Bruce Norris is joined this week by Brett Rainey, the sales rep Bruce has worked with for a long time. He is with First American Title and has had lots of jobs along the way. He has been a sales rep now for 29 years and does a great service for the Norris Group.
Episode Highlights
- How does the title business in Florida compare to that of California?
- What are the different types of title insurance that are available?
- What is the percentage of title policies that produce claims?
- What are the ramifications for getting title without the title insurance?
- How prevalent is fraud in the real estate industry and what are red flags?
- What is the latest news on the HERO program?
Episode Notes
29 years goes back to 1987, which was a good year for real estate. Bruce wondered how this affects the title business, including the volume of business. He asked if it radically changes or only changes hats since you now have things like REOs. Brett said there are a lot of changing hats, and their claims also change along the way. In a downturn market, the claims rates go through the roof and you have a lot of mortgage fraud. This is always something he has to look into, but always changes with whatever the market is. Interest rates drop, and they go into a refi phase. They were always worried about the resale business, then they had homebuilder services (developers building new homes). They also have their commercial division and 1031 exchange division, which is very cyclical. But they do a lot to keep up with it.
Bruce asked about claims, which he has only had in his entire life. Brett said this is because they try to take care of them in advance by finding the problems before they are a problem. They do all the work to prevent the claims in advance so they will hopefully not have them. He is seeing a big upsurge in wire fraud, forgery, and other similar issues.
The Norris Group has been doing more business in Florida. The title business in Florida and the business in California are very different. He does not know why this is the case. You have agency states and attorney states. Even in Southern and Northern California the business is completely different. Brett said when he was building his comprehensive system internally, it was very complicated because each state and county is very different. It is tough because when you go from California to another place, you think you will do business as usual and that is not the case. You have to completely relearn everything.
Bruce learned this lesson when he bought some wrecked houses in Florida after Hurricane Andrew came. The first thing he realized was that he had to have an attorney and could not just go right to escrow. Bruce asked Brett if in his 29 years his ability to give certain information out to clients has changed. He wondered if there have been more restrictive policies on what he can give to a client. Brett said when it comes to privacy he has completely revamped his policy so everybody in the company is being constantly trained regarding personal and private information. You cannot have this opened on somebody’s desk where it could have personal information. Everything has to be shredded and securely destroyed. They have really taken a real proactive approach at preserving people’s privacy.
Bruce asked what different types of title insurance there are. He asked if building a house would be different from if he bought an existing one. Brett said absolutely and that typically when someone builds a house they have an LP 10 policy. This is a construction loan policy that contains a rewrite for permanent financing. Along the way there are also a lot of endorsements. Depending on how they draw on the construction loan, they will give endorsements during the time to the lender. They will then check the property to make sure no mechanics liens or any actions have been recorded on the property. They will then receive 133 endorsement, or date down endorsement. They also have a 102.5 endorsement, which is a foundation endorsement. Through this they verify that the foundation is 100% within the property lines. This way they do not have any encroachment issues.
Bruce went on to share a funny story about building a home and having title insurance. He was building five duplexes in Cathedral City, and his friend who was a listing agent called him up to see if he wanted to buy another lot. They bought the lot where the sign was and proceeded to build the duplex. However, the sign was on the wrong lot. Interesting, Brett said these situations come up all the time. You could also have a situation where the developer puts the wrong numbers on a house for the address. Years go by, and they keep transferring it thinking it is the wrong property until you look at the legal transcription that actually dictates what property you have. Sometimes they are complicated to unwind and would want to go to the point of switching houses.
Bruce asked what percentage of title policies produce a claim since it must be way less than 1%. Brett was not sure of the answer. Bruce asked if he were to build something in Riverside and were to do something in advance of getting the loan, would it be a problem. Brett said it’s actually a huge problem. This is breaking priority on a construction loan. If any work of improvement is done prior to the time the construction loan goes on, this is considered broken priority. This means that the deed of trust going on is no longer in first deed position. As they learned from the Mission Inn where they had their largest claim of all time in Riverside, once one mechanic’s lien creditor has their priority broken it is broken for all the mechanics liens creditors. Even if you started your work of improvement after the construction loan went on, if the priority is broken for all you now have a lot of people with their hands out who were not wiped out by a foreclosure.
