Standard Mortgage Contingency Language At Issue

I recently came across a very interesting and scary case from the Appeals Court, Survillo v. McDonough No. 11–P–290. Dec. 2, 2011. (It’s technically an “unpublished” opinion but it’s available to the public). The case underscores how carefully attorneys must craft the mortgage contingency to protect the buyer’s deposit in case financing is approved with adverse conditions.

“Prevailing Rates, Terms and Conditions”

The buyers, Mr. and Mrs. Survillo, submitted the standard Offer To Purchase the sellers’ home in Walpole. The offer provided it was “Not subject to the Sale of any other home.” The sellers accepted the offer. The buyers received a conditional pre-approval from a local bank for a first mortgage in the amount of $492,000. The pre-approval also stated that anticipated loan was “[n]ot based on sale of any residence.”

The parties then entered into the standard form purchase and sale agreement (P & S), with the typical mortgage contingency provision for a $429,000 mortgage loan:

“In order to help finance the acquisition of said premises, the [buyers] shall apply for a conventional bank or other institutional mortgage loan of $492,000.00 at prevailing rates, terms and conditions. If despite the [buyers] diligent efforts a commitment for such loan cannot be obtained on or before October 5, 2009, the [buyers] may terminate this agreement by written notice to the [sellers] and/or the Broker(s), as agent(s) for the [sellers], prior to the expiration of such time, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto “

Change In Circumstances: Lender Requires Piggyback Loan & Buyers List Their Residence

Due to the buyers’ debt to income ratios, the lender required that the loan be structured as a “piggyback” — a first mortgage of $417,000 and second mortgage of $73,400, and with the condition that the buyers listing their primary residence for sale prior to the loan closing. The buyers absolutely did not want to list and seller their residence, so they wanted out of the deal.

On the last day of the extended financing deadline, the buyers timely notified the sellers that they had “not received a loan commitment with acceptable conditions,” and attempted to back out of the agreement under the mortgage contingency provision. Ultimately, with the buyers refusing to sell their home, the bank denied the buyer’s the mortgage application based on the fact that the “borrower would be carrying three mortgage payments and the debt to income is too high.”

Focus On “Prevailing Terms” Language

The sellers refused to return the deposit, and litigation over the deposit ensued.

The Court framed the case as follows: “Before the extended mortgage contingency deadline of October 21, the buyers received a commitment from the bank for two mortgages totaling $492,000. The P & S’s mortgage contingency was accordingly satisfied unless the bank’s requirement that the buyers list their home for sale was not a “prevailing” term or condition.”

The court started with the assumption that “the typical loan condition for most borrowers is to require them to sell an existing home before the new loan closes. The condition here required only that the buyers list, not sell, their home and it was accordingly not a typical condition.” The buyers argued that because the condition was unusual, it was not a “prevailing” condition within the meaning of the contingency clause of the P & S, despite the fact that the condition was more favorable to them than the standard condition. The court flat out rejected that argument, citing prior rulings that terms of a mortgage contingency presuppose that the buyers will accept commercially reasonable loan terms. If less is required, the condition becomes an option. The court also noted that the buyers failed to notified the sellers that they were unwilling to list or sell their existing home, nor did they insert a proviso to that effect into the mortgage contingency clause. Subsequent events suggested that if the buyers had timely disclosed their intentions to the bank, the loan would have been disapproved, which may well have given the buyers the shelter they sought under the mortgage contingency clause.

The court ruled against the buyers who had to forfeit their $31,000 deposit.

An Ounce of Prevention Is Worth A Pound of Cure

I’m not sure who is to blame here, the buyer’s attorney or the buyers themselves. Probably both.

From a legal drafting approach and as the court pointed out, the buyer’s attorney could have insisted on language into the mortgage contingency provision that the buyers’ financing could not be conditioned on the listing or sale of the buyers’ present residence. After all, the language was in the Offer, so it could have easily been carried over into the P&S. There was no indication from the decision that this was raised or negotiated.

It also seems apparent that the buyers were not particularly up front with anyone on their insistence that they would not list and sell their current residence. If they had been more forthcoming about that, perhaps they could have avoided this situation.

