MAY 21, 2012 HUD 203(K) REHABILITATION LOANS KNOWN MATTERS OF RECORD VIRGINIA UNDERWRITING BULLETIN Virginia Offices

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1 CHICAGO TITLE FIDELITY NATIONAL TITLE COMMONWEALTH LAND TITLE UNDERWRITING BULLETIN MAY 21, 2012 VIRGINIA UNDERWRITING BULLETIN HUD 203(K) REHABILITATION LOANS HUD administers a mortgage insurance program providing funds for rehabilitation and repair of single family properties known as the Section 203(k) program. A 203(k) loan may be purchase money or refinance, and always includes a construction component. Affirmative mechanics lien coverage is required on a title policy insuring a 203(k) loan. However, HUD s requirement that its lenders maintain strict inspection and disbursement procedures greatly reduces the Company s mechanics lien risk, allowing simplified underwriting. Underwriting Guidelines Require receipt of Indemnity Agreement (FNTG 06) executed by borrowers and any guarantors. Fill in all blanks on indemnity form. For a 203(k) loan with a construction component of $50,000 or less, the Company does not require receipt of lien waivers at each draw. For a 203(k) loan with a construction component greater than $50,000, call Company underwriting or agency counsel for lien waiver requirements. If a building permit will be issued, require that a mechanics lien agent be posted. Include on the loan policy the standard mechanics lien exception and the Mechanics Lien Coverage E (August 2010 form). Include an exception for possible supplemental assessments and taxes for improvements. No extra hazard premium is charged for this coverage. Older may be subject to restrictions that will not be found in a standard 40- year residential search. If an agent or title examiner is aware that a property is burdened by restrictions, easements or other mat- KNOWN MATTERS OF RECORD subdivisions ters recorded beyond the search period, please include such matter as an exception to title. For example, an agent or title examiner may know about restrictions because of familiarity with the area, inclusion of the matter on an old plant policy or from a past transaction. Use good sense and do not eliminate known matters of record simply because they were recorded prior to the search period. INSIDE THIS ISSUE: IS THE PROPERTY REALLY FREE AND CLEAR OF LIENS? ISSUING AN ENHANCED LOAN POLICY REVERSE MORTGAGE CAUTION FLIPS AND... FLOPS CREDIT LINE ISSUES EVER HEARD OF A PACE LOAN? Virginia Offices Centreville Richmond Norfolk Virginia Beach Newport News Roanoke Search Services CPL UPDATES 5

2 PAGE 2 PROPERTY FREE AND CLEAR OF DEED OF TRUST The title insurance industry has seen a wave of forged releases and certificates of satisfaction. A title found to be free of liens should be a red flag alert to title examiners and underwriters to make further inquiry. FNTG has implemented requirements effective immediately to address and curtail rising claims caused by forged releases. (1) If a release appears in the chain of title within 12 months of settlement with no corresponding refinance or sale of property, FNTG requires that the settlement agent independently verify with the released lender that the debt has been paid. Verification may be by any reasonable method. Acceptable forms of verification include: Written or oral confirmation of release by noteholder; Satisfactory explanation from seller/borrower (as in, I won the lottery or I got an inheritance ). Indication on the MERS website that the loan is Inactive. Written or oral confirmation by the notary that the release was properly acknowledged by the noteholder. (2) Whether or not a release appears in the chain of title within 12 months of settlement, if a property has no open recorded deed of trust or mortgage, agents must require and receive a no financing affidavit in substantially the form attached hereto, executed by the record owner, addressed to the company, and stating that there are no recorded or unrecorded deed(s) of trust, personal notes and/or obligations intended by the mortgagee, lender or noteholder to be paid by proceeds of sale/refinance of the property. Item ( ) No recorded deed of trust or mortgage on the subject property was found in a search of the land records. Accordingly, the Company requires receipt of an Affidavit from record owner addressed to the Company, stating that there are no recorded or unrecorded deed(s) of trust, personal notes and/or obligations on the above real estate intended by the mortgagee, lender or noteholder to be paid with closing proceeds. (3) In addition to the above requirements, if a property has no open recorded deed of trust or mortgage, agents must obtain written approval of the Company to issue any policy in excess of $1 million. Note that these requirements are not applicable to the outsale of foreclosed property by an REO lender, Fannie Mae, HUD, etc. ISSUING AN ENHANCED LOAN POLICY The form of loan policy to be issued is dictated by the lender. Settlement agents and approved attorneys must adhere to the lender s written instructions. If the lender does not specifically require an enhanced loan policy, a standard ALTA policy should be issued. It is the position of this Company that a settlement agent should not require the consumer to pay for a product or coverage not required by the lender. Further, the Company believes that a request by the lender for the most recent version of the ALTA policy is a reference to the most recent standard form of loan policy. If in doubt, verify with the lender which form of policy is required. For a purchase transaction in which an ALTA Homeowner s Policy will be issued, a standard loan policy must be issued to the lender unless the lender requires an enhanced loan policy. Please visit our Virginia websites for up-to-date forms and underwriting guidance. Chicago Title Commonwealth Fidelity National

