When you ask a mortgage originator what the most critical aspect of a loan file is, some may say it is the sales process. In reality, the primary functions of the loan origination process – marketing, sales, and processing – all rely on the escrow agent to close the transaction. So, finding the right escrow agent is paramount in ensuring you remain compliant and avoid delays so that your loans close on time – every time.
Find a Trustworthy Escrow Officer
Working with and building a relationship with an escrow officer you can trust will help you close deals more quickly and avoid the pitfalls that can cause hang-ups or even kill deals. A competent escrow officer can clear issues from a title, identify red flags that may delay closings, help you establish and meet your closing commitments, and over time familiarize themselves with the needs and expectations of you and your clients.
Your settlement agent can work with you on meeting tight closings or working with you and the client to set a closing date that works for all parties. Escrow officers generally offer the escrow closing when they feel it is ready, and do not typically arrange their schedule around your need for a close. By establishing a good working relationship with an experienced settlement agent, you get them to understand your needs better and work with you on meeting the timelines you have set with your clients.
Identifying Red Flags
Many of the red flags that arise during the settlement process stem from title insurance. For example, if you pull a preliminary title report on a property and an uninsured deed shows up from years earlier, you may get a denial of title insurance. However, if you have a competent settlement agent who has established a good relationship with their title officer, you will most likely get the issue resolved, and they will opt to insure. On the other hand, if you do not have a strong relationship with your settlement agent they may not push title on your behalf to resolve the issue, ultimately causing closing delays.
While many originators understand settlement issues and can give a heads-up to the escrow agent about possible red flags, having an experienced agent on your side becomes your second line of defense in ensuring other issues you may have missed are identified and resolved early on in the process.
Other potential trouble items may be erroneous payoff demands, inaccurate clouds on title, and exception items that were never removed from previous closings. Even borrowers themselves can become potential delays if they are not adequately prepared with the expectations of a loan closing. Borrowers have the responsibility of delivering stipulations and demands from escrow. A proactive loan officer can help their settlement agent by preparing their borrower in advance with a list of potential items that may be required before their closing.
By forming a solid relationship with your settlement agent, you can trust that these potential show-stoppers are identified, logged, and resolved before they become a headache for you and your client.
Establishing a Closing Schedule
When you are originating a mortgage, time is an essential component from the beginning to the end of your file. Naturally, an escrow officer typically manages multiple loans at any given time. Working alongside your settlement agent to identify potential trouble items that may cause delays will go a long way in making sure your file closes on time.
While meeting closing timelines is one of the most desirable traits of an escrow officer, it is not always as easy as just marking the closing date on their calendar. For instance, clearing an IRS lien or other government agency liens such as child support, alimony, or the like, can take weeks to clear up. It is essential to assist your escrow agent with identifying troubling liens on the preliminary report early in the process, so they can begin working on clearing the claim as soon as possible. Your loan will close sooner, and your settlement agent will appreciate your proactive approach.
Another area that may hamper your closing schedule is obtaining payoff demand letters. Many banks and lenders can require several days or even weeks before they deliver a payoff amount to escrow. Identifying which lenders could potentially take longer than others, is a function escrow officers have learned over years of experience and can save a loan originator from an unexpected delay.
Reviewing Closing Documents
A vital step in the loan closing process is the review of the closing documents. You should check the entire loan package before and after signing to ensure everything is accurate and prepared properly. Working with a known and trusted settlement agent can assist you in this review process because as they become more familiar with your files, they will become a second set of eyes in helping to ensure that your file is complete.
Some items commonly checked during the loan closing process are:
Review of the Settlement Statement
• Ensure parties and property are matching
• Ensure loan amount and fees are correct
• Confirm all liens to be paid off have current payoff demands
• Confirm all premiums to be paid (insurance, property tax, HOA, etc.)
Review of Insurance Documents
• Liability insurance obtained in the amount of $1M per occurrence or $2M aggregate
• Hazard insurance replacement cost coverage to cover the loan amount
• Review other insurance requirements of lender (hurricane, earthquake, builders, etc.)
• Review insurance policy to ensure addresses, loss payee, coverage amounts and expiration dates are all accurate.
Escrow Instructions
The escrow instructions are a guideline for the escrow officer and title officer to follow in order to close the loan. The settlement agent will review the instructions to ensure they are meeting all the requirements of the loan and then confirm that the instructions are signed by both the escrow and title officers.
Title Insurance
Before closing, the title policy should be reviewed to verify the following:
- Review and verify the pro forma
- Verify policy coverage is at least 125% of loan amount
- Verify the loan endorsements to ensure all required endorsements have been obtained
The reasoning behind ensuring title policy coverage of 125% of the loan or more is outlined below.
The following is the standard ALTA language concerning the extent of coverage:
The extent of liability of the Company for loss or damage under this policy shall not exceed the least of
(i) the Amount of Insurance,
(ii) the Indebtedness,
(iii) the difference between the value of the Title as insured and the value of the Title subject to the risk insured against by this policy, or
(iv) if a government agency or instrumentality is the Insured Claimant, the amount it paid in the acquisition of the Title or the Insured Mortgage in satisfaction of its insurance contract or guaranty.
While the definition of Indebtedness includes principal and accrued unpaid interest, etc., if the Indebtedness exceeds the Amount of Insurance, title will only pay the Amount of Insurance. If we pad the Amount of Insurance to 125% of the loan amount, this will allow for a greater payment on the claim.
The following example illustrates the impact:
Scenario A w/ 100%
Loan Amount $100,000
Insurance (100%) $100,000
Indebtedness $100,000 + $20,000 in accrued unpaid interest and protective advances = $120,000
Title pays $100,000 ($20,000 uncovered loss)
Scenario A w/ 125%
Loan Amount $100,000
Insurance (125%) $125,000
Indebtedness $100,000 + $20,000 in accrued unpaid interest and protective advances = $120,000
Title pays $120,000 ($0 loss)
Therefore, if available, we encourage clients to opt for 125% coverage or more.
Post-signing Document Verification
You should also ensure all documents are signed by the borrower(s) and duly notarized. After the signing, you should request that the Check for legible signatures, missing signatures or initials, missing notary attestations, or other errors or omissions that will need to be resolved and can cause closing delays. It is a good idea to make sure the borrower is available immediately after a signing in case corrections need to be made.
Funding
Once all documents have been verified and accepted by the lender, they begin the funding process. Another critical function of the escrow officer to ensure on-time closings is the payoff of lien holders. The escrow officer has to make sure the schedule of the signing allows enough time for the executed package to be returned, confirmed, and verified prior to wires being scheduled.
Managing wire cutoffs for east coast/west coast closings is another function that is sometimes taken for granted. Experienced settlement agents are familiar with cutoff times for wires and will work with the loan officer if any unforeseen circumstances could cause a delay in the payoff schedule. Likewise, alerting your settlement agents to any potential delays can help them manage wire instructions and ensure your client’s closing expectations are met.
In Closing
You can see from the details laid out in this article how important it is to obtain and build a long-lasting and mutually trusting relationship with your escrow agent. Settlement agents are the gears that turn the wheels on every loan transaction. Seeking out key relationships with competent and well-traveled agents is imperative in ensuring your clients get their loans closed on time and without problems.
We would like to think that every mortgage professional and escrow agent is doing the very best job they can for their clients, but if you have been in the business for any length of time, you most likely understand that this is not always the case. There is a myriad of regulations being unleashed upon the financial markets forcing a constant change in documentation and the emergence of new electronic closing technology. It is essential to form a solid foundation with an escrow professional that you trust will do the very best job in closing each deal on time – every time.
