Title Issues of the Peculiar Variety

Transcription

1 Title Issues of the Peculiar Variety - Over Burdening of Homestead, Mezzanine vs. 2-Story Restrictions John Rothermel September 20, 2018

2 In order to obtain a CE Certificate or CLE Credit, you must listen to the webinar for a minimum of 55 minutes obtain the password (provided at the end of the presentation) follow the instructions as given 2

3 ATTORNEY INFORMATION Because of opinions expressed by the Texas Department of Insurance (TDI) concerning rebates, legal credit is available only to: Attorneys who own title agencies that are Stewart Title Guaranty Agents Attorneys employed by a title insurance agent licensed with Stewart Title Guaranty or Stewart entities Fee attorneys who have an Escrow Officer license through a Stewart Title Agent or Stewart entity We welcome any other lawyers to listen, but cannot provide continuing education credit to you. 3

4 Title Issues of the Peculiar Variety: Overburdening of Homestead; Mezzanine v. 2-Story Restrictions John Rothermel Senior Vice President Regional Underwriting Counsel Senior Underwriter SW Regional Underwriting Office Stewart Title Guaranty Company

5 5 OVERBURDENING HOMESTEAD

6 Overburdening of the Homestead and Spreading Lien to Homestead To some extent, this problem was dealt with in 1999 and 2005 when Texas passed legislation and a constitutional amendment dealing with the twin issues of overburdening of homesteads and spreading of liens. 6

7 Overburdening of the Homestead and Spreading Lien to Homestead Overburdening releasing part of homestead property from lien Spreading using homestead as collateral to buy more homestead property 7

8 Overburdening of the Homestead and Spreading Lien to Homestead Although, these issues are no longer relevant as to the previous facts, the history lesson remains important and will allow you to understand when NOT to worry about a proposed deal. 8

9 Stewart found the problem. Stewart fixed it. It is very difficult to find the case law creating the doctrine of overburdening and spreading. It was first published in a Stewart Examiner s Manual created in the mid-1960s. Stewart took the position because of a couple of cases from the 1940s. Stewart would not insure a loan where spreading or overburdening could be alleged. John Hancock Mutual Life Insurance v. Glasgow (135 Tex. 470, 141 S.W.2d 942) Baxter v. Crow (133 S.W.2d 187) 9 Apparently, the entire title industry followed suit.

10 Stewart found the problem. Stewart fixed it. Since we were amending the constitution anyway, we decided to fix the problems. The constitutional amendment for overburdening was drafted first and the author wouldn t allow spreading to be added, so we had to find a creative place in the property code, and we did. 10

11 Overburdening and Spreading 11 Art. 16 Sec. 50 of the Texas Constitution provides the only time homestead property can be used as collateral is for a debt. Purchase Money Taxes Improvements Owelty Liens Federal Tax Liens Home Equity Loans Reverse Mortgages MHU Refinances

12 Overburdening and Spreading The rationale of the bankruptcy courts in declaring owelty liens unconstitutional (pre-1995 amendments) applies to spreading of the liens doctrine. Not using homestead property you already own as collateral to buy more. 12

13 Overburdening and Spreading A owns property and wants to buy additional property. Lender wants the lien to be against the additional property and the borrower s homestead. 13 Looking at the list of permissible homestead loans, where would this fit in? It doesn t. And even though spreading no longer applies when acquiring additional homestead property, we wouldn t allow homestead property to be used as collateral for nonhomestead acquisition, like a commercial building in town when you live on a rural homestead or vice versa.

14 Overburdening and Spreading The concept of adding the homestead to a purchase money lien on other land, EVEN IF IT WAS TO BE HOMESTEAD, would be prohibited. Thus, the doctrine of spreading of the liens would have declared the lien invalid. The Stewart lobbying team overturned this doctrine. (See Art. 16 Sec. 51.) 14

15 Legislative Fix to the Overburdening Problem 15 Art. 16 Sec. 51. SIZE OF HOMESTEAD; USES; RELEASE OR REFINANCE OF EXISTING LIEN. The homestead, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with the improvements thereon; the homestead in a city, town or village, shall consist of lot or contiguous lots amounting to not more than 10 acres of land, together with any improvements on the land; provided, that the homestead in a city, town or village shall be used for the purposes of a home, or as both an urban home and a place to exercise a calling or business, of the homestead claimant, whether a single adult person, or the head of a family; provided also, that any temporary renting of the homestead shall not change the character of the same, when no other homestead has been acquired; provided further that a release or refinance of an existing lien against a homestead as to a part of the homestead does not create an additional burden on the part of the homestead property that is unreleased or subject to the refinance, and a new lien is not invalid only for that reason.

