which is good news for buyers; prices are expected to hold steady in 2008, and then rise 3.1 percent in 2009 to $224,400.”
So, factor in their various self-serving interests and multiple by how completly wrong they’ve been, well you get the idea. They are going through stages of grieving, and we’re just about to the acceptance stage, not quite out of the anger stage.
Ok Ray, show me a 900-1100 sq.ft condo still in Seattle City limits with wash/dryer, parking and storage for under $200K and I’ll bite.
“All real estate markets are local, and buyers and sellers who are thinking about making a move should consult with a Realtor® in their local market to learn about conditions specific to the area.”
Yes, so that they can tell you how good a time it is to buy in their local market. After all, it’s always a good time to buy Real Estate, especially if they get a commission from it.
well Moe…got 1 for ya. Listing # 27183865 195k 1 bed 1 bath built in 1929 on mkt since 10/07. In Queen Anne area!
Patience there will be many more.
Ray Pepper
I can’t tell you how many times I get phone calls from settlement agents and/or brokers at 4:50pm for a 5:00pm closing where there are issues with the closing docs….and I mean big issues like incorrect property addresses, missing middle initials, vesting all jacked up, names spelled wrong…it’s insane. It seems no one takes the time to review the docs until they are literally at the closing table and are signing legal docs representing the biggest financial decision of most people’s lives.
“Ok Ray, show me a 900-1100 sq.ft condo still in Seattle City limits with wash/dryer, parking and storage for under $200K and I’ll bite.”
Doesn’t look like it fits the criteria Ray, at least not based on the photos I saw of the unit.
I once walked out of an escrow office because there was a problem with one of the docs. They looked at me like I was insane and nobody had ever done that before.
Makes you wonder.
First time I bought a house I couldn’t believe how broken the whole signing process was. Frankly, I still can’t believe it but I suppose I just got used to it. The process represents a tremendous opportunity to screw over the purchaser/borrower who apparently often does not really have the opportunity (or wherewithall) to go over all documents with a fine tooth comb.
not sure where else to post this comment, so here it is.
Did anyone else catch last week’s new episode of 30 rock? Essentially, it was funded by the NAR. Half of the story was of Jenna telling Tina Fey’s character how great real estate is and how Tina Fey was an idiot for not buying something. It sounded so fake and “NAR-produced”, I couldn’t finish the episode. I left off where Tina was pleading with her prospective co-op board to let her buy in their building. I mean, I know product placement goes on all of the time, and that show openly does it, in a sort of mocking, funny way, but this was completely different. It was actual product placement in a “suttle, deceiving way, much worse in my book. I can post a clip if you want
that’s subtle. wow it’s early in the morning.
“Patience there will be many more. ”
Exactly, Ray. And that one looks like I’d pay about $125K. I said I’d bite, I didn’t say I’d draw blood, certainly not my own blood. We’ll see where it is in about a year.
Plus, it’s got shared laundry and a closet for a bedroom. You kinda missed my point Ron. The condo I described currently sells for about $400K. I say that’s $200K too much. I’ll wait 2 – 4 years, but thanks a bunch there big guy!
That is an incredibly cute apartment, though. Wow!
It’s so important that borrowers understand their mortgage program and the entire process BEFORE they get to escrow.
Great advice, Tim. If a borrower doesn’t want to read the inch thick papers, they should at the very least, let their LO and the escrow company know that they require a copy of the HUD 1-3 days prior to their signing appointment. They can also request the copy of their final GFE/TIL and Note just to get the “down and dirty” of their transaction (make sure there are no prepays, the rate/term is what it’s suppose to be, etc.
My last tip is to let your LO know when your signing appointment is and find out what number they can be reached at during the signing in the event you have any questions.
Thanks Rhonda,
For those deciphering loan lingo:
GFE = good faith estimate (itemization of list of fees associated with the transaction)
TIL= Truth In Lending Statement (shows APR calculation, terms, assumability of loan, any prepayment penalty and other “stuff”)
I have seen cases where the TIL is indicating pre-payment penalty and the Note/Deed of Trust & Riders shows none.
On a complete side note. This posting for a townhouse in Queen Anne caught my attention.
New toyota scion ($17,000) with every purchase. $5,000 contribution to closing costs/loan fees.