3 PAGE 3 POWER OF ATTORNEY REVERSE MORTGAGE Settlement agents and attorneys can prevent elder abuse. Be alert to fraud. FLIPS AND... FLOPS Carefully scrutinize any power of attorney to be used to execute a reverse mortgage. HUD s guidelines for insuring a reverse mortgage include that the property be the principal residence of the borrower. A borrower who lives in his own home will normally have the mental capacity to execute his own loan documents. The Company prefers that any insured reverse mortgage be executed by the homeowner. Ask questions if a POA is tendered. Contact the FNTG Virginia title plant for prior policies issued by our underwriters. Send an with property information and your case number to vabacktitle@fnf.com Continued high levels of foreclosure sales have inspired a new group of investors to purchase, repair and sell properties. The majority of these folks are hard-working individuals just trying to make a dollar while putting well-priced homes back into the market. The FHA continues to limit its insured financing only to arms-length transactions in which the sales price is no more than 20% greater than the sellers acquisition cost. Related Parties and Inflated Values. It is vitally important that all players in the settlement process keep their eyes open for related-party transactions and inflated values, and that settlement agents strictly adhere to lender instructions. An agent recently closed a short sale with all approvals in place. After the closing the shorted lender learned that the purchaser was also the listing agent of the property, and therefore a related party. The shorted lender returned the payoff funds and refused to release the deed of trust, prompting a claim to FNTG by the new purchaser s lender. The Flop. Another example of a breach of the related party rule is called a Flop. The original borrower sells its property to an LLC by an approved short sale. The purchaser LLC appears to be a bona fide purchaser in an arm s length sale. But shortly after settlement the original borrower is substituted in as manager of the LLC which then sells the property for a higher price to a new purchaser. The shorted lender learns of the fraud and refuses to release its deed of trust. Again, please be alert to any whisperings that a short sale purchaser is a related party. Don t fall for a Flop. Mechanics Liens. Mechanics lien risk on flipped property is high. The goal of the investor rehab seller is to buy, repair and sell. The short time between purchase and resale leaves the Company at risk for mechanics liens arising from the repair work. Carefully underwrite mechanics lien risks on flipped property. Follow the Company s instructions for outsale of residential completed construction in the FNTG Mechanics Lien Coverage Guidelines MECHANICS LIEN RISK ON FLIPPED PROPERTY IS HIGH. FOLLOW UNDERWRITING GUIDELINES FOR OUTSALE OF NEW CONSTRUCTION Lifetime Television did a great job of explaining title insurance and the closing process. Click here to watch it.

4 PAGE 4 Credit Line Solicitation by Lenders A troubling disconnect has emerged in the banking world. Here s the scenario. Settlement agent/attorney submits seller s close the line letter to credit line lender in anticipation of a full payoff and release of the existing deed of trust upon sale of the property. Lender, not wanting to lose a customer, contacts the seller directly and urges the seller to keep the credit line in place. Seller is, of course, delighted (who wouldn t be?) and verbally rescinds his close the line letter. Meanwhile, settlement agent/attorney closes the sale and submits funds for a full payoff, with a request to release the deed of trust. No release is forthcoming. Seller has significant moving expenses and puts them all on his credit line, running the line up to its limit, then fails to make his payments. Credit line lender attempts foreclosure and the title insurer receives a claim from the new owner. The Company has had numerous claims based on the above fact pattern. Attached is a sample Credit Line Freeze Authorization with language specifically informing the lender that advances made after receipt of the freeze authorization will be unsecured. Please distribute the form to settlement officers and attorneys. We also recommend that any settlement agent/ attorney communication with the seller include a warning that lines of credit will be frozen and closed. Review Virginia Underwriting Bulletin for more information on closing a line of credit. CLAIMS CLEAN ENERGY IMPROVEMENT LOANS ority as water, sewer and tax liens. The language of the statute authorizes a locality to include loan payments with its tax assessment and presumably create a lien on par with real estate taxes. Nationwide both ALTA and the Federal Housing Finance Agency (Fannie Mae, Freddie Mac and Federal Home Loan Banks) have urged states to revise PACE legislation to clarify such loans do not enjoy the super-priority of real estate taxes, and instead have priority established by state Property Assessed Clean Energy (PACE) loan programs provide local funds to retrofit properties for energy efficiency. Virginia s PACE statute at Va. Code Sec authorizes a county or city to make loans to property owners for clean energy improvements. The statute authorizes counties and cities to include loan payments with billings for water or sewer charges, or with real property assessments. The effect of this statute may be to give PACE loans the same prirecordation law. We know of no county or city in Virginia actually making PACE loans. However, please be aware of the issue. Call Company counsel if clean energy loan documents are found in a title search, or are noted in tax records. Please let us know if your locality is actively making such loans. DOES YOUR CUSTOMER NEED TO FILE A CLAIM? DIRECT HIM TO THE FNTG CLAIMS CENTER FOR ASSISTANCE titleclaims@fnf.com Fax: (904) Ph: (877) RIVERSIDE AVE, BUILDING 5 4 th FLOOR JACKSONVILLE, FL 32204

