With the market heating up, and borrowers putting less money down, we’re starting to see a lot of questions about private mortgage insurance. Here is a refresher on what it is and what it does:
FannieMae and FreddieMac require mortgage insurance any time the borrower has less than 20% equity in the property being financed. FHA and VA also require upfront and monthly mortgage insurance since these programs, by their nature, require less than 20% down from the borrower. The mortgage insurance is to protect the lender, Fannie Mae, Freddie Mac, FHA, and VA. Here is generally how it works:
If a borrower stops paying or otherwise default on their mortgage, the lender will foreclose the property. In Florida, that means that they will sell the property at auction. If a third party bidder purchases the property for more than what you owe the lender, then the lender is paid off in full, and the borrower gets the surplus proceeds from the sale.
However, in most cases, the lender is owed more than the property is worth at the foreclosure auction. In those events, the lender usually is the “successful bidder” at the foreclosure sale and gets the property back. At that point, the lender will take possession of the property and try to sell it on the open market. If they can sell it for more than they are owed, then great. All’s well. However, if we go through another real estate crash, they usually can’t get that much for it, and end up selling it at a loss.
At that point, they’ll go back to court and ask the judge to order that the lender receive a “deficiency judgment” against the borrower. The deficiency judgment will be in an amount roughly for the difference between the amount the borrower owes the lender minus the value of the property foreclosed. So, if the property is worth $200,000.00 at the date of the foreclosure, but the borrower owes the lender $230,000.00, then the judge would give the lender a deficiency judgment of $30,000.00 against the borrower and the borrower’s assets.
The lender will then try to collect that additional deficiency judgment from the borrower. If the borrower is bankrupt or otherwise simply can’t pay the judgment, then the lender goes to the mortgage insurer and makes a claim for the uncollectible deficiency judgment. The insurer then, we hope, has the reserves necessary to pay the claim to the lender to make the lender whole on the borrower’s loan so they can continue lending mortgage funds to new borrowers. As part of paying the claim, the lender will also assign the deficiency judgment to the mortgage insurance company who may make further attempts to collect the funds from the defaulted borrower to replenish the insurer’s reserves.
This is not credit life or credit disability insurance that protects borrowers (or their heirs) in the event of death or disability. Lenders typically cannot require that borrowers carry that type of insurance; but they can require mortgage insurance whenever the borrower brings less than 20% of the purchase price to closing or otherwise has less than 20% equity in the mortgaged property.
Gov. Desantis signed HB 409/SB 548 into law last week. While most lawyers call it the “E-Wills” law, we real estate attorneys call it the “Hallelujah! Law.”
As of January 1, 2020, a document requiring notariziation will no longer require that the notary and the signer be physically in the presence of each other. Instead, they will be able to communicate via two-way audio/video communication (like Skype, FaceTime, Google Hangouts, etc.). During the videoconference, the notary and the signer will be able to see the documents that require notarization. No longer will closing agents need to engage local mobile notaries to print out reams of paper, drive to meet with a customer, execute and notarize documents, scan them back to the closing agent, then ship them back to the closing agent who will then ship them to the parties, including the lender. The amount of carbon emissions and paper that will be reduced is inconceivable. Hallelujah!
In remote online notarization, signers will connect with a notary through an online service provider, usually using their smartphone or tablet. The signers will then verify their identity several ways: by holding up the front and back of their government-issued picture identification to the camera which reads and verifies the data, answering knowledge-based questions that only the signer would know (i.e. “Which one was your address in 1999?” A, B, C, or D), and — with some services — facial recognition. Once the signers’ identity is confirmed, the notary will ask them a few questions that are recorded as part of the signing ceremony. The signer will then electronically sign the document(s) on the screen much like documents are currently signed via Docusign, DotLoop, Form Simplicity, SignNOW, and other electronic signing platforms. The notary will then place their electronic notary seal on the document as well as their signature. This will seal and secure the document against any further changes or tampering. Further, the video of the signing ceremony will be retained by the notary’s platform for at least five years.
The document, if it’s a deed or mortgage, can then be electronically recorded in the official records without requiring printing of paper hard copies. The notary, signer, and the lender, REALTOR, or other parties to the transaction, can receive electronic copies of the fully executed and notarized documents immediately.
Florida requires two witnesses on deeds to be valid. This can be accomplished in one of two ways. The witnesses can be present either with the notary or with the signer. However, the witnesses cannot be “present” by way of a separate videoconference feed from a third location where they are not physically in the presence of either the notary or the signers.
