New Real Estate Practitioners
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Spring 2007, Volume 6, Number 2
New Real Estate Practitioners
by Melanie Hagopian, Agency Services Representative
Who do you represent in a real estate transaction? There are many parties involved in a transaction and the new real estate practitioner must be ever mindful of who they represent. Do you represent the lender? If there is a mortgage broker involved, what is your relationship to the mortgage broker? What are your obligations to the borrower in a transaction where you are representing the lender and the borrower does not have their own counsel? When a lender asks their approved closing attorney to draft the Purchase and Sale Agreement on behalf of the borrower/buyer as part of the services offered to them, what are the attorney’s obligations to the borrower/buyer? What are the practitioner’s obligations to the lender/client with respect to nontraditional mortgage products being offered by their clients in this challenging housing market? What advice, if any, should be given to lenders in a climate where HUD has stepped up its oversight of lender practices and charges?
Representing the Lender
Since a mortgage lender ultimately may own the property, the lender has the same concerns as the borrower/buyer with respect to the quality of title. A lender must be assured that:
- Title to the property is good and clear of record and insurable.
- The value of the property is equal to, or greater than, the agreed sales price.
- All of the improvements on the property are structurally sound, and all of the operating systems are in satisfactory working order.
- The property is zoned so as to allow the present use and any contemplated different or additional use.
- The property is not located in a flood plain zone, or, if it is, flood insurance can be obtained.
- All improvements are located within the boundary lines of the property and comply with present zoning setbacks and dimensional requirements.
- Adequate insurance (fire and general liability) can be obtained.
- All real estate taxes and other municipal charges that are due and payable have been paid, and there are no other outstanding municipal charges.
Accordingly, you as lender’s attorney either examine the title or arrange for a title examination and a plot plan or zoning opinion, if required, and procure a municipal lien certificate and appraisal. The borrower must obtain an inspection and an insurance certificate to give the lender the necessary level of comfort. As the time for the closing approaches, a request must be made to anyone shown by an abstract to hold a mortgage, attachment, tax lien, or other encumbrance against the property, to report the amount needed to discharge the lien. All loan documents must be prepared (the lender may prepare the note and mortgage or ask you to do so), the HUD, title insurance commitment, insured closing letter (if required) must be prepared as well as all other lender and state and federal government required documents. You may be asked to prepare the deed on behalf of the seller if the seller does not have an attorney. If the seller is represented by counsel, you should request counsel to submit a copy of the proposed deed for your review prior to closing.
Letter to Borrower
Once the lender has notified you that they have approved a loan for a borrower you should send a letter to the borrower informing them that your office has been engaged by the lender to represent its interests in documenting and securing (closing) the borrower’s mortgage loan on a particular property. Your obligation to disclose to the borrower your relationship to the lender has been met. You may offer additional services to the borrower such as drafting a Homestead Declaration. You may also inform the borrower of additional services offered by your firm such as drafting wills and trusts.
In the past few years some lenders have asked counsel to review or negotiate purchase and sale agreements on behalf of borrowers as part of the services offered to the borrower in this increasingly competitive mortgage lending market. Again, it is your duty to disclose to the borrower that you represent the lender and have been asked by the lender to represent the borrower’s interests as well in reviewing and/or drafting and negotiating a purchase and sale agreement. There are attorneys who will not agree to this type of arrangement. The drafting and negotiation of a purchase and sale agreement is an extremely important process that can have a huge impact, good or bad, on a buyer/borrower. Some attorneys believe that including this service as part of their representation of the lender creates a potential conflict of interest with the buyer/borrower and undermines the importance of vigorous legal representation of a buyer in one of the most important contracts they will ever enter into. As long as you have disclosed to the borrower that you are representing the interests of the lender as well as their interests your ethical obligation has been met. Of course, if the buyer/borrower is represented by counsel you will be talking directly with their attorney. In that case you should not contact the buyer/borrower directly.
Working with Mortgage Brokers
Be aware that when you are working with a mortgage broker, they in turn are agents for several lenders. Who do you represent in transactions where the mortgage broker has sent the deal to you? The mortgage broker is your contact and is the liaison with the lender; however, ultimately it is the lender’s interests you are protecting. Where the mortgage broker is sending you business, but the lender is their client and you are responsible for protecting the interests of the lender (oftentimes you will not know who the lender will be on a transaction until the day before, sometimes even the day of, closing) it is important for you to educate the mortgage broker on the closing process: the need for good, clear, record and marketable title, the necessity of a lender’s title insurance policy and the benefits of an owner’s policy, the necessity of a loan-to-value ratio that does not put the lender at risk, the benefits of obtaining a plot plan. Many mortgage brokers and loan originators are inexperienced. Many of them may not remember the bank failures and claims of the late 1980s. They do not have experience with title concerns and poor loan-to-value ratios. At the same time, mortgage brokers and lenders are facing stiff competition and pressure to reduce fees. Competitors may offer borrowers quicker closing schedules and lower closing costs. This has certainly taken the form of lower attorney’s fees, reduced requirements for surveys, plot plans or environmental reports.
Lenders still desire the same level of protection on their title policies but often request deleting the survey exception, based on a plot plan as opposed to a survey, or reliance on an out-of-date plot plan, or even no plot plan. Lenders are asking for additional survey coverages without an ALTA survey.
In this competitive lending market it is important for you, as lender’s counsel, to educate your lenders and not compromise standards. The best way for you to distinguish yourself in this market is to offer lenders regular updates on the law. Stewart Title Guaranty is here to assist you in providing you with all of the tools to best represent your clients. We offer regularly scheduled seminars on the second and third Wednesdays and Fridays of each month, our quarterly newsletter with updates on the law and a dedicated and experienced underwriting staff who stand ready to assist you at any time.