Wake-up call on title insurance?

Wake-up call on title insurance?

Kenneth R. Harney

Aug 15, 2014

WASHINGTON – A new federal court suit alleging kickback violations by one of the countrys top-producing real estate sales teams raises an unsettling question for homebuyers- Could your agent or broker be pocketing under the table large chunks of what you pay for title insurance?

Some legal analysts say the litigation should be a wake-up call for realty brokers and their customers nationwide. It focuses fresh attention on the often murky financial relationships that exist between title insurance agencies and realty firms – relationships that have been drawing increasing scrutiny from the federal Consumer Financial Protection Bureau.

The suit, which was filed in U.S. District Court in Baltimore earlier this month, alleges that the Creig Northrop Team P.C. – a real estate group ranked among the highest-grossing nationwide in recent years – received payments totaling $1.3 million between 2001 and 2014 from a title insurance company, which the complaint characterizes as illegal kickbacks that were never disclosed to buyers. The plaintiffs also allege that the defendants used sham employment and marketing agreements to disguise the true nature of the payments.

The Northrop team is affiliated with Long and Foster Real Estate Inc., the largest independent brokerage in the country. Timothy Casey, an attorney representing both the Northrop team and Long and Foster, said he had no comment on the case, pending authorization from his clients to do so. Lakeview Title Insurance Co., which allegedly paid kickbacks in exchange for referrals of business by the Northrop team, did not respond to a request for comment. The defendants answer has not yet been filed.

The filing seeks class action status, $11.2 million in compensatory damages for the plaintiffs, plus potentially millions more in other damages. A related suit sought and was granted class action status by the same federal court earlier this year. In that case, the Northrop team and Long and Foster denied any wrongdoing. The court ultimately dropped Long and Foster from the class action, having found no evidence that Long and Foster had participated in the Northrop teams alleged actions.

The new suit, brought by Nancy Wade and Janice Rulli, who purchased a home in Ellicott City, Md., through the Northrop team, seeks to reinstate Long and Foster as a defendant with new allegations that an employee of the brokerage firm not only was aware of the allegedly illegal payments, but “admonished and disciplined” sales agents when they did not steer business to the title agency.

The complaint alleges that Carla Northrop, vice president of the team, received $775,000 from Lakeview Title over a six-year period under an employment arrangement that required little or no work – she had no office space, no set hours, no cellphone or business cards – yet was compensated with one-half of the title insurance premiums charged to home purchasers who were referred by the Northrop team.

No one can predict how the court system ultimately will rule on the allegations in the Northrop case. But real estate industry experts say it highlights an area of growing sensitivity for brokers and agents- Though federal prohibitions against kickbacks for business referrals have been in place for decades, regulators and consumer attorneys are becoming more aggressive in challenging marketing and employment compensation deals that can add significant amounts to brokers incomes – but discourage their buyers from shopping for lower-cost or better settlement services.

Such arrangements are widespread, says New Orleans attorney Marx Sterbcow, and a lot of them are vulnerable to legal attack. According to Sterbcow, payments for questionable marketing services can range into the hundreds of thousands of dollars a month in the case of large brokers or involve more modest payments to small brokerages or even to individual agents who have negotiated arrangements with title and other vendors.

When there is little or no proportionality in the referral deal – say a broker or agent gets substantial sums of money but provides only vague services beyond the referral of customers – the arrangement is open to challenge, say realty industry legal experts.

The Consumer Financial Protection Bureau has begun stepping up its own investigations and enforcement actions against brokers and title companies – especially on alleged referral-fee arrangements and inadequate disclosures provided to consumers. It recently settled with one large realty broker for $500,000.

Affiliated business arrangements that are disclosed to consumers and follow the regulatory rules are permitted under the law. Though its difficult for most consumers to detect illegal kickback arrangements, its easy to remember this- Under federal law you are free to shop for title and other services. Your realty firm may recommend an affiliated company as the best around, but you are free – and wise – to test that proposition by checking out the competition.

