Closing And Ownership - Chapter 19 Flashcards
Closing
Closing is when all parties COMMIT to the loan.
Consummation
Consummation is when the borrower becomes CONTRACTUALLY OBLIGATED to the loan.
In cases where the right to rescind exists, lenders will typically not fund the loan until the 3 business day period passes. Once the loan is funded, the agreement is consummated and the documents are filed with the county. Waiting until the rescission period passes to fund and file the loan allows the lender to avoid hassles in case the borrower has second thoughts.
Closing A Purchase
In the case of a purchase transaction, the closing agent will typically meet with the borrower first and have them sign the necessary documents and collect any payment of closing costs. Closing costs could include the down payment, loan fees, and prepaid items. This payment must be provided in the form of certified funds such as a bank check or wire transfer. By paying it this way there’s certainty that the funds are available, and this also provides a paper trail for record keeping purposes.
Once the closing agent collects signatures and payment from the borrower, the closing agent then meets with the seller. At this meeting the seller will sign any necessary documents, and depending on the settlement terms, (we’ll talk about this later in this chapter) may provide the buyer’s payment from the lender. Once both parties have signed their documents and have paid/have been paid, the closing agent will take the documents and file them with the county.
Simultaneous Closings
Before we talk about who signs what and when, it’s necessary to explain that when real estate is purchased with a loan (the mortgage) there are actually two transactions occurring simultaneously (at the same time).
One transaction involves the agreement between the seller and the buyer. The seller sells the home to the buyer for a specific sum of money. In exchange for the money, the seller conveys (gives) title to the buyer. If no mortgage is involved, the buyer pays the seller and the necessary documents are signed. Done deal.
When a mortgage is used by a buyer to purchase a home, the process becomes more complicated. This is where the term simultaneous closing comes into play.
With a simultaneous closing, not only is the transaction between buyer and seller taking place, but there is also another transaction taking place between borrower (the buyer) and their lender. It’s almost like a three-way hand-off in which the seller turns over title to the buyer/borrower, then the lender turns over the money to the seller. But the lender can’t give the seller the money without the buyer/borrower promising to pay the lender. With a simultaneous closing the seller and buyer/borrower have a purchase closing while the buyer/borrower and lender have a loan closing. Both must occur at the same time for all parties involved to be satisfied with the agreement. Think about it this way, the seller is not going to give up the keys to their house unless someone gives them the money, and the buyer/borrower cannot give them the money without pledging the rights to the house to the lender. A refinance transaction is much simpler because the borrower already has title to the property and thus there are only two parties - the borrower and the lender - involved.
Closing A Refinance
For the most part, a refinance closing follows the same steps as the purchase closing. The one big difference is that with a refinance, the borrower already owns the home so there’s only one signing meeting rather than two.
In a refinance closing, the borrower meets with the closing agent, signs the necessary documents, and pays any required closing costs. In many cases, the borrower will roll those closing costs into the new loan, but this is not a requirement. There is a possibility that the borrower will bring cash to close (which we already understand has to be certified funds and not really cash). Once the documents are signed, the closing agent will then take the documents to the county for recording.
Who Must Be Present At Closing
At a minimum anyone with ownership interest in the property, anyone with debt obligation interest in the loan, and/or their representatives must be present at closing. Either party may send a Power of Attorney to the closing to represent them as well.
The Closing Agent
The closing agent (aka settlement agent or escrow agent) is the facilitator for the closing process of a mortgage loan. If you think of the players in the closing process (e.g., the borrower, the lender, the seller) as musicians, the closing agent is the conductor. The closing agent controls what documents need to be signed, when and where the signing will occur, and how the documents will be filed.
They will also notarize (legally witness) the signatures made at closing and provide an explanation of the documents and fees.
Beyond these basic responsibilities, the closing agent may prepare the documents prior to close, arrange for the setup of escrow accounts, and disburse funds to the necessary parties. Because of the responsibility with funds, the closing agent is typically required to be bonded or insured for this purpose.
The closing agent is often an employee of the title company, or an attorney, but this is not a requirement.
Wet Settlement
A wet settlement is one in which the funds are disbursed to the parties at the time of closing. Or to be more literal, while the ink from the signatures on the documents signed at closing is still wet.
A wet settlement is typically used for purchase transactions. If the method for settlement is wet, the loan also consummates at closing due to the exchange of funds.
Some states prohibit wet settlements regardless of the type of loan.
Dry Settlement
Now that you know what a wet settlement is, we’ll bet you have a pretty good idea of what a dry one is as well. The dry settlement is one in which the funds are disbursed after closing. Or more literally, after the ink has dried on the documents signed at closing.