Wow – buy this house and we throw in a car and closting/loan costs!
http://www.redfin.com/stingray/do/printable-listing?listing-id=1399369
Where are you getting the 5.375% and 5.5% for less than $500??? I’m looking for a 15 year, the best I’ve seen is 5% APR…is there anything better out there?
Off topic question that probably has an obvious answer, but would someone please explain why there are three columns in the inventory listing? It doesn’t look like a year over year comparison. Also, I see a 100 house drop in listings at 3:00 am today. What gives there?
The escrow scenario is perfect. The thing that bothers me is that the Purchase and Sale Agreement used to have the phrase “on or before” a certain closing date, which I currently write in. About a week before closing I start calling the Loan Officer, not originator, to ask for documents for review. I call every day.
I get lectured that the closing date means the day of closing and there are no documents prepared before then.
I have had clients needing to take money to escrow a week after closing because there is a clause that says any descrepencies in escrow can be dealt with after closing and to hold the escrow agent harmless.
My God what a messed up process.
In addition if there is a problem who fixes it? If you doctor the documents the chances are the Loan Underwriter will kick the documents back. Loan officers can make any requests up to documents being prepared to secure the loan. Bank of America had a client of mine pay off his car loan a the week of closing. What a mess.
For all the talk about attorneys, they are useless in a Real Estate transaction. Real estate is an Agreement to buy and sell. Attorneys can add thousands of phrases that only muddy the water and protect themselves. It’s ridiculous to think an attorney will do anything other than what they are told. That is the job they chose. They are well aware that they either do what they are told or take full liabilty for a transaction. You should see these guys defend themselves in court.
Good post! I agree with your thoughts. Too often things are such a rush at the end and buyers, lenders, and escrow officers are scrambling because loan docs arrive shortly before the appointment to sign. Escrow is then working up the numbers at the last minute and calling the buyers to bring in the certified check for the downpayment just before the signing appointment. Way to stressful.
FYI, generally buyers sign loan docs a couple of days ahead of closing, so docs can go back to the bank for review. It is rare that a buyer is signing on the actual day of closing, unless the sale is all cash or it’s table funded.(The bank sends their money along with loan docs and does not require review.)
A few suggestions: Go to a lender you trust who will be your advocate from start to finish. Your lender should be willing to talk with you at length, reviewing all the terms of the loan. Make sure you know all the costs and what to expect before you go into sign. Do not be afraid to ask questions at any time during the process.
When you make an offer on a home, make sure your agent allows 7 days between the deadline for loan approval and closing. This gives time for the loan docs to arrive at escrow to be reviewed and you to sign well before closing.
J,
NAR had nothing to do with the 30 Rock episode with Tina Fey buying. I just came back from Inman Real Estate Connect in NYC and Manhattan real estate is still going great guns! It is part of a global market, which is largely unaffected by what is happening in the rest of the country. There are a lot of foreign investors who are fueling NYC’s economy. I am going to do a post on The Seattle P-I Real Estate Professionals blog about a man I met on the plane who just bought in Williamsburg, an emerging neighborhood in Brooklyn not even Manhattan. Prices are still skyrocketing there.
Mr. Losh,
I’m a real estate attorney and over the past year I’ve handled over $20 million in residential transactions. Accordingly, I take offense at your depiction of attorneys. While I respect the apparent fact you’ve had a bad experience(s) in the past, to stereotype all attorneys the way you have is childish and suggests a simplistic way of thinking. Hopefully, you are merely venting. I will freely admit that, like all things, there are attorneys who are terrible, those who are ok, and those who are fantastic. I make no claim about where I fall; instead, I let my clients to speak for me. Feel free to check out my testimonials page.
As for S-Crow’s post, I think he raises a very important point about the shortcomings of the current real estate settlement process. Unfortunately, most buyers and sellers go into a transaction under the mistaken impression that their realtor, loan officer, and the escrow company will take care of everything and all they have to do is show up and sign on the dotted line. The truth is that the realtor’s focus is on getting the deal closed and funded. The pessimist would say this is because they only want to get paid and not show the buyer anymore houses or hold any more open houses for the seller. The optimist says realtors have a rigid code of ethics and never put their own interests ahead of their clients. I only want to point out the realtor’s self-interest in the transaction. As for the loan officer, this person also gets paid only if the deal closes and thus, has the same self-interest issue. As for escrow, they have a common law and statutory duty to be impartial as between the parties. Among other things, this means they cannot and will not give legal advice about the meaning of the documents nor the prudence of signing them. In fact they make you sign a document that says you did not receive nor rely on legal advice from the escrow agent.
