Chicago Title

Minimum Standards Revised for ALTA/NSPS Surveys

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Celebrating the festival of Terminalia?

surveyorAmerican Land Title Association and National Society of Professional Surveyors have spent two years working on a new set of minimum standards for surveys. Their efforts resulted in the adoption of new 2016 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys which go into effect on February 23.  The standards can be found here.

A notable change is the title which acknowledges the merger of ASMC with NSPS. The list of atypical interests in real estate has been expanded to clearly include easements. And a surveyor should now be provided with the most recent title commitment. The term “record documents” has been abandoned in favor of referencing documents that are “to be provided to the surveyor”.

A significant change is the new duty of the surveyor to show “the location of each edge of the traveled way”, including divided streets and highways. The 2011 standards required showing the “width and location of the traveled way”. The change will require surveyors to show the width of the dedicated road in addition to the width of the asphalt.

The requirement to show water features has beefed up. Previously, surveyors were required to show springs, ponds, lakes, streams and rivers bordering or running through the property. Now surveyors must also show canals, ditches, marshes and swamps if any are “running through, or outside but within five feet of the perimeter boundary of the surveyed property.”

If a new legal description is prepared, the surveyor must include a note stating that the new description describes the same real estate as the record description, or if it does not, then the surveyor has to explain how the new description differs from the record description.

The surveyor must now show all observable evidence of both easements and utilities on his plat. Previously, there was some confusion as to whether both had to be shown.terminus 2

There are other modifications, most of which will assist surveyors while not diminishing the value of their surveyors to commercial practitioners and title insurers.

What’s the significance of the date? The Roman god Terminus protected boundary markers. The name “Terminus” was the Latin word for boundary marker. On February 23, Roman landowners celebrated a festival called Terminalia in honor of Terminus. Let’s throw a party!

Will Biltmore Estate’s Owners Get Their Fairytale Ending When IRS Is Done With Them?

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Biltmore EstateOne piece of real estate that fascinates most Carolinians is the picturesque Biltmore Estate in Asheville surrounded by the natural beauty of the Appalachian Mountains. According to articles in Law360*, a trial is scheduled for February 24 in the U.S. Tax Court that may determine whether the property continues to be privately owned and operated or whether portions of the real estate must be sold to developers to pay taxes.

The estate consists of 8,000 acres, 75 acres of formal gardens, and the largest privately owned house in the United States. The 255-room mansion was built between 1889 and 1895, in the Gilded Age, by George Washington Vanderbilt. Mr. Vanderbilt intended for the estate to be self-supporting, so he established a forestry program, poultry farms, cattle farms, hog farms, a dairy and a furniture business.

IMG_3884[1]George Vanderbilt had one child, Cornelia, who married British diplomat John Francis Amherst Cecil. Mr. and Mrs. Cecil worked with the City of Asheville to open the estate to the public in 1930 to spur tourism in the area during the Depression and to generate revenue to support the estate. The Cecil family turned the aging estate into a thriving tourist attraction, now including an inn, a farm, restaurants, gift shops and a winery, among other money-making ventures.

Most national treasures are operated by governmental agencies. According to the Law360 articles, the Cecils believe The Biltmore should be given special consideration because it operates as a business venture causing no drain on federal or state governments.

At issue now is a stock gift to the Cecils’ five grandchildren reported on 2010 tax returns at $20.88 million. The IRS claims the stock is worth $95 million. The family believes the stock should be valued as minority interests in a going concern.  But the IRS argues that the asset value is worth more than the value of the going concern, so a liquidation value should be used.

Lovers of this historic landmark will need to follow this story to determine whether the preferred destination of more than a million visitors per year will remain available as a vacation destination.

*Biltmore Owners Say IRS Is Stonewalling $95M Gift Row, 1/11/2016; Biltmore Owners Battle IRS over $95M Stock Gift, 7/7/2014.

(The Estate’s website is the source for many of the facts in this blog.)

The Big Short: Required Reading (and watching) for Dirt Lawyers

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thebigshort

Super Bowl 50 was the big entertainment news of the weekend, but coming in at a personal close second were the book and movie The Big Short. I rushed to finish the former before dragging my husband to a Saturday matinee of the latter. Then, a friend pointed me to an NPR special “The Giant Pool of Money”, which provided a fascinating diversion for my Saturday afternoon walk.  (I confess to being easily entertained by all matters involving real estate.)

I encourage everyone involved with “dirt” to read the book, watch the movie and listen to the podcast. All relate to the 2008 financial crisis. At the center of the book (and movie) were several eccentric investors/money managers, who predicted the fall and brilliantly crafted a method to cash in on it. At the center of the podcast was the “giant pool of money”, the trillions of dollars in the economy that constantly need a place to be invested.