A commenter on Boston.com also places some blame on the loan officer:  “Not all pre-approvals are created equal. For a few minutes of work and adherance to a common standard of practice by the mortgage professional, a true pre-approval is supported by a credit report, the main criteria for ability to qualify for a mortgage. This is generated in a few seconds, and the pre-approval letter usually states subject to verification of income, assets, and property appraisal. Had this been done, THE DEBT TO INCOME RATIO ISSUE WOULD HAVE SURFACED EARLY.”

Based on the loan amount, this mistake or gamble cost the buyers around $31,000 plus legal fees. Ouch!

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. Please contact him if you need assistance with a Massachusetts purchase or sale transaction.

April 1st marks the Boston Red Sox’s Opening Day. No more wait ’til next year. This is the year!

Come to think of it, there is a lot that Youk, Pedroia, Big Papi and the rest of the Red Sox can teach us about real estate. Here are a few tips–

Listen to your Manager and your General Manager. Your Manager is your real estate agent. Your General Manager is your real estate attorney. Tito and Theo (yeah!). Joe Girardi and Brian Cashman (boo!!!). This is the foundation of your team. Listen to them. Trust them. They will lead you to the World Series–your closing.

Spring training is more than just practice. In real estate, spring is the busiest time of year. So apply your eye black and get your game face on. Make your best offer. Swing for the fences. Everything counts in the spring in real estate.

When you get up to the plate, make sure you have your batting helmet and battling gloves on, and you’ve studied the pitcher. In real estate, this means that if you are buying, you need to be well prepared. Get pre-qualified or even better, pre-approved for a mortgage so your offer will be seriously considered by the seller. Studying the pitcher means do your homework. Have your real estate agents pull comparable sales and obtain market research before settling on a offer price. Same for sellers. It’s not what you need or want for a price, but what the market will bear. Reality check.

Baseball is a rewarding long-term investment. Watching a baseball game can be a long term investment. (Sometimes too long!). So is real estate. Think long-term. This is going to be your home for the next several years. Don’t lose sight of that.

Don’t get caught stealing. Sellers, be honest and upfront about your home and its problems. The home inspector will most likely find all the issues you’ve tried to hide, so disclose up front. Otherwise, you’ll lose all credibility, and the deal will be that much harder to close.

Expect an occasional curveball. With tight credit requirements and longer underwriting, closing in 30 days is very difficult. Delays are becoming more prevalent as well. So, hope for the best, but prepare for the worst.

Statistics & numbers are critical. ERA stands for Earned Run Average, not a well known local real estate office. CMA stands for Comparative Market Analysis. For real estate, you need to crunch a lot of different numbers: price per square foot, PITI, down payment, taxes, etc. You can’t properly analyze a baseball team or a real estate market without understanding the numbers. Sabermetrics for real estate anyone?

Waiting until next year is not always the best strategy. This is more true than ever. Most experts believe we have hit bottom in the Greater Boston area. Interest rates are still at historical lows. It’s time to pine tar the bat and get up to the plate. Get out of the on deck circle.

Spitting should never be permitted in a dugout or a living room. ‘Nuff said.

Play Ball and go Red Sox!!!

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Richard “Lefty” Vetstein, Esq. is an experienced Massachusetts real estate attorney and life-long, diehard Red Sox fan. Rich was once a fire-balling southpaw pitcher in Little League, striking out 14 batters in one game. His baseball career is now relegated to second-guessing managerial decisions and throwing things at the TV.

Annual Percentage Rate (APR), Amount Financed, Finance Charge, and Total Payments…the Truth In Lending Disclosure Statement is one of the most challenging disclosure forms to explain to borrowers at a Massachusetts real estate closing. I like to call it the “Confusion In Lending” Statement because the form is what happens when the government attempts to recalculate your interest rate and closing costs in a way most human beings would not even consider.

To explain the Truth In Lending Disclosure, we’ll use a dummy form for a $500,000 purchase transaction with a $400,000 loan (20% down payment), a 30 year fixed rate loan at 5.00% at a cost of 1 point.

Annual Percentage Rate

The confusion begins. The Annual Percentage Rate, or APR, as you can see is not 5.00%, which is the contract interest rate for the loan. Why? Because the APR does not use the loan amount for its calculations but rather the “Amount Financed.”

Amount Financed

And the confusion continues. The Amount Financed is not the $400,000 loan amount, but is about $6,600 less than the loan amount. That is because the Amount Financed equals the loan amount ($400,000) less prepaid loan and closing fees and payments. Fees included in the amount financed are: points, lender fees such as underwriting, process, tax service, mortgage insurance, escrow company fees, prepaid interest to end of closing month, and Homeowners Association fees. All of these fees are added up and subtracted from the loan amount to reach the Amount Financed figure. Note that depending on when the loan closes in the month, and fees from third parties such as escrow companies the Amount Financed will vary and therefore so will APR.

How The APR Is Calculated

Now that we have the Amount Financed, we can calculate the APR. For a 30 year fixed loan such as this, the true loan amount is amortized for the loan period using the interest rate. In our example $400,000 amortized for 30 years at 5.00% has a payment of $2,147.29 per month paying principal and interest.

To calculate the APR, we use the same payment –$2147.29 every month for 30 years– to pay off an Amount Financed of $393,372.22 (loan amount less costs) to reach an APR of 5.141%. So the APR is higher than the interest rate because the Amount Financed is lower than the loan amount for the same monthly payment and term.

ARMs–Adjustable Rate Mortgages

If you are taking out an adjustable rate mortgage (ARM), you may as well just throw the Truth in Lending Disclosure out the window. The TIL is allowed to be based on the introductory interest rate through the entire life of the loan. Your adjustable rate mortgage, however, will reset its interest rate after 3, 5, 7, or 10 years depending on the type of product. There’s no way to predict where interest rates will be in the future, so the Truth in Lending Disclosure is inherently inaccurate for ARMs.

Explaining the Truth in Lending Disclosure is one of the many functions of a Massachusetts real estate closing attorney. In other states which aren’t required to use closing attorneys, they will not explain these complicated forms to you.

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Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Closing Attorney. For further information you can contact him at info@vetsteinlawgroup.com.

As a real estate attorney, I always take the time to fully explain to our clients the intricacies of the Massachusetts Purchase and Sale Agreement. As my first blog post here, I thought this would be a great topic to start off with.

The purchase and sale agreement is the governing contract between the Buyer and the Seller regarding the proposed property to purchase. Most Buyers submit an initial Offer to Purchase to a Seller, which spells out the terms of the contract.  The purchase and sale agreement supersedes the offer, and can be thought of as the “long form” contract. At first blush, the purchase and sale agreement, like most legal documents, can be difficult to read and comprehend.

Deal Terms

First, like all contracts, the purchase and sale agreement sets out the terms of the deal. These terms primarily are taken from the offer. This includes the names of the parties, the legal description of the property (taken from the current deed), the purchase price, the mortgage commitment date, the closing date, any Seller credits, and any agreed upon fixtures that will remain with the property or be taken by the Seller.

Title and Deed

Second, the purchase and sale agreement deals with the title to the property and the deed. It lays out the framework for a conveyance (a real estate transfer) in Massachusetts. The agreement spells out that the Seller conveys the deed to the Buyer in return for consideration, then the deed is recorded and the Buyer becomes the owner of the property. However, in Massachusetts, once the deed is recorded at the proper Registry of Deeds, then any title issues “run with the land.”  Thus, the new owner becomes responsible for any outstanding encumbrances or liens that were not properly discharged. In order to protect the Buyer, the purchase and sale agreement provides that the Seller must convey “good, clear and marketable” title. Acting as the buyer’s or lender’s counsel, or both, attorneys will review the title exam and work with the Seller’s attorney to clear any title issues, so that the buyer will receive a certification of title and an owner’s title insurance policy.

Seller Responsibilities

Third, the purchase and sale agreement lays out the responsibilities of the Seller. This includes maintaining insurance and upkeep on the property until closing, obtaining a smoke and carbon monoxide certificate at closing, paying the broker’s commission, obtaining a 6(d) certificate for a condominium, and requiring that the taxes be paid by Seller up until the closing date (through an adjustment to the HUD Settlement Statement). The agreement also provides that the Seller’s agent (either the realtor or the attorney) holds the buyer’s deposit in an escrow account.

Anything But “Standard”

There is a note of caution about the standard form Massachusetts purchase and sale agreement. The standard form provides several hidden advantages to a Seller, as my colleague Rich Vetstein has written about on this Blog. Thus, buyers must have an experienced attorney revise the agreement and flag those built in deficiencies. For example, if a Buyer were to default prior to closing, the standard form document provides no cap on the damages; a skilled attorney will know to cap the damages at the deposit. The same is true if a buyer loses his rate lock if there is a delay of the closing; a skilled attorney would use language to protect the buyer in this situation.

An experienced attorney will produce a Rider to the purchase and sale agreement that will have language that protects a Buyer’s deposit and provides an aggressive layer of due diligence. For example, if the Buyer is purchasing a condominium, the Rider should have the Seller make representations that the association is not contemplating any special assessments, there are no pending lawsuits against the association, and the budget is in good order. Other issues include seller repairs, septic system/Title V compliance, radon gas, UFFI insulation, lead paint, and buyers’ access to the property while it is under agreement.

Since the P&S is “anything but standard,” an experienced real estate attorney who review and negotiates the document will certainly add value to the closing process.

Marc E. Canner, Esq.

After months in the making, I am very pleased to announce the roll-out of TitleHub Closing Services, LLC, a cutting-edge closing settlement service that uniquely provides a full platform of legal and technology-based services. TitleHub’s mission is to transform the convoluted real estate closing process into an easy, customer-focused and technologically enhanced experience. In collaboration with my colleague Marc Canner, Esq., we have created a company that we believe will serve as the model for the next generation of residential real estate title and closing services.

Buyers, sellers, realtor and lenders will “stay informed” and “stay connected” to their transactions through:

• Our innovative, content-packed website (www.titlehub.com) which serves as a great informational resource.
• Our “E-Closings” system. This is a secure on-line document management system that allows borrowers and real estate professionals unlimited real-time access to obtain status updates of their deals and the ability to upload and download key transactional documents (recorded condominium documents, executed Purchase and Sale Agreement, Good Faith Estimate, HUD-1 Settlement Statement, etc). Click here for more information.
• Exclusive partnership with the Massachusetts Real Estate Law Blog.
• Social media interaction. Check us out on Facebook, Twitter, Linked In and Active Rain.
• Seminar Series; We offer topical seminars to realtors and lenders to help them stay current with the complicated real estate legal landscape as well as seminars to learn new marketing, blogging, and social media techniques.
• Paperless Solutions. We do have the ability to electronically record deeds and mortgages at registry of deeds which offer the service. In the future, we hope to be at the forefront of true e-closing paperless transactions, once there is broader lender and regulatory acceptance.

If you are a realtor or mortgage professional interested in TitleHub’s platform, please contact us at info@titlehub.com, and we’ll give you a demonstration.

The TitleHub Leadership Team
Marc E. Canner, Esq., President/CEO
Richard D. Vetstein, Esq., Vice President and Director of Marketing
Patrick T. Maddigan, Esq., Director of Operations & Business Development

A lot more than you might think. Plus, Massachusetts law now requires attorneys to preside over residential real estate closings.

Many buyers and sellers often wonder what a real estate closing attorney does other than conduct the closing. Well, quite a bit of work actually.

The closing attorney acts as the “quarterback” of the closing process, performing many time consuming tasks preparing a transaction from intake to closing. (Important note: many borrowers don’t realize that they may request to select their own closing attorney instead of the bank attorney. The new RESPA rules which went into effect on January 1 encourage lenders to allow borrowers to select from a list of attorneys or their own personal attorney. This will most often save you several hundred dollars because you won’t have to hire a separate attorney to review/negotiate the purchase and sale agreement.

Intake/Title Examination

When the title order arrives from the lender, the closing attorney first orders a municipal lien certificate, which verifies the real estate taxes and other municipal charges on the property. Insurance binders and payoffs of mortgages are also ordered.

The closing attorney is responsible for examining the title to the property. For purchases, the title is researched going back 50 years. The closing attorney carefully reviews the title examination to ensure there are no title defects; if there are any issues, the attorney will work with all parties to resolve them. Some title defects are extremely difficult to resolve. (By law, the closing attorney must provide new home buyers with a certification of title).

Title Insurance

The closing attorney also coordinates the issuance of title insurance to the lender and the new home buyer. I always recommend that buyers obtain their own title insurance policies because even with the most accurate title examination, there can be hidden title defects that could derail a later sale or refinance. Look no further than the Land Court Ibanez foreclosure mess for what can happen when you don’t get an owner’s title policy.

The Closing

As the closing day approaches, the closing attorney will coordinate with the lender for the preparation and delivery of numerous documents to be signed at closing, including the mortgage, promissory note, truth in lender disclosures, and most importantly, the HUD-1 Settlement Statement. The closing attorney will also coordinate with the seller to receive the deed to the property, final utility bills, smoke detector/CO2 certificates and condominium 6(d) certificates. As outlined in the Settlement Statement, the closing attorney is responsible for handling a number of issues at closing:

• Payoff and discharge of mortgages
• Payment and allocation of real estate taxes and utilities (water, oil, etc.)
• Payment of realtor commissions
• Disclosure and payment of lender fees and closing costs
• Funding of mortgage escrow account
• Payment of transfer taxes and recording fees
• Payment of pre-paid interest
• Distribution of sale proceeds
• Title V septic certification and condominium 6(d) certification

The closing attorney then conducts the closing. He will explain the numerous loan and closing documents signed by buyer and seller, collect and distribute all funds, and otherwise ensure that the closing is properly conducted.

Post Closing

After the closing, the attorney processes the loan funding, performs a title rundown to ensure there are no changes in the title, then records the deed, mortgage and other recordable instruments. The attorney will also ensure that all paid off mortgages and liens are discharged. Title insurance policies are issues several weeks after the closing.

We are experienced Massachusetts real estate closing attorneys. Please contact us if you need legal assistance with your purchase, sale or refinance transaction.

Here is a great video outlining the closing process from our underwriters at Westcor Land Title-New England.

An excited young couple about to close on their first home walk into into the closing attorney’s office. The day before they received via secure email all of the loan documents to review and approve with their personal attorney. The closing attorney arrives without any paper, armed only with a laptop attached to a digital signature pad. The sellers are not present as they have already signed the deed and other documents electronically the day before over the secure electronic closing system. The couple quickly review the closing documents on the attorneys’ laptop, clicking an “I Agree” button acknowledging receipt and review of each document. The couple sign the digital signature pad, and the captured signatures are automatically applied to all of the signature blocks of the documents. The closing attorney electronically notarizes all documents requiring witnessing or notarization. The closing is over in 15 minutes, and the couple walks out with a CD-ROM containing all the signed closing documents and the keys to their new home. The closing attorney then electronically records the deed and mortgage with the registry of deeds, funds the loan, and makes all of the disbursements. The executed loan documents are then electronically transmitted to the lender and digitally archived.

This is not an imaginary scenario. Electronic closings (e-closings) are happening now, and they are the future of real estate conveyancing. I believe that electronic closings will change the way lenders, title companies and closing attorneys do business.

The advantages of an e-closing system are numerous and include:

• More convenient and efficient closing process for home buyers and sellers.
• Automated delivery of electronically signed loan documents directly to post closing – eliminating costs and time. Fund the loans faster, in as little as 48 hours.
• Drastically improve the efficiency of real estate transactions with reduced contract-to-closing times.
• The Green Factor: Eliminates thousands of paper documents. Buyers receive the entire signed closing package on CD.
• Reduce shipping and closing costs.

Electronic closings are very slowly moving into Massachusetts. (Attorneys, who must conduct most real estate closings in Massachusetts, are notorious late adopters of new technology). Since July, without much fanfare, the Middlesex Registry of Deeds in Cambridge, Hampden County Registry in Springfield, and Plymouth Registry of Deeds have adopted electronic recording capabilities. Hopefully, the other registries follow suit.

TitleHub Closing Services LLC, in Massachusetts, is on the cutting edge of e-closing technology.

Electronic closings are a great selling point to customers mortgage lenders, banks and credit unions. Here is a recent article about a credit union in Michigan successfully offering electronic closings.