The credit score logjam

The credit score logjam

Aug 1, 2014 Kenneth R. Harney

WASHINGTON – Are mortgage lenders finally loosening up a little on their credit score requirements – opening the door to larger numbers of home purchasers this summer and fall?

It depends on what type of loan you’re seeking. If it’s a Federal Housing Administration (FHA) insured mortgage, the answer is a resounding yes. The average FICO credit scores for approved applicants for FHA home purchase loans have been dropping steadily this year, according to new data from Ellie Mae, a Pleasanton, Calif.-based company whose mortgage origination software is used by most large lenders.

But if you’re shopping for financing in the much broader conventional market – where most mortgages are purchased or guaranteed by giant investors Fannie Mae and Freddie Mac – scores have not budged for months. They averaged 755 FICO in June, the same as in January, four points below their average for all of 2013. FICO scores run from 300 to 850; higher scores indicate lower risk of default.

Though credit scores represent just one factor that lenders use in determining whether to grant an applicant a mortgage, today’s average scores are far above historical norms and represent a high hurdle for many would-be purchasers – especially first-time, minority and moderate-income buyers.

Phil Bracken, a mortgage industry veteran and founder and chairman of America’s Homeowner Alliance, a nonprofit group that promotes affordable housing, calls current score levels “serious” contributors to a national problem- homeownership is now at 64.8 percent, its lowest level since 1995, in part because so many consumers can’t get past lenders’ severe underwriting tests. The ownership rate for Americans under 35 is 36.2 percent, the lowest on record.

“There are lots of people out there who are creditworthy and should be eligible” to buy a home, Bracken says. Scores are not the only obstacle in their way, but they play a powerful role.

Leaders of both of the country’s major credit score model developers – FICO and VantageScore Solutions, LLC – have confirmed to me that banks could reduce their scoring requirements from today’s highs and not materially increase their risk of delinquencies and defaults. In the process, they would increase the volume of mortgages they make, spur more home sales and stimulate employment.

So what’s holding them back? Interviews with top officials at lending institutions suggest something that may not be widely understood by consumers- Fear and finger-pointing are gumming up the system.

Lenders fear that big investors such as Fannie and Freddie will force them to buy back loans they make that have below-par scores or underwriting. Both companies have required lenders to repurchase billions of dollars worth of defective mortgages. In the process, they’ve made banks and mortgage companies hyper-obsessive about delivering pristine loans, even though that means rejecting borrowers they would have funded in the years before the housing boom and bust.

Anthony Hsieh, founder and CEO of loanDepot, a California-based mortgage company that specializes in conventional loans, says his firm cannot afford the risks of deviating from the Fannie and Freddie guidelines – or even tip-toeing close to the line.

“We have no control over credit scores,” he said in an interview. “Until (Fannie and Freddie) put out a directive telling us to provide credit to more Americans, our hands are tied.”

Spokesmen for Fannie and Freddie say they have tried to ease lenders’ fears about overzealous buyback demands and do not require scores to average 755 or anywhere even close. Both companies do assess higher fees on loans they purchase with credit scores below various thresholds – 740 FICOs and above get the lowest fees – but insist they do not dictate scores. They also point out that many lenders set their own score thresholds higher than Fannie’s or Freddie’s, levying “overlays” that increase costs to consumers.

Despite all this, however, there may be glints of hope on the horizon at Fannie and Freddie on credit scores and other fees. Under its new director, Mel Watt, the Federal Housing Finance Agency, which oversees Fannie and Freddie in conservancy, has reached out to lenders and asked for their advice on where to set some of the fees the two investors charge, including those connected with credit scores. The deadline for lenders to respond is Aug. 4.

Though no one can predict whether this will help curtail the finger-pointing and fears that are keeping scores unnecessarily high, there’s a real possibility. And that could be a big deal for buyers in the months ahead.