Locally, we heard the stories about real estate investors who lost properties and funds in the crash. In our office, we compared the crash to a game of musical chairs. The investors who sat in the chairs when the music stopped (the ones who held titles to the properties) were the ones who lost.

All areas of South Carolina were affected, but our coastal areas were hardest hit. Property values were phenomenal!  A contract on a yet-to-be-constructed residence might change hands several times at increasing prices before the final purchase. And loans were easy to procure at all income levels. No one thought property values would ever soften, and it didn’t matter if adjustable rate loans would reset in two years at staggeringly high fixed interest rates because refinances were readily available. Properties and mortgages churned like butter. There was apparently no end in sight.

The book’s author, Michael Lewis, who also wrote Moneyball and The Blind Side (back to football, which really is the center of the universe), said in explaining the mindset of the people who would borrow again and again, “How do you make poor people feel wealthy when wages are stagnate? You give them cheap loans”.

One of the money managers in The Big Short had his eyes opened by a story from his own household. His babysitter revealed she and her sister owned five townhouses in Queens. When he questioned asked how that possibly could have happened, she responded that after they bought the first townhouse, the value increased, and lenders suggested they refinance and take out $250,000, which they used to buy another townhouse. And so on….

The “giant pool of money” that at one time had been invested safely in boring assets like Treasury bonds, needed a place to land with higher interest rates. With mortgage rates being at 3.5% and higher, no better place could be found.

How did the money managers cash in?  They looked at pools of mortgages that were being sold on the secondary market, saw that the interest rates would collectively begin to reset in early 2007, and bet against the housing market.

They created a “credit default swap” market that bet against collateralized debt obligations. Huh?

One of the points of the book is that the financial markets created fancy terms that average individuals could not possibly understand. In this particular case, it turned out that that the big Wall Street firms, the people who ran them as well as their regulators, did not understand what was happening either.

“Credit default swap” is a confusing term because it is not a swap at all. It is an insurance policy, typically on a corporate bond, with semiannual payments and a fixed term. The money managers who predicted the subprime lending crisis bought credit default swaps that paid off, like insurance policies, when the market crashed.  These eccentric money men were able to predict that there would be a crash of the subprime mortgage market even if housing prices only stalled because borrowers would not be able to refinance or make payments.  When prices dropped, the money men were able to cash in at astonishing levels.

The most horrifying point of the book was that the government’s response to the crisis, the so-called bailout, will not prevent the crisis from happening again. We can only hope that we are all better educated the next time around. As I opened Outlook this morning, though, the first article that caught my eye was from Housingwire entitled “Risky home lending really on the comeback?”  Let’s collectively hope not!

SC Supreme Court Assesses “Sick” Pawleys Island Condo Project

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A 30+-year saga of leaky buildings continues to be litigated

watery apartmentFisher v. Shipyard Village Council of Co-Owners, Inc.,* involves a four-building condominium project in Pawleys Island that experienced leaks as early as 1983. The leaks began around the windows and sliding glass doors, which were defined as a part of each “unit” by the master deed, making the respective owners responsible for repairs rather than the owners’ association.

The bylaws require the Board to act if an owner fails to maintain a unit and that failure adversely affects other units or the common areas. Reducing the facts in this case to one sentence, the issue is whether the owners of units in all four buildings must be responsible for extensive repairs required in two of the buildings.

The cause of the water intrusion is still in question, but the evidence indicates the Board may have known about the leaks for years before it took action.

In 1999, the Board notified owners that they should waterproof balcony thresholds and window frames. In 2002, the Board hired a consultant who found safety issues with the windows and told the Board to pursue legal action. In 2003, the Board hired a construction company that concluded water was leaking through stucco, not windows.

In 2004, Ben and Katie Morrow, owners of a unit in Building B, replaced their windows but continued to experience water intrusion. They engaged an engineer who identified stucco cracks as the source of the problem and stated that Building B was “sick and about to become cancerous” because of the severe moisture intrusion.

And the saga continued.

In 2006, the Board received a $2.4 million proposal to replace windows in Buildings A and B and attempted to amend the Bylaws to designate the windows as common elements, which would have placed the responsibility on the Board. After two attempts to pass the amendment, the Board crafted a letter stating the amendment had passed. The letter did not address the voting procedure and, in fact, incorrectly said a special meeting had been held. The amendment did not address the sliding glass doors.