For real estate investors, this means that obtaining an emergency signature of a shaky seller on a deed or memorandum of contract will be much easier, since a notary will be as close as a smartphone or tablet.
For estate planning attorneys, this means that disabled or mobility-challenged clients will no longer have to travel to an office to execute wills, trusts, and other estate planning documents.
For other industries — such as banks — that rely upon notaries, the ability to consolidate this function in a call center and provide it via Internet on call at any time, will reduce the expense of maintaining and regulating notaries in-house a locations and branches all over the country.
For lenders, this will greatly reduce the time it takes to receive executed documents after closing, potentially saving billions each year on warehouse lending interest for mortgage lenders.
For title insurance agencies, this means that the costs of closing can be reduced by avoiding the need to pay outside mobile notaries, opting instead to handle the closing remotely from their desks.
As an aside: To become a notary in Florida, one must be a resident of Florida, and their powers as a notary are only active so long as they are inside Florida’s geographic boundaries. However, Florida also has the concept of Commissioners of Deeds in its Statutes. Commissioners are appointed by the governor as notaries who are empowered to notarize deeds and other documents as if they are notaries who are citizens of and physically present inside Florida’s geographical boundaries. However, a requirement to be a commissioner is that the person does not reside inside nor is present inside the United States. This is means that the governor can appoint an unlimited number of Commissioners of Deeds who reside outside the US (i.e. in Canada, the Phillippines, India…) who will have the authority to notarize documents affecting Florida property or Florida residents. For this reason, we fully expect that — as time progresses — a lot of the closing/signing ceremony could be outsourced by large title insurance underwriters and agencies to offshore call centers full of commissioners of deeds. The large title insurance underwriters they often already obtain the title search and other closing file processing activities offshore with cheaper labor, so this wouldn’t be unprecedented.
Now that the governor has signed the bills into law, the Secretary of State will work with industry partners to make rules and regulations to implement the law.
Florida will be one of 17 states that allow remote online notarization as of January 1, 2020. The trend started with Virginia only seven years ago. This year, at least 11 states passed legislation to allow it in their state as well, and at least one other state (SC) considered it. With states such as Texas, Florida, Nevada, Virginia, and Tennessee now accepting remote online notarization, a tipping point has been reached. It is conceivable that, within the next two years, it will be legal and accepted in every state in the Union.
The U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), in its continued efforts to fight money laundering, has renewed, expanded, and clarified its Geographic Targeting Order to Title Agencies, closing attorneys, escrow agents, and title insurance underwriters who handle closing real estate transactions.
The order is no longer confidential, therefore we’re now allowed to share its details with the public. We were not permitted to do this with the previous version of the Order.
The Order requires that if a closing agent is handling a closing where the purchaser is an entity (LLC, corporation, partnership, limited partnership), there is no mortgage financing being used, and the sales price is $300,000.00 or more in certain jurisdictions, the closing agent must gather the identification information of the shareholders, officers, partners, members, managers, directors, etc. and report it to FinCEN under the Bank Secrecy Act. It’s important to note that “Trusts” are no longer considered to be “Legal Entities” that will require reporting of beneficiaries. This is probably because the trustee is already required to file IRS Form 56 that notifies the IRS of the beneficiaries’ identification information.
It’s also important to note that the definition of “funds” used for purchase now includes virtual currency along with wires, cashier’s checks, ACH, and cash itself.
The following jurisdictions are now covered:
When the Order was first initiated, only closings of $3 million or more in New York City and $1 million or more in South Florida were covered, so this is a considerable expansion of coverage since it first rolled out.
The Order appears to be working at preventing criminals (international and domestic) from using the funds they gain from criminal activities and laundering them through the legitimate activity of purchasing and selling investment real estate. As a consequence, this has also had a negative effect on the market for high-end real estate in many of these jurisdictions.
If you have any questions about the renewed order, please don’t hesitate to contact us.
The Florida Legislature has passed, and the Governor has signed, a new law (Section 732.7025, Florida Statutes) that will make it easier for spouses to waive their homestead rights via a deed of the homestead property to the other spouse.
Effective July 1, 2018, any deeds conveying the homestead that is executed by one spouse to the other, must contain the following statement if the parties are intending that the deed waive the spouse’s homestead rights in the property after death:
By executing or joining this deed, I intend to waive homestead rights that would otherwise prevent my spouse from devising the homestead property described in this deed to someone other than me.