16 Overburdening of the Homestead A owns 83 acres of land and has a mortgage of $290,000. A has paid the loan down to $160,000 and asks the lender to release 40 acres of the homestead land. The doctrine of overburdening would not allow this. Currently, each acre bears a debt loan of $ (290000/83). 16

17 Overburdening of the Homestead Upon the release, each acre bears $ (160000/43). So each remaining acre would now bear more debt than it originally started with and thus wouldn t be allowed under the Texas Constitution. The Stewart lobby team fixed this problem, too. 17

18 Legislative Fix to Spreading Sec ABOLITION OF COMMON-LAW RULES. (a) The common-law rules known as the rule in Shelley's case, the rule forbidding a remainder to the grantor's heirs, the doctrine of worthier title, and the doctrine or rule prohibiting an existing lien upon part of a homestead from extending to another part of the homestead not charged with the debts secured by the existing lien upon part of the homestead do not apply in this state. 18

19 19 MEZZANINE V. 2-STORY

20 In 1920, Mrs. Dorothy Smith owned three adjacent lots. She wanted them to be developed into a nice area and restricted each of them to a 2-story single family home. Three nice homes were built and remained until In 2014, a developer bought two entire blocks of land, including the two adjacent lots to tear all homes down and build a nice townhouse addition of 3-story homes. The developer knew about the 2-story restriction which would destroy the uniformity of his addition. What to do? 20

21 Developer consults a very smart attorney who advises that a mezzanine would comport with the restrictions because the third floor wouldn t actually be a floor. Attorney purporting to represent the Heirs of Mrs. Smith sent a letter to the developer stating that the restrictions had been violated and demanding several thousand dollars in damages. 21

22 Questions Does a mezzanine violate a 2-story restriction? What is a mezzanine? Under the 1920 building code, there was not a definition of a mezzanine. Under the 2012 building code, there is. 22

23 A mezzanine Think of a theatre You have the main floor and you have a balcony, but many theatres also have a mezzanine, a sort of ½ balcony between the main floor and the balcony. Under modern building codes, a floor covers more than 40% of the floor beneath it. A mezzanine covers less than 40% of the floor beneath it. 23

24 A mezzanine Think of the bonus room that partly covers a den (but not the kitchen, living room and dining room or the bedrooms) What was Mrs. Smith thinking when she restricted the homes to 2-stories? Would she have considered the mezzanine a floor? Too expensive of a test case for the underwriting premium. 24

25 Premium to Profit Chart Risk Adverse Analysis Gross Underwriter Premium Net before Operating Potential Policy Amount Premium Reserves tax expenses Expenses Profit $25, $49.80 $0.06 $4.48 $45.26 $16.93 $28.32 $50,000 $503 $75.45 $0.09 $6.79 $68.57 $25.65 $42.91 $75,000 $671 $ $0.12 $9.06 $91.47 $34.22 $57.25 $100,000 $843 $ $0.16 $11.38 $ $42.99 $71.92 $250,000 $1,644 $ $0.30 $22.19 $ $83.84 $ $500,000 $2,979 $ $0.55 $40.22 $ $ $ $750,000 $4,314 $ $0.80 $58.24 $ $ $ $1,000,000 $5,649 $ $1.05 $76.26 $ $ $ $2,500,000 $12,234 $1, $2.26 $ $1, $ $1, $5,000,000 $23,209 $3, $4.29 $ $3, $1, $1, $10,000,000 $41,309 $6, $7.64 $ $5, $2, $3, $15,000,000 $59,409 $8, $10.99 $ $8, $3, $5, $20,000,000 $72,259 $10, $13.37 $ $9, $3, $6, $25,000,000 $85,109 $12, $15.75 $1, $11, $4, $7, $35,000,000 $139,009 $20, $25.72 $1, $18, $7, $11, $75,000,000 $162,109 $24, $29.99 $2, $22, $8, $13, $100,000,000 $200,609 $30, $37.11 $2, $27, $10, $17, $250,000,000 $431,609 $64, $79.85 $5, $58, $22, $36,