5 PAGE 5 CLOSING PROTECTION LETTER UPDATES Always use the LetterTRAX program on AgentTRAX to prepare closing protection letters. No other form of CPL is authorized by the Companies. No Blanket CPL Effective Immediately, no blanket Closing Protection Letter covering all transactions may be issued for Virginia property. Every CPL must include transactionspecific information including the borrower s name, property address and the agent s file number. In LetterTRAX use the box marked RE: (Agent File#) to insert the transactionspecific information. Have a question about CPL fees? Contact your FNTG agency representative for help. VA/FHA LOAN A CPL IS REQUIRED BY THE LENDER AND THE FEE IS ALLOWED TO BE PAID BY BORROWER IN A VA OR FHA LOAN CLOSING. CALL YOUR AGENCY REP IF QUESTIONS ARISE. WHERE IS THE CPL FEE SHOWN ON A HUD-1? The Company believes that the CPL fee should be included with other lender title services fees within the borrower s column on Line 1101 of the HUD-1 settlement statement. The fee should also be either disclosed as payable to the applicable underwriter on a line within the 1100 series, below Line 1108, outside the column; or shown as payable to the underwriter on a separate disclosure statement attached to the HUD-1. Some lenders seem to prefer one form of disclosure over the other and both appear to meet RESPA guidelines. Agency agreements require that agents follow all underwriting guidelines. Alerts and bulletins issued by the companies contain underwriting guidelines. All agency material, alerts and bulletins must be properly disseminated to staff and retained for future review and reference. Fidelity National Title Group, Inc. Chicago Title Insurance Company Commonwealth Land Title Insurance Company Fidelity National Title Insurance Company USE THE FNTG RATE CALCULATOR FOR THE MOST CURRENT RATES PUBLISHED IN VIRGINIA BY OUR COMPANIES

6 To: [Insert name of title insurance company] NO FINANCING AFFIDAVIT I/we,, the owner(s) of property known as ( the Property ), more particularly described in Commitment No., do hereby state: 1. I/we acknowledge that no recorded deed of trust or mortgage was found affecting the Property in a search of the land records in the county/city where the Property is located; 2. The Property is owned by me/us free and clear of liens, other than the lien of real estate taxes; 3. There are no recorded or unrecorded deed(s) of trust, personal notes and/or obligations intended by the mortgagee, lender or noteholder to be paid prior to sale or refinance of the Property; 4. The Property has not been pledged as security for the repayment of any personal or business loans. This affidavit is made for the purpose of inducing (the Company) to issue its policy or policies of title insurance as to the Property and is given with full knowledge that the Company will rely upon the accuracy of statements made herein. The undersigned further states that he/she is familiar with the nature of an oath and with the penalties provided by the laws of the Commonwealth of Virginia for falsely swearing to statements made in an instrument of this nature. The undersigned further certifies that he/she has read and understands the full facts of this Affidavit. Affiant: Affiant: (print name) Contact Information: (print name) Contact Information: State/Commonwealth of, County/City of, to-wit: I, the undersigned, a notary public in and for the jurisdiction aforesaid, do hereby certify that, who is known to me, appeared before me on the day of, 20, and acknowledged the foregoing instrument. Given under my hand this day of, 20. Notary Public/ID # My commission expires

7 To: [Name of Lender] DATE: CASE NO.: LOAN NO.: BORROWER(S): PROPERTY ADDRESS: DB/PG # or INST. # OF YOUR DEED OF TRUST: AUTHORIZATION TO FREEZE AND CLOSE CREDIT LINE Freeze the Credit Line. You will be receiving a payoff statement request from [insert name of Settlement Agent/Attorney] ( the Settlement Agent ). This letter authorizes you to freeze the referenced credit line upon issuance of your payoff statement. If you require further authorization, please contact at [phone number] immediately. In order to avoid unsecured additional advances, the account must be frozen. If you make additional advances after issuing your payoff statement, such advances will not be secured by the referenced property. Close the Credit Line and Release your Deed of Trust. Upon your receipt of funds representing payment in full as shown on your payoff statement, you are to close my/our line of credit and forward a certificate of satisfaction for the above reference deed of trust to the Settlement Agent. Payment of amounts due as set forth in your payoff statement will eliminate any security interest you have in the above referenced property. Property to be Sold or Refinanced. I/we will be selling or refinancing the referenced property in reliance on the release of the above deed of trust. Upon payment in full pursuant to your payoff statement, you must issue a certificate of satisfaction for the above referenced deed of trust which is securing your line of credit. Any verbal agreement to the contrary with the undersigned Borrower(s) will not negate this obligation. I/we agree to pay any charges pending that are not reflected on your payoff statement issued to the Settlement Agent and I/we agree to cease activity on this account. Borrower(s) Signature: Date: