Dear Benny: In April 2009, my son bought his first home using the $8,000 first-time homebuyer credit. It was a foreclosure property that cost $125,000.
His loan was purchased by a major bank shortly after closing, and he received a coupon book stating the amount of his payments, which were slightly lower than he was expecting.
He made payments of $863, on time until May 2010, which included his tax escrow.
In May 2010, he received a notice from the bank that his payments were increasing to $1,275 per month due to an escrow shortfall. Since he did not have enough income to support this higher payment, his loan became delinquent and he received a foreclosure notice in September 2010. At that time, he contacted my husband and me and asked what he should do.
After some investigation on our part, we found that the bank had been escrowing only $138 per month because of an error on the closing documents. The tax certification listed taxes of $338 per year, but the taxes are actually $2,900.
There was an escrow collected at the closing of approximately $3,200, so the 2009 taxes were paid from that, and the bank obviously knew that his taxes were not $338 per year since they had paid them in 2009. The error goes back to the title company, which was an agent for the foreclosing lender.
Does the title company or my son’s lender bear any financial responsibility for their error? The lender is trying to work out a loan modification for our son, but he is still in danger of losing the house due to all of this.
Neither we nor he has the financial resources to pursue legal options and aren’t sure if there are any grounds to recover monies. Our son has not owned a home or dealt with a mortgage prior to this, and he assumed since he was making the amount of payment that the bank instructed originally that all was well.
The loan is nearly $6,000 in arrears at this point. — Beth
Dear Beth: That’s a tough question. Most title companies — also called escrow companies in the Western states — require borrowers to sign a statement indemnifying and holding the company harmless for any errors they may have made.
Of course, our court system will generally not enforce such an indemnification agreement if the company was grossly negligent or acted in bad faith.
Clearly, your son’s lender will not be liable for the error. Although they paid the correct amount of the tax initially, this was most likely done by computer without any human involvement. Banks will generally reassess the amount of escrow a borrower must pay at the end of each year.
Your title company made a mistake, which is causing your son major problems. I do not believe they are obligated to pay the escrow difference, since your son is also negligent for not carefully reviewing the settlement statement before he signed it.
However, since it was the title company’s mistake, they should be willing to cooperate and perhaps advance the funds necessary to bring your son’s loan current.
If I were the attorney representing you, I would send a strong letter of complaint to the title company, with a copy to your state’s attorney general. Also, since most title insurance companies are regulated by the state’s insurance agency, I would also copy the insurance commissioner of your state.
So that is what I suggest you do, immediately.
But hopefully this will teach your son — and my readers — a valuable lesson. Do not just blindly sign documents when you go to settlement (escrow). Typically, the person conducting the settlement puts a large number of documents before you and says, “Sign here, sign here.”
Tell that person you want to review everything first and ask questions when you don’t understand things. And also go over each and every item on the settlement statement, called the HUD-1. It’s your money, so be careful.
Dear Benny: I own an investment condominium with a business partner. Both of our names are on the title as joint tenants. However, only his name is on the financing.
We are in the process of short-selling the property. I know that there will be a negative impact to my business partner’s credit rating. Will there be any negative impact whatsoever to me? — Steve
Dear Steve: Interesting question. I don’t usually get involved with determining how credit scores and ratings are determined, so I really don’t have an answer for you.
However, one would think that since you are not involved in the financing and did not sign the promissory note or the deed of trust (the mortgage document), your credit would not be impacted.
If any of my readers have experience with credit ratings, I welcome your comments.
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.