26 What happened? We heard later the developer settled with the Heirs group for a few thousand dollars (much less than the cost of litigation) and got a release of the restriction. So is a mezzanine a story? We still don t know. 26

27 27 CONSTRUCTION LIEN BONDS

28 Construction Lien Bonds In Texas, all persons who provide labor or materials for improvements to real property have a lien against the property to secure payment for the labor or materials. We call this a mechanic s lien. When the person hasn t been paid, the claimant files a mechanic s lien affidavit (MLA) claiming a lien. The lien must be judicially foreclosed. The legislature has provided mechanisms where an owner can provide a surety bond to secure the payment of the MLA. When the bond is signed and recorded, the lien attaches to the bond and not to the property. 28

29 SUBCHAPTER H. BOND TO INDEMNIFY AGAINST LIEN Sec BOND. (a) If a lien, other than a lien granted by the owner in a written contract, is fixed or is attempted to be fixed by a recorded instrument under this chapter, any person may file a bond to indemnify against the lien. (b) The bond shall be filed with the county clerk of the county in which the property subject to the lien is located. (c) A mechanic's lien claim against an owner's property is discharged after: (1) a bond that complies with Section is filed; (2) the notice of the bond is issued as provided by Section ; and (3) the bond and notice are recorded as provided by Section

30 SUBCHAPTER H. BOND TO INDEMNIFY AGAINST LIEN Sec PERIOD FOR BRINGING SUIT TO FORECLOSE LIEN. (a) Except as provided by Subsection (b), suit must be brought to foreclose the lien within two years after the last day a claimant may file the lien affidavit under Section or within one year after completion, termination, or abandonment of the work under the original contract under which the lien is claimed, whichever is later. (b) For a claim arising from a residential construction project, suit must be brought to foreclose the lien within one year after the last day a claimant may file a lien affidavit under Section or within one year after completion, termination, or abandonment of the work under the original contract under which the lien is claimed, whichever is later. 30

31 Construction Lien Bonds The legislature has not dealt with bonds for constitutional liens. It may be possible for an underwriter to accept a special bond in a non-statutory form. You will need to contact a Texas underwriter to discuss. 31

32 SUBCHAPTER I. BOND TO PAY LIENS OR CLAIMS Sec BOND. (a) An original contractor who has a written contract with the owner may furnish at any time a bond for the benefit of claimants. (b) If a valid bond is filed, a claimant may not file suit against the owner or the owner's property and the owner is relieved of obligations under Subchapter D or E.Acts 1983, 68th Leg., p. 3551, ch. 576, Sec. 1, eff. Jan. 1, Amended by Acts 1997, 75th Leg., ch. 526, Sec. 22, eff. Sept. 1,

33 33 SUBCHAPTER I. BOND TO PAY LIENS OR CLAIMS Sec BOND REQUIREMENTS. The bond must: (1) be in a penal sum at least equal to the total of the original contract amount; (2) be in favor of the owner; (3) have the written approval of the owner endorsed on it; (4) be executed by: (A) the original contractor as principal; and (B) a corporate surety authorized and admitted to do business in this state and licensed by this state to execute bonds as surety, subject to Section 1, Chapter 87, Acts of the 56th Legislature, Regular Session, 1959 (Article , Vernon's Texas Insurance Code); (5) be conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials, and normal and usual extras not exceeding 15 percent of the contract price; and (6) clearly and prominently display on the bond or on an attachment to the bond: (A) the name, mailing address, physical address, and telephone number, including the area code, of the surety company to which any notice of claim should be sent; or (B) the toll-free telephone number maintained by the Texas Department of Insurance under Subchapter B, Chapter 521, Insurance Code, and a statement that the address of the surety company to which any notice of claim should be sent may be obtained from the Texas Department of Insurance by calling the toll-free telephone number.

34 34 AFFIDAVITS

35 Affidavits What does the person know? How does (s)he know it? What steps did (s)he take to find out the facts? 35 Is there information in the affidavit that would lead to a different conclusion? 3 children with 2 different mothers 2 nd wife doesn t own 100% of property

36 Affidavits In an affidavit of heirship, has the person known the deceased long enough to have actual knowledge of and conversations about the people involved? Statement that all debts have been paid is highly unlikely to be true. 36

37 37 FINANCIAL STATEMENTS

38 38 Reviewing Financial Statements Used by title underwriters when presented with unusual risks such as non-imputation endorsements, early starts of construction, MLAs and similar matters which require an indemnity. There is a real difference between wealth and having cash assets. Wealth homes in many locations, fine art, expensive sports cars, a fancy watch for every day of the month and a stock and equity portfolio worth billions, value of company, good will etc. Cash money in the bank maybe even short term accounts receivables with regular payments. Many investors are wealthy but don t have tons of ready cash. How likely are they to sell a Picasso to pay off a title company indemnity?

39 Going Up Stream to Find Cash Many owners of real property are limited asset entities. 506 Elm St. LLC for example owns only 506 Elm Street. Its owners are likely other LLCs and Limited Partnerships that are also owned by other entities. Which, if any, have sufficient assets with which to back up a $3 million indemnity? Ultimately, you may have to have a string of entities and ultimately individuals with enough cash to cover the risk. Look back to wealth vs. cash as you look at those offering the indemnity. 39

40 40 POLICY AMOUNTS

41 Policy Amounts and P-66 One way folks have of lessening their title insurance premium is to get a dirt policy only. In other words, even though there is a $50 million apartment building on the property, they want a policy for the appraised value of the land only of $3 million. 41

42 Policy Amounts and P-66 The rationale is that the quality of searches and examination today is so high that few, if any, claims require a cash payment of more than $3 million. Missed taxes won t. An easement that requires a parking lot to be torn up won t. There are just a few instances of a total failure of title. Missing a $70 million deed of trust, may be a total failure. Missing the sale to a different LLC, may be as well. 42

43 P-66 Owners Policy 43 Owner's Policy - Owner's Policies shall be written to protect the estate or interest in the land, e.g. fee simple, leasehold, or easement. Fee Simple All Owner's Policies shall be issued for the amount of the current sales price of the land and any existing improvements appurtenant thereto, plus, at the option of the insured, the cost of improvements immediately contemplated to be erected thereupon. In the last instance, such policy is permitted only if the applicable exception and clause provided for in Rule P-8 are placed in the policy.

44 P-66 Owners Policy (cont.) 44 If no sale is being made, all Owner's Policies shall be issued for an amount equal to the value of the land and any existing improvements appurtenant thereto, plus, at the option of the insured, the cost of the improvements immediately contemplated to be erected thereupon. In the last instance, such policy is permitted only if the applicable exception and clause provided for in Rule P-8 are placed in the policy. If improvements are subsequently added, a new Owner's Policy may be issued in the aggregate amount of the original Owner's Policy, plus the cost of improvements. The premium for such policy shall be as provided in R-3.

45 P-66 OTP Leasehold Leasehold: The amount of the Owner's Policy covering a leasehold estate shall, at the option of the Insured, be based upon: the total amount of the rentals payable under the lease contract; or the value of the land and any existing improvements; or the value of the land and any existing improvements and the cost of improvements immediately contemplated to be erected thereupon. In this instance, the policy must contain the applicable exception and clause provided for in Rule P-8. 45

46 P-66 Other Easement: An Owner's Policy covering an easement estate shall be written for the amount of the value of the easement at the time the policy is issued. 46 Acquisition by the United States of America: Where improvements are located on land acquired by the United States of America and such improvements will be removed or destroyed, at the option of the United States, an Owner's Policy (Form T-11) shall be issued for the stated amount of the sales price of the land only, which price shall not include the amount paid for the existing improvements which are to be removed or destroyed.

47 P-66 Other (cont.) Increased Value: When the value of the insured land and improvements has increased and when requested by the Insured, upon compliance with Rule P-9a(2), endorsement form T-34 shall be attached to the Owner's Policy upon payment of the premium set forth in R-15a. 47 Multiple Tracts: When multiple tracts of land are conveyed pursuant to separate contracts to a single purchaser and a single owner's policy is issued covering all the land conveyed, the conveyances shall be treated as separate transactions and the premiums shall be charged accordingly.

48 P-66 Loan Policy Loan Policy Except as otherwise provided in this rule, all Loan Policies shall be for the amount of the loan(s) insured, when the land covered in the policy represents all of the security of the loan(s). When the land covered in the policy represents only part of the security of the loan(s), then the policy shall be written in the amount of the value of such land or the amount of the loan, whichever is the lesser. 48

49 P-66 Loan Policy (cont.) 49 When requested by the insured, the policy may be issued in an amount equal to the original principal amount of the indebtedness plus legal interest (capitalized or otherwise) not to exceed twenty-five percent (25%) of the said principal amount. A previously issued loan policy insuring variable rate mortgage loan may, when providing for negative amortization, be reissued (or endorsed), effective as of the date of the original Loan Policy, increasing the face amount of the Loan Policy from the original principal amount of the loan to an amount not to exceed one hundred twenty-five percent (125%) of the original principal amount upon the payment of additional premium as provided in R-4.

50 50 P-66 Loan Policy (cont.) When a Loan Policy is issued subsequent to either an Owner's Policy or Loan Policy pursuant to Rate Rule R-6, it shall be issued in the amount of the current unpaid balance of said indebtedness. When the insured lien secures a reverse mortgage loan, the Loan Policy may be issued in an amount not exceeding: % of the total advances to be made according to a plan established by the original loan agreement; or 2. the maximum amount that may be secured by the lien of the insured mortgage, as estimated by the lender according to the written lender instructions; or 3. in the case of an FHA-insured loan, the Maximum Claim Amount as established by FHA.

51 One way this issue was dealt with Jumbo Rates Premiums shall be calculated as follows for policies in excess of $100,000: For policies of $100,001 - $1,000,000 Basic Premium 1. Subtract $100,000 from policy amount. 2. Multiply result in 1.(1) by $ and round to nearest whole dollar. 3. Add $843 to result in 1.(2). 51

52 Jumbo Rates For Policies of $1,000,001 - $5,000,000 Basic Premium 1. Subtract $1,000,000 from policy amount. 2. Multiply result in 2.(1) by $ and round to nearest whole dollar. 3. Add $5,649 to result in 2.(2). 52

53 Jumbo Rates For policies of $5,000,001 - $15,000,000 Basic Premium 1. Subtract $5,000,000 from policy amount. 2. Multiply result in 3.(1) by $ and round to nearest whole dollar. 3. Add $23,209 to result in 3.(2). 53

54 Jumbo Rates For policies of $15,000,001 - $25,000,000 Basic Premium 1. Subtract $15,000,000 from policy amount. 2. Multiply result in 4.(1) by $ and round to nearest whole dollar. 3. Add $59,409 to result in 4.(2). 54

55 Jumbo Rates For policies in excess of $25,000,000 Basic Premium 1. Subtract $25,000,000 from policy amount. 2. Multiply result in 5.(1) by $ and round to nearest whole dollar. 3. Add $85,109 to result in 5.(2). 55

56 The big deals get a really big rate reduction. Millions < 1 $ $ per $1000 of policy amount 1 5 $4.39 (95 ) 5 15 $3.62 (77 ) $2.52 ($1.10) 25+ $1.54 (98 ) $3.50 per $1000 overall rate reduction Remember though, you pay the incremental amount for each level of policy amount. That s what the instruction (3) Add $5,649 to result in 2.(2) means. It also means that on the policy amounts over $25 million, the underwriter s share of the premium is $.231 (which is very close to the proverbial 25 per $1000 we hear about in other states).

57 John Rothermel SW Regional Underwriter Senior Vice President Senior Underwriter Stewart Title Guaranty Company San Antonio, Texas

58 Per the TDI and the State Bar, in order to obtain a CE Certificate or CLE Credit you must: listen to the webinar for a minimum of 55 minutes obtain the password (provided at the end of the presentation) follow the instructions as given 58

59 To Receive CE Credit Each individual seeking credit hours must send their own certificate request to: Please include the following information: Provide only this Presentation Name in the Subject Line of your Title Issues of the Peculiar Variety In the body of your Name of Participant (as it appears on your Escrow Officer License); Presentation PASSWORD given at the end of the webinar; License Number Only (located on left side of Escrow Officer Certificate of License for example: License Number: ) For Attorney CLE Credit also include: Texas State Bar Number Affiliation with Stewart Employed by Stewart Title Guaranty Company; an affiliate; or a Stewart agent For more details, see the CE and CLE FAQs at: 59

60 Recordings Under Texas TIPS tab Posted online 10 days after live presentation Other current courses available Certificates Processing can take up to 10 business days. Contact us if you haven t received your certificate after the allotted processing time. CEcertificate@stewart.com 60

61 Join us for the next Texas TIPS webinar! October 18, 2018 Spooky Claims 2018 Stephen C. Reid, III For Questions/Comments or 61