The idea is that the construction loan forecloses while the foreclosure wipes out all junior liens. This includes 2nd, 3rd, and fourths on the property as well as any mechanics. These are all wiped out by the foreclosure process. In a broken priority situation, they are not wiped out through the process. Therefore, this can turn into a very sticky title insurance claim. If they do find a situation where there is broken priority, they try to get away from it. In the past they have taken indemnities from the builder along with their financials to ensure they are solvent and have the ability to pay the people back. These are all done on a one-by-one basis, and each one is underwritten individually.
The group of investors Bruce teaches at the boot camps are sometimes a tricky group and like to save money. Bruce asked what some of the ramifications are of getting title on something without title insurance. Brett said right now if they come into a transaction, they first ramped up their scrutiny on uninsured transactions since there is so much fraud and forgery. One of the number one forged documents is an inter spousal quick claim deed. There will be other transactions with vacant land where the seller is out of state, and these are prime targets for fraud. Another is free and clear property when there is no loan on the property. People will forge all kinds of documents, including re conveyances. If there is an existing deed of trust on a property, they will forge a re conveyance and can resell the property when the loan was never paid off.
This process only needs a couple agreeable people, which is really scary. At the last boot camp they talked about the trustee’s deed forgery scam that is happening. What they will do is show up at the trustee sale with all the information on the property, not bid on it, find the amount the sale went for, and immediately go on their computer and draw up a fraudulent trustees deed. When you go through a regular trustee, it will take them 5-7 days to get the trustees deed to you. During that time what they will do is go home, immediately draw up a fraudulent trustees deed, have a notary notarize it, take it down to get it recorded, and now they want to sell the property. However, they have to sell it right now so they will give you a really good deal. Investors will look at this and think it is the greatest deal of a lifetime. They will want to sell it right away.
This is not a completely unusual conversation in the real estate world, which is why deals happen. Therefore people don’t ring a bell right away until they see if they can sell or find the property. For example, if they give the property to the buyer at this tremendous discount, everything looks like it’s fine until the real trustees deed records and the person who legitimately bought the property shows up at the trustee sale ready to do their rehab then this is when everything gets discovered.
This is a big red flag, and there are a lot Brett sees and are identifying. As a proactive step, if they see a situation where a seller is out of state with vacant land and no deed of trust on it, for those types of transactions they send out a preemptive letter. As soon as an escrow or title order opens with them, they will send out a letter to the owner of the property thanking the person for trusting them with their transaction. At the end of the letter, it says to call a number if they do not know anything about the transaction. Bruce has actually received a letter like this, and Brett has caught 17 actual fraud transactions where the person calls and says they did not know anything about it.
Bruce asked what happened to the people who attempted it but did not make it. Brett said he has had some successful sting operations. They met them at Starbucks to sign some documents, and the people showed up thinking they were pulling the wool over his eyes. The district attorney came in and took them away. This is not really a once-in-a-lifetime thing, and it is probably their MO. They are not doing just one, but they are doing it as a business model. They had one claim that was found out where they did not blow the whistle right away, but instead kept going and ensured the transaction would not happen in the end. The fraudster told the borrowers not to worry and if it did not work out they had several others. For Brett this meant he had to hunt down all the other fraudulent deals.
Things like this get found out in so many different ways. They had one in San Diego where a buyer of a vacant land worth $780,000 where they were going to build their home. The buyer is out there looking, scoping out the place and deciding where he will put everything. The neighbor happened to come out and say they were buying the property. The other party said he had talked to the people supposedly in charge and they never said anything about that. He called them, and neither of the owners had any idea what was going on.
In another situation, First American had just written a $500,000 check about a month ago. Brett said the situation was where their escrow officer was communicating with the listing agent via email. The party was asking their agent all the information they needed and were fairly comfortable with them. She received an email asking if she had received the seller’s wiring instructions. She asked to have them sent over only to find out the agent’s email had been hacked. They went through to look for key words like wire closing, funding, escrow, title. They read through the email, familiarized themselves with the situation, then right at the right time they slip in the wrong wiring instructions. What happened was they closed, sent the seller’s proceeds to the account that gave the wiring information, and within 2 hours it was out of the country and they could not get it back.
To avoid situations like this, call the sellers to verify the account number. Then they could say whether they really gave wiring instructions or not. This was a complicated situation because it used her actual email address, so the email did come from there. A lot of times what hackers will do is change one digit that could look the same if you are not paying attention. This is why Brett trains all of his employees to go the extra distance. If something does not feel right, slow it down and really look into it. The hair standing up on the back of the neck is a really important feature of experience. Bruce asked about the timeframe for reconciliation to the seller. He asked about the previous situation and how long it took the sellers to get the $500 grand back. Brett said it was resolved fairly quickly since it was obviously not the party’s fault and they were a victim of it. Sometimes claims can drag on, especially when there is litigation involved.
Bruce asked if title companies have title insurance. If you take a $500 grand hit, that is not little. Brett said his company is self-insured. He used to have the large Lloyd’s of London policy in case of a catastrophic event, but he does not know the real situation with this. They do have re-insurance, so they will split some of the liability with other title insurers when it is over a certain dollar amount. It is like a pool to limit the liability. If you are working on a skyscraper in New York for $1 billion, you do not want to be in the boat all by yourself on those.
Bruce asked if MERS caused any problems when it raised its head about trust deeds. However, Brett said it was more of a scare than a reality. Brett said they did not really have a significant problem because of that. A lot of times an investor will deal with a seller directly, take a grant deed, and do everything themselves. They may want to rehab it then sell it, and the other party will want title insurance. Bruce asked if they have messed up the chain of reliability and what people have to do in order to get title insurance for the new buyer. Brett said what they typically want to do is verify with the seller that he bought them the property 6 months ago and it was a legitimate transaction.
They have a document they will call an affidavit of uninsured deed. This basically says you knew what you were doing, not under duress, and did mean to transfer the property to another. They will have to go back and get that from the seller, which can sometimes be difficult if the seller has disappeared or they cannot find them. It is not a good idea to not use an escrow company or a note company. However, Brett said he will work with you to get to their comfort level when underwriting the file. Then they can get to the comfort level knowing it was a legitimate arm’s length transaction, even if it did not have title insurance.
Bruce gave an example of if he were the winning bidder at a tax lien sale. If he was going to sell it and have it go into escrow 30 days later, he would not receive title insurance right away for this. Tax sales are complicated because they do not have follow the same rules that a trustee sale does. Trustee sales have several different steps to follow, then they are published in the newspaper and posted on your door. There are a bunch of steps they do so that when it forecloses, that first deed of trust that is foreclosing does in fact wipe out all degenerate liens on the property. Since tax sales do not really need to follow the same rules, he is really concerned that all the junior lien holders did have proper notification. One of the things they always asked for was a copy of the notification package to verify that everybody was notified.
If it was a piece of vacant land that had no tax liens on it or they forgot about it, this may be something with which he could work. After receiving the notification package after a year has gone by, he would just need that time to see if anyone would come out of the wood work. It is really a time-driven thing. You could not receive the notification package and make a decision within just a month. If you say you have a deed of trust that is wiped out through the tax sale, they will not be able to write over it without having some type of extra documentation. This could include an instrument bond. These types of bonds are issued by First American Title since there is no way you could have a re-conveyance for that type of deed of trust. He will therefore use this documentation to process the re-conveyance and have it removed off the public record.
There is a program Bruce has become more aware of because one of his clients just obtained a HERO loan. He had thought they had a first trust deed, but they really do not. This is complicated and something with which they are always working with HERO as well as the boards of realtors. Originally they had come out with prepayment penalties on them, so in some circumstances these are being waived. The property is being placed; there is a lien being placed that is collected through the taxes. Now that you have a first trust deed, you obtain a HERO loan for solar panels on your roof and go refinance the property. They tell you they will refinance and put a new deed of trust on the property. However, they will first need a subordination agreement from the HERO loan to say they are in second position.
They always asserted that since it was not a first lien, and the title companies could not really get behind it because it seemed like it wasn’t priority. The first that exists could be subordinated after the fact, and that is the part that is disturbing. Bruce asked if they are subordinating to a new refi, which Brett said a couple people said they did but they have really not seen a lot of this. If you see even one it would be precedent-setting because that will come into play and get in the way of a lot of real estate transactions. On one side, you have a green program you want to make sure everyone has access. You do not want to mess up the sales of real estate by a big percentage either.
Thank you for joining us for this week’s radio program with Brett Rainey of First American Title. For more information, you can call him at (951) 203-5641.
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