Chapter 9:
Processing: Escrow
Settlement, Title and
Appraisal
By Dr. D. Grogan
M.C. “Buzz” Chambers
©2011 Cengage Learning
PREVIEW
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5.
The mortgage loan broker does not close the loan.
The process is handled by an escrow agent and the title company.
The escrow agent:
• makes sure all documents are prepared and properly signed.
• calculates the various charges to be assessed against each party.
• deposits all the necessary funds.
• gives each party an itemized list of the costs, charges and fees associated with
the transaction.
The title company:
• handles the existing loan payoff, if any.
• receives the new loan proceeds.
• records the necessary documents with the recorder’s office.
An appraisal is normally required for most loans. After all these
items have been completed, the loan is then in a position to fund and
close.
©2011 Cengage Learning
Student Learning Outcomes
1.
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5.
Outline the what, why, who, and how of the escrow
process.
Discuss escrow instructions, expenses handled by
escrow and the impound account.
Describe title insurance, a preliminary title report, and a
binder.
Differentiate between a title company and a title
insurance policies.
Review the appraisal report.
©2011 Cengage Learning
What is escrow?
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An independent stakeholder.
A neutral depository for things of value to be
handled according to the terms and conditions of
the mutually agreed upon escrow instructions
given to the escrow holder, agent or officer.
Money and instruments include the down
payment, deposits, deeds, and documents.
©2011 Cengage Learning
Escrow = Confidentiality
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Parties in an escrow must have:
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an interest
Lien
Claim
Estate into or on the property
Outside parties are not privileged to any
information on the property held “in escrow”
©2011 Cengage Learning
A binding Escrow
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All parties must execute written escrow instructions.
All parties must deliver written escrow instructions to the
escrow holder.
Represent a written statement of instructions to the
escrow agent:
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The lender is not required to sign instructions (refinance)
Failing to sign and return the instructions may be deemed
“breach of contract” on a separate contract (usually the offer to
purchase form).
©2011 Cengage Learning
Southern California Escrow
1.
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3.
Title Insurance company, escrow division,
under the insurance commissioner.
Broker-owned escrow, division of sales office,
under the California Department of Real
Estate (DRE) commissioner.
Independent escrow services, under the
California Department of Corporation (DOC)
commissioner.
©2011 Cengage Learning
Northern California Escrow
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Title insurance company
Broker-owned escrow services (very few)
Regulation falls under the California
Insurance Commissioner
Handle the escrow and write the title
insurance policy
©2011 Cengage Learning
Escrow
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Opening of Escrow
 Instructions come by phone, fax, email
 Certified escrow instructions
 Verification of funds deposited
 Affidavit of occupancy
 Vesting to be held by borrower(s)
 Competent parties
 Lawful object of the subject matter
©2011 Cengage Learning
Why is an Escrow needed?
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Assurance of an exchange of a deed for money
Clear and marketable title
Clearance of tax liens
Clearance from government agencies
A neutral third party to determine execution in
good faith of escrow instructions--orders
©2011 Cengage Learning
Escrow
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During escrow period
 Property profile/Preliminary title report
 The escrow “take sheet”
 Existing liens and the assessor’s parcel number
(APN) (AIN)
 Amendments to escrow
 Lender instructions: No or Only approved junior
liens
 Supporting documents: Reconveyance deed, riders
 Buyer signs many documents
©2011 Cengage Learning
Escrow
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At Close of Escrow (COE)
 Lien clearances
 Closing statements on property
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Preparing the HUD-1
Insurance policies:
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hazard
flood
Earthquake
other types of insurance
©2011 Cengage Learning
When is an escrow required, by law?
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Escrow is required for LIPS:
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L – iquor license
I – mpound account involved
P – robate
S – ecurities transfer
©2011 Cengage Learning
Who pays the expenses of escrow?
Buyer pays:
Seller pays:
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Conventional escrow fee(1/2)
DVA escrow fee
FHA escrow fee
Documentary transfer tax
Drawing the grant deed
Recording fee-grant deed
Beneficiary demand stmt
Reconveyance fee
Existing loan pay off
Home warranty policy
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Conventional escrow fee(1/2)
FHA escrow fee
Documentary preparation fee
Drawing the 2nd trust deed
Recording fee-trust deed(s)
Loan tie-in fee
Loan origination fee
Assumption fee
Appraisal fee
©2011 Cengage Learning
Who pays the expenses of escrow?
Buyer pays:
Seller pays:
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Termite: Correction
Survey
Unpaid liens
CLTA title insurance
Sub-escrow fee (1/2)
Prepaid rent/taxes/assn dues
Unpaid taxes/insurance
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Termite: Prevention
Credit report
Appraisal
ALTA title insurance
Sub-escrow fee (1/2)
Preliminary Title report
Assumed taxes/insurance
©2011 Cengage Learning
Escrow documents
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Contingent upon:
Memorandum Items
Sale of another property
Purchase of another property
Loan rate not to exceed “X%”
Appraised value of not less
than “$X”
Loan amount to be “$X”
Seller carrying back a second
trust deed for “$X”
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Personal property included in
sales price
Working conditions of utilities &
appliances
Date for transfer of physical
possession
Any other agreement or event
outside of escrow
©2011 Cengage Learning
Supplemental/Additional Escrow Requirements
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Foreign Investors Real Property Tax Act (FIRPTA)
Additional tax assessments
Preliminary Change of Ownership Report (PCOR)
Smoke detector requirements
Internal Revenue Code (IRC) Section 6045 (E)
Revenue & Taxation Code Sections 18805 &
26131
©2011 Cengage Learning
Homeowner Association
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www.hoacerts.com
Current Budget
Balance Sheet
Evidence of Fidelity Bonding and/or Directors
& Officers Liability Insurance
CC&Rs
Articles of Incorporation
By Laws
©2011 Cengage Learning
Vesting
Sole Ownership
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Co-Ownership
A single man
A single woman
An unmarried man
An unmarried woman
A married man (or woman)
as his (or her) sole &
separate property
Corporation
Trust
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Community property
Joint tenancy
Tenancy in common
Partnership
©2011 Cengage Learning
9.2 Statement of Information (SI)
Areas:
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Name, birthplace, date of
birth, marital status
Residences for past 10
years
Occupation/employment for
past 10 years
Former marriages or
deceased spouses
Signature & date
Purposes:
 Not intended as any invasion
of privacy
 Strictly confidential
 Not available for public
examination
 Accuracy is important
 Not used for credit check
 Available in most all
languages
©2011 Cengage Learning
9.3 Impound Account
& Property Taxes
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P I T I – Principal, Interest, Taxes (Property),
Insurance(s)
Prorate Taxes at close of escrow
Prop 13 – 1% of PCOR at close of escrow
Mello-Roos
Supplemental property tax bill
©2011 Cengage Learning
9.4 Title Insurance
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Preliminary Title Report shows:
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Encumbrances on subject property
Easements affecting subject property
Policy of Title Insurance
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Lenders require Special Endorsements
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Mineral leases
Street address
Street access
Private road agreement
All-include endorsements to protect lender
Recordation of document: Deeds & Riders
©2011 Cengage Learning
Title company personnel
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Advisory title officer (ATO)
Title officer (TO)
National Title desk
Inner counties department
Customer services department
Market department
Sales department
©2011 Cengage Learning
Title company customer service for loan
originators
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Farm package – information on people,
geographic area, type of property
Address labels – for marketing plan
Property profile – recorded documents
Legal and vesting – existing title holder
Property information – liens, room count, lot
size, CC&Rs, public record (year built)
©2011 Cengage Learning
What is a Preliminary Title Report?
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Designed to provide interim response to an
application for a title insurance policy.
Identifies existing title, estate, interest and land
description.
Contains a list of defects, liens, encumbrances
& restrictions to be excluded from coverage.
©2011 Cengage Learning
3 elements of a prelim
1. An offer to issue a title insurance policy.
2. A partial reporting of the chain of title.
3. A statement of the terms and conditions of
the offer to issue a title policy.
•
Note: See Appendix F.
©2011 Cengage Learning
Types of Title Insurance
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CLTA
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ALTA
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Coverage for the lender
Extended Coverage
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Standard coverage
To shield buyer from unforeseen claims
To cover above standard coverage
Binder
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When a future sale is anticipated in a short time
©2011 Cengage Learning
9.5 APPRAISAL
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Uniform Residential Appraisal Report (URAR)
(10-0-4)
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Depository Institutions Deregulation & Monetary
Control (DIDMCA of 1980
Regulated under Financial Institution’s Reform &
Recovery Act (FIRREA)
Appraisers abide by Uniform Standards of
Professional Appraisal Practice (USPAP)
Appraiser receives a state license
©2011 Cengage Learning
Appraisal format
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Subject property description
Neighborhood characteristics
Planned unit development (PUD)
Description of site and improvements
Three approaches to value sections
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Cost approach
Sales Comparison analysis
Income approach
©2011 Cengage Learning
Appraisal form has 5 areas:
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Complete visual inspection of the interior &
exterior areas of subject property.
Inspection of the neighborhood.
Inspection of each comparable sale.
Collection, confirmation & analysis of data.
Recording of analysis, opinions &
conclusions in the appraisal report.
©2011 Cengage Learning
Appraisal Report
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Reconciliation may be with conditions
Appraiser date – license number & signature
Sketch of property exterior measurements
Recorded plat map
Map location with subject and comparables
Disclaimer, certification & limiting conditions
Photographs of subject and street view
©2011 Cengage Learning
FHA Appraiser shall:
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Be certified by the state in which the property
is located.
Be certified by a nationally recognized
appraisal organization.
Demonstrate verifiable education in FHA
appraisal requirements.
©2011 Cengage Learning
Appraisal
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Non state licensed appraiser work:
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Review Appraisal
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Used for non-federally related or portfolio loans
Used for quality control purposes
Responsible for clarifications on appraisal report
May add conditions or reject the appraisal report
Appraisal report
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Used to qualify the property for LTV
Used for solutions to conditions of the appraisal
©2011 Cengage Learning
Appraisal Management Company
(AMC)
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AMC specifically authorized by the lender.
AMC selects, retains & provides payment of
all compensation to the individual appraiser
on behalf of the lender.
Appraiser correctly identifies the lender as
the lender/client on the appraisal report.
Lender policies & procedures in place to
comply with the code.
©2011 Cengage Learning
Appraisal Licensing Criteria:
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Trainee
 150 hours/education – no experience-property that supervising
appraiser is permitted to appraise
Residential
 150 hours education – 2000 hours experience in past 12 months,
1-4 unit up to $1million & non-residential up to $250,000
Certified Residential
 200 hours education – 2500 hours experience in past 30 months,
1-4 unit & non-resident up to $250,000
Certified General
 300 hours education + 3000 hours experience in past 30 months
w/1,500 hours must be non-residential.
©2011 Cengage Learning
Lender approval for appraiser:
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Copy of current state license or certificate
Current resume
Sample work
References
Copy of errors & omissions insurance
Sample appraisal review
©2011 Cengage Learning
Conditions and Reconsideration
Appraisal conditions:
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Reconsideration:
Specific property conditions
for the appraisal to be valid
Loan broker, lender or
appraiser may verify that
condition has been met
Usually work on the
property
May be permits or work of
others: termite, survey,etc
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Must submit a cover letter
with explanation and
summary
Documented closed comps
or backup data must be
provided
©2011 Cengage Learning