In 2007, the Board hired a consultant who identified an “open joint” directly under the doors’ thresholds which allowed water to leak to units below.  In 2008, the Board said Buildings A and B required repairs to the tune of $12 – 13 million. The Board hired yet another consultant who identified two primary problems in Buildings A and B: (1) failures in the structural concrete, including corrosion of the reinforcing steel; and (2) the building envelope was not “weather tight”. Another inspection revealed this startling list of defects in Buildings A and B:  roof, façade, edge beam, soffit, concrete, expansion joint, horizontal surface and HVAC anchorage failures, and poor to non-existent flashing in the windows and doors.

In 2008, the owners of units in Buildings C and D hired an attorney, who sent a letter to the Board asserting that a proposed special assessment was invalid because the amendment had not been property adopted, and the cost of repairs should be the responsibility of the owners in Buildings A and B. In 2009, a majority of the owners of units in Buildings C and D brought suit challenging the validity of the amendment. Later that year, the Board notified the owners that the windows and doors in Buildings A and B would be replaced through a special assessment of up to $88,398 per unit. The owners voted against the special assessment, and the Board incorporated the repair costs into the 2010 and 2011 operating budgets.

Later in 2009, the Petitioners (50 owners in Building C and D) filed a new suit, alleging negligence, gross negligence, negligent and gross negligent misrepresentation, breach of fiduciary duty and breach of the master deed and bylaws. This two suits were consolidated, and in May of 2012, the Petitioners moved for summary judgment on their negligence and breach of fiduciary duty causes of action.

The trial court granted summary judgment on the issues of duty and breach, finding the bylaws and master deed imposed affirmative duties on the Board to enforce, investigate and correct known violations, and to investigate evidence of the owners’ neglect of maintenance responsibilities. The trial court also found that the Board was precluded from asserting the business judgment rule because of its ultra vires conduct, as well as its lack of good faith and failure to use reasonable care in discharging its duties.

The Court of Appeals affirmed the trial court’s grant of summary judgment on the existence of a duty to investigate but reversed on the business judgment rule and the issue of breach. The case was remanded for trial, but the Supreme Court granted Certiorari.

The Supreme Court stated that the business judgment rule applies only to intra vires acts. In other words, the rule protects a board that exercises its best judgment within the scope of its authority. The Court held that a corporation that acts within its authority, without corrupt motives and in good faith, is protected by the rule, and remanded the case for jury consideration of whether the Board violated its obligations.

warren buffet quote

As to the issue of summary judgment on breach of duty, the Court found that the record contains at least a scintilla of evidence that the Board did not breach its duty to investigate. The Court stated that the record contains some evidence to support a conclusion that the water leaks occurred because of water intrusion through the common elements.  Thus, the trial court should not have decided the question of whether the Board breached its duty to investigate as a matter of law.

The parties are now free to litigate for years to come!

* S.C. Supreme Court Opinion 27603, January 27, 2016

Feds Play Shell Game in Manhattan And Miami

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Title companies obligated to ID true owners behind shell entities.

Will this obligation migrate closer to home?

money launderingSecretly purchasing expensive residential real estate is evidently a popular way for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

The Federal government is seeking to stop this practice.

The Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasury issued orders on January 13 that will require the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

This is a temporary measure (effective March 1 to August 27) and is limited to at this point to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies must disclose to the government the names of buyers who pay cash for properties over $1 million in Miami and over $3 million in Manhattan. FinCEN will require that the natural persons behind legal entities be reported if their ownership in the property is at least 25 percent.

FinCEN’s official mission is to safeguard the financial system of the United States from illicit use, to combat money laundering, and to promote national security through the collection, analysis and dissemination of financial intelligence.

FinancialCrimesEnforcementNetwork-Seal.svgThese orders are a continuation of FinCEN’s focus on anti-money laundering protections for the real estate sector. Previously, the focus was only on transactions involving lending. The new orders expand that focus to include the complex gap of cash purchases.

FinCEN’s Director, Jennifer Shasky Calvery, was quoted in the agency’s press release: “We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money.”

American Land Title Association officials met with FinCEN to confirm the details of the orders. Michelle Korsmo, Executive Direction of ALTA, indicated that ALTA is supportive of the effort but is concerned that the program must be implemented in order to determine whether it will work. She said it will be difficult for a title insurance company to figure out a transaction involving a major drug kingpin who buys a mansion through a string of shell corporations all over the world.

This phase of the new program is being called temporary and exploratory, meaning that it may or may not work, and if it does work, it may or may not be expanded to other locations. (Query:  why won’t a money launderer who seeks to purchase residential real estate during the initial phase of this program, simply