The dry settlement is used for transactions covered by TILA’s Right to Rescind (reverse mortgages and refinances on primary residences) as well as many other loans in which it is unnecessary or illegal to disburse funds at the table (thus triggering consummation).
Table Funding
With table funding the loan is closed at the table by the loan originator in their own name. For example, if the loan is originated by a mortgage broker using table funding as their approach, they would be responsible for processing and underwriting the mortgage and serve as the lender at the closing table.
As the loan closes, a new lender (i.e., investor) immediately advances funds for the loan and the loan package is transferred to the new lender. The loan documents are then filed in the new lender’s name.
Table funding is a great tool for many MLOs because it allows them to maintain a relationship with their client throughout the entire loan process and with a minimal amount of expense, because the loan is transferred to another lender immediately at closing.
Warehouse Funding/Lending
Warehouse funding (aka warehouse lending) is a practice in which an investor provides funds from which the MLO may draw to close mortgage loans. These funds are sometimes referred to as a warehouse line of credit. In warehousing lending, the MLO closes the loan in their own name (like table funding), but instead of instantly transferring the loan over to the investor, the loan is held by the MLO until they sell it in the secondary market. Once the loan sells in the secondary market, the MLO pays the investor for the use of their funds with the warehouse line.
The use of warehouse lending is popular with many MLOs because it allows them to be the lender on record. Some consider warehouse lending to be riskier for MLOs because of the possibility that they will be unable to sell the loan in the secondary market and will thus be unable to repay the warehouser for the use of the line of credit.
Direct Funding/Lending
Direct funding is just like it sounds - the MLO is responsible for funding the loan. There are no intermediaries or investors involved when a loan is directly funded. The loan is funded directly by the lender.
Recording
As the last step in the closing process (some refer to everything that occurs after the closing table as post-close, so we could say this is the next post-close step), the appropriate documents must be filed with the Registrar of the county in which the property is located. This filing process is known as recording.
After the loan is consummated, the closing agent’s final obligation is to record the documents. In an earlier unit, we discussed the issues of lien priority and who gets paid first when title is conveyed to a new owner. Making sure the documents are filed and recorded in a timely manner will ensure that the lien is placed in its proper position of priority for future settlements.
Typically, the security instrument (which collateralizes the home as the pledged asset by the borrower) is recorded with the county. If the transaction is a purchase, the deed, which shows who owns the property, (ownership is also referred to as title) will also be filed.
Servicing
The servicer is the collector of the borrower’s monthly mortgage payment. Servicers collect and record borrower payments, administer the loan, handle ongoing communication with the borrower, manage the borrower’s escrow account (if applicable), process/evaluate borrower proposals such as loan modifications and disburse payment receipts to loan owners.
Some lenders will service their own loans while others will sell the loan’s servicing rights to another organization. Servicing rights are different than owning the loan. For doing their work, servicers are typically paid a fee or a percentage of the loan payment based on the loan’s principal value.
RESPA’s Servicing Rules
Under Section 6 of RESPA, servicers must set specific policies and procedures within their organization to meet certain RESPA-required objectives. The following four objectives are foremost:
- Provide timely and accurate information; whether in relation to an information request, complaint, foreclosure process, or death of a borrower. Ensure that borrowers are well informed about procedures for submitting error notices and requests for information.
- Properly process and evaluate loss mitigation applications (loss mitigation is when a borrower seeks to resolve a defaulted loan with the servicer through arranging temporary terms such as extended payments or waived fees). Follow proper regulations with regard to the pre-foreclosure process.
- Properly oversee and ensure compliance of all employees with relation to procedures and laws. Certain procedures must be followed with relation to a borrower’s escrow account and/or hazard insurance policy.
- Ensure that necessary information about probable or actual transfer of servicing are disclosed to the borrower, and ensure that all documentation is transferred during actual servicing transfer situations.
TILA’S Servicing Rules
Section 36 of TILA has three basic standards that servicers must follow. Whereas RESPA’s servicing rules focus on the management and administration of the borrower’s loan, TILA’s servicing rules impact the timing of payments and the information associated with the loan’s mechanics.
Payment Processing
Servicers must process a borrower’s periodic (monthly) payment properly by crediting a borrower’s payment to the loan account on the date the payment is received. This prompt application may be delayed if the delay in crediting does not result in any charges to the borrower or in the reporting of negative information to the consumer reporting agencies.
With regard to late fees on periodic payments, servicers can only charge a fee if the payment is received after the due date or after the courtesy period noted on the mortgage contract. Late fees cannot be charged solely because the borrower failed to pay a late fee on a previous mortgage payment.