So, what role can a good real estate attorney play? In my opinion, a good attorney can play an incredibly beneficial role by providing good, timely advice. A bad attorney can be a road block or worse. My practice is solely focused on residential real estate. I charge a flat fee and have no financial interest in whether a given deal closes. This means my advice is strictly focused on my client’s best interests. If they want the deal to close, then I work my tail off to make sure it does. If they decide it is not in their best interest to close (or if I help them come to that conclusion), then I work my tail off to get them out of the deal.
My flat fee service includes reviewing all of my client’s closing documents before they ever set foot in the escrow office (in addition to drafting and negotiating purchase and sale agreements, advising through the contingency periods, reviewing title, and advising on financing matters).
Finally, people should not think the current system is fatally flawed. The truth is that trillions of dollars in transactions go through each year and the mass majority of them result in a happy buyer and a happy seller. In the end, that’s what matters.
I’ve bought three houses in the US over the years, and have always been amazed and overwhelmed by the amount of paperwork and the size of the pile of documents I have ended up with. I have also bought and sold a house in New Zealand (sold December 7th) so have a comparison of the two systems. Wow, New Zealand was easy and quick. You have to have an attorney, usual fee is about $600 NZ, to do the paperwork. You sign exactly one (!) single page document after reviewing it with your attorney. This gives him/her power of attorney to sign all documents, do all filings, etc. Way easy. Purchasing is just as easy. The bank has you sign a single document, as does your attorney. It probably helps that all real estate sales are handled by the same government entity. Anyway, there are certainly better and more transparent ways of doing a real estate transaction. I suspect it has become so complex because, as Marc suggests, lots of people have their hand in the till.
I guess I better not make my usual stereotypical remarks about Real Estate Agents. I wonder if one whom has handled $20 Million in sales is trustworthy just based on that fact alone. Ira is excluded, of course.
Wow. nice bump inventory. Is KC up 1000 units in 15 days?
Well, my wife and I walked out of signing as SELLERS because things were wrong on the closing paperwork. I actually only do RE transactions now where I get the documents given to me two or three days in advance so I can review them, or have them reviewed, at my leisure. Remember, all it takes is a notary to be present. You do not HAVE to do it in the office at 4:45PM on Friday the 31st if you plan accordingly.
I’ll respond just because an attorney responded. I love that. Flat fee and no interest in whether a transaction closes. I should have stayed in school; just kidding.
What do you offer a buyer or seller? What are you going to put, pen to paper? As so as you answer you’re liable.
Nice plug for yourself, but any one who reads this should be aware that this guy is charging for doing what you tell him to do and no more. That’s all he’s allowed to do. You can do it yourself for nothing and less liability.
Leftoverpriced…,
I’m curious what happened? Fill me in or let me know offline.
-Tim
FWIW- Our office has closed hundreds and hundreds of millions of dollars worth of real estate of transactions. I know, it’s meaningless. I’m just having some fun. :)
By the way, the Snow at Stevens Pass was phenominal on Sunday. Nothing like sunshine all day. Crowded lift lines, but my kids could only go on Daisy as they are just learning.
Mr. Losh,
Finally we agree. Based on the grammar in your last post, you should have stayed in school.
Dear sir,
Some of us were busy working for a living. Others sat in school waiting for that opportunity to go out into the world to make money. Which is it for you?
Litigating Real Estate agents, and misrepresentation? You’re filling out paper work for a fee. I know it, you know it. If you had a case you wouldn’t be here looking for business.
“Call an attorney to review your loan documents? Not going to happen”
And then this:
“My flat fee service includes reviewing all of my client’s closing documents before they ever set foot in the escrow office (in addition to drafting and negotiating purchase and sale agreements, advising through the contingency periods, reviewing title, and advising on financing matters). “
Hmmm. Go figure.
I have only purchased three homes in which financing was used. I had an attorney involved in all three sales. The only time it is “not going to happen” is if you haven’t mastered the simple task of placing a telephone call.
If there are time limits that don’t allow proper review of all transaction documents, you shouldn’t be signing the papers, IMO.
Good point Peckhammer. You have to work in escrow to see how the system works. Many times the process does not lend itself to providing the time necessary to review documents—-largely due to lending processes.