With this language on the deed, it clarifies that the grantor spouse intends to waive the homestead rights that spouse has in the homestead when the grantee spouse dies.
For example, currently, if the homestead is held only in the name of the husband at his death, the wife may elect to take a half interest in the property together with the children; alternatively, the wife automatically receives a life estate in the property with the remainder to the children. However, if this clause is in the deed after July 1, 2018, the wife can convey her interest in the homestead to her husband via deed prior to his death so that it is solely in his name; and it’s clear that she’s waiving her right to own a half interest or at least a life estate in the property automatically when he dies.
The law clarifies that such a waiver by deed does not waive the homestead protection against creditor’s claims during and after the owner’s death, however. Further, even if such a deed is recorded with this statement on it, the other spouse whose name is no longer on title is still required to sign any future mortgages or deeds for them to be effective against the spouse whose name is omitted.
This begs the question: If a spouse has already conveyed his interest in the homestead solely to his spouse, should a new deed be created and recorded after July 1, 2018, to ensure that their wishes are carried out at death?
Miami-Dade County now requires that, if you are a developer of new residential property in the county, and the property is subject to pending or existing a special taxing district, you must disclose that fact on the face of the deed, conveying the property to the buyer.
The statement on the face of the deed, must be as follows:
I HEREBY CERTIFY THAT I UNDERSTAND THAT THE PROPERTY WHICH IS THE SUBJECT OF THIS TRANSACTION IS LOCATED WITHIN ___________ SPECIAL TAXING DISTRICT CREATED BY MIAMI-DADE COUNTY (OR PROPOSED TO THE BOARD OF COUNTY COMMISSIONERS) FOR THE PURPOSE OF PROVIDING LOCAL IMPROVEMENTS AND SERVICES IN THE NATURE OF ____________.
Signature of Purchaser Date
The new law is effective as of February 16, 2018, and is implemented 90 days after that date. The statement must appear on the face of the deed, be signed by the purchaser/grantee, and acknowledged (notarized). Of course, the blank lines would need to have complete information about the name of the taxing district and for what purpose the district is created.
Phil Diamond, the Orange County Comptroller (the guy who oversees recordings of deeds, mortgages, and any other Official Records related to real estate and identity), announced today that his office now provides automatic alerts to subscribers who sign up for them.
Using the office’s online system, subscribers can sign up to be alerted whenever a document is recorded in the Official Records with a name that matches the subscriber’s. The service is free and recommended for everyone who is concerned about identity or property theft.
Users can subscribe for free here: https://pfa.fidlar.com/FLOrange/
We are often asked whether a land trust can be used in a seller-financing transaction to avoid the need for judicial foreclosure in the event of the buyer-borrower’s default. In such a scenario, the property would be conveyed at closing to a third-party independent trustee who would hold title to the property until the purchase money note is paid in full. If the buyer-borrower defaults, then — under the terms of the land trust — the trustee would convey the property back to the seller-lender.
There are a couple of problems with this scenario in Florida. First, if a buyer is buying a property to occupy it as their primary residence, they will find it difficult if not impossible to obtain the Florida homestead tax exemptions or creditor protections while the property is held in the name of a third-party trustee. To obtain the tax exemption, the occupant must have at least an equitable interest in the property being occupied. In the case of a true Florida land trust, all equitable and legal title vests solely in the trustee. At that point, the buyer has no equitable interest that would be subject to homestead tax exemptions or creditor protections.
Secondly, Florida does not allow non-judicial foreclosures except in timeshare mortgage and assessment lien foreclosure actions. While it is common to see the land trust with a primary and secondary beneficiary used for hard money loans with real estate investors, those avoid judicial foreclosure mostly because the parties involved are looking at it solely from an economic rather than an emotional standpoint and are willing to work together to avoid the need for a formal judicial foreclosure. However, when the property in trust is occupied by the borrower, it has been our experience that the borrower is not willing to go down without a fight. In that case, judges consistently have required the lender to file a mortgage foreclosure action while disallowing the summary ejectment of the borrower from the trust property.
If a client is selling or buying a property, using seller financing, we will review their situation and advise them — in most cases — to stick to the traditional note and mortgage or agreement for deed, knowing that they may be forced to judicially foreclose the borrower’s equity of redemption in the future.
On June 23, 2017, Florida Statute Section 627.7843 was amended significantly. Many real estate investors and others are intimately familiar with the Florida Ownership and Encumbrance (O&E) reports that title insurers and agents have issued for years. Those reports were typically limited in scope as compared to a title search report or a title insurance commitment and policy. For instance, an O&E report typically listed only the current property owners, some of the easements, and liens or mortgages of record. The liability of the issuer of the report could limit its liablity for mistakes in the report to a maximum of $1,000.00.
The Property Information Report (PIR), in contrast, can be issued by anyone. There is no requirement that they be issued by anyone with any type of license or experience in title abstracting or examining. The PIR can include as much or as little information about the property’s title as the requestor wants. For instance, it may include as little information as the names of the vested owners, or as much as information from the State Corporation’s databases, all liens, easements, and pending litigation records related to the property. Unlike the O&E Report, if particular language is included in the PIR, the issuer’s liability is limited to a refund of the amount that the requestor paid for the PIR. Therefore, if the issuer made mistakes in the PIR that cost the requestor hundreds of thousands of dollars, the issuer would only have to refund to the requestor the amount that the requestor paid for the report, even if that amount is as little as $50.00.
Contrast this with an opinion of title from an an attorney. If an attorney makes a mistake (commits malpractice) in preparing a title opinion for a client, there is no limit on the damages that the recipient of that opinion can seek. Also, contrast this with a title insurance commitment and policy where the damages that the insured can seek are limited only to the face amount of the title policy.
Since a PIR can now be issued by anyone, whether an attorney, title agent, or Joe Schmo off the street, and damages are limited to the amount paid for the PIR, we recommend that clients be wary of requesting or relying upon such PIR’s when making major financial decisions in buying or investing in real estate. Even when considering purchasing a property at a foreclosure auction, one should be wary of relying upon a PIR which may miss the priority of the mortgage being foreclosed, or other major issues. If anything, PIRs should only be used as a first step in evaluating a property (i.e. prior to preparing a letter of intent), but should not be used for final and potentially expensive decisions.
We’ve noticed over the past few years that clients have gotten sloppier in how they title mortgages and real estate in their self-directed Individual Retirement Accounts (IRA) and retirement plans. Florida has a specific statute that dictates exactly how such assets must be titled in order to avoid the necessity for a title agent to review the custodial agreement or inquire as to who is required to execute the documents on behalf of the custodian.
Lately, we have seen a lot of assets titled as “IRA Custodian, Inc FBO #123456789.” This is technically legally deficient. The law requires that assets be titled as, “IRA Custodian, Inc. as custodian or trustee for the benefit of (name of individual retirement account owner or beneficiary) individual retirement account.” If the custodial account is a retirement plan, then the asset must be titled as, “IRA Custodian, Inc. as custodian, or trustee of the (name of plan) for the benefit of (name of plan participant or beneficiary).” Florida Statutes Section 689.072 (2006).
To title the asset in any manner that doesn’t follow the statutory language to the letter runs the risk that a title agent, examiner, or underwriter may demand production of the custodial agreement for review prior to closing the purchase, sale, or refinance of the asset. That may be the least of a client’s problems, however. If the asset is a mortgage and note, it is conceivable that a defaulted borrower could demand production of the custodial agreement or raise the defense that the custodian has no authority to foreclose until the custodial agreement is produced, and the power to foreclose is proven.
We would encourage anyone who is using the self-directed IRA or retirement plan through a custodial account to follow the statute to the letter when titling the self-directed asset whether in a deed, lease, or mortgage and note. Doing so will provide the benefit of a statutory presumption that the custodian has the full power and authority to protect, conserve, sell, lease, encumber, or otherwise manage and dispose of the real property described in the recorded instrument without joinder of the named individual retirement account owner, plan participant, or beneficiary.
If the assets are held in a “checkbook-control” IRA limited liability company, or within a land trust, the title agent will likely never realize that the statutory language hasn’t been used, so there may be no issue. However, we would still counsel that the statutory language be followed to the letter even when titling within the LLC or land trust to avoid the potential problems. While a client may lose a little privacy when their name is published as the beneficiary or plan participant, that loss of privacy is nominal when compared to the other issues that can arise.
Finally, we advise that the beneficiary’s or plan participant’s name should never appear in the asset’s title together with the plan’s account number. This causes problems with redaction requirements later should litigation ever arise in relation to the asset.