Payoff Statements
Servicers must provide borrowers, upon request, an accurate statement of the outstanding balance that would be required in order to satisfy the borrower’s mortgage as of a specified date. This payoff statement must be provided within a reasonable time, but no later than 7 business days after the borrower’s request. In certain circumstances such as if the loan is in foreclosure, where the payoff statement cannot be provided within 7 business days, it must simply be provided within a reasonable time.
Periodic Statements
For each billing cycle of a closed-end mortgage loan, a periodic (monthly) statement must be provided to the borrower with the following information:
• The amount due, including the payment due date and the amount of any late payment fee that will be imposed if the payment is not received. If the transaction has multiple payment options, the amount due must be shown under each of the payment options.
• An explanation of the amount due, including a breakdown of how the principal, interest, and escrow (if applicable) will be applied. The total of all payments received since the beginning of the current calendar year must also be shown.
• Any partial payment information regarding how the payment will be applied.
• A toll-free telephone number and, if applicable, an e-mail address that may be used by the borrower to obtain information about their account.
• Basic account information such as the outstanding principal balance of the loan and current effective interest rate.
• If the borrower is more than 45 days delinquent, a separate statement must be attached. This statement or letter must notify the borrower of possible risks that may be incurred such as foreclosure, account history information, the total payment required to become current on the loan account, and a reference to a homeownership counselor.
The periodic statement must be provided to the borrower within a “reasonably prompt” time after the payment due date, or the end of any courtesy period, of the previous billing cycle. The statement does not need to be provided more often than once a month, regardless of the billing cycle time frame. Reverse mortgage loans, timeshare plans, and certain fixed-rate mortgage loans with coupon books are exempt from this disclosure requirement.
Securitization
Securitization is what happens to a loan after it is sold into the secondary market. By selling these loans, the lender has fresh capital with which to make more loans.
Loans can be packaged or bundled together into a financial security (investment) product that they will then sell in the investment market place. These bundles are commonly referred to as mortgage backed securities (MBS).
Types of MBS
The two most common forms of MBS are pass throughs and collateralized mortgage obligations (CMO). Pass throughs function as a financial trust in which investors buy shares. Investors are then paid their share of the payments made on the mortgages in the trust.
CMOs consist of many MBSs combined. The CMO is then categorized into slices which are called tranches. The tranches are created based on the interest rate of the mortgages in the CMO. Tranches with higher interest rates have higher investor risk, while those with lower interest rate have lower investor risk.
The MBS Marketplace
The MBS marketplace is made up of institutional investors and GSEs (government-sponsored enterprises). Lenders can sell their conventional conforming mortgages to Fannie Mae and Freddie Mac, or to investors. Because conventional conforming loans meet Fannie and Freddie’s standards, they are considered of high quality in the market. These high quality loans are then packaged by Fannie or Freddie as agency MBSs and sold in the financial markets.
Loans that do not meet Fannie and Freddie’s standards can also be sold in the secondary market. They cannot be packaged with conventional conforming loans, and are called non-agency MBSs.
Government (non-conventional) mortgage loans can be packaged into non-agency MBSs that are guaranteed by Ginnie Mae.
Ginnie Mae serves a specific purpose with non-conventional mortgages in that it functions in the secondary market as a packager and guarantor of MBSs comprised of government loans. Whereas with conventional conforming mortgages, Fannie and Freddie buy the mortgages in the secondary market and then package them as MBSs, Ginnie Mae may buy government mortgages and package them as MBSs, but more prevalently Ginnie Mae provides insurance and serves as the guarantor to investors who buy government loan MBSs in case the MBS product fails.
Reconveyance
Reconveyance occurs when the borrower pays off the mortgage debt in full. This repayment can occur by following the monthly payment schedule or by paying the loan off early. When the loan is paid off, the lender is obligated to provide a document to the borrower showing that the homeowner has met their financial obligation and a guarantee that the mortgage encumbrance has been removed from the property’s title rights (clearing the title).
At the time of reconveyance, the lender is also required to file a Deed of Reconveyance in the county records. The Deed of Reconveyance shows:
• Names of lender and borrower
• Address and legal identification of the property
• Initial loan amount
• Where in county records the original transaction documents were filed
Sale
If the borrower sells the home they must repay the lender the current principal balance owed on the mortgage. This responsibility can be found in the Due on Sale Clause located in the mortgage contract. The basic language of the Due on Sale Clause requires that the balance be paid to the lender if the property is sold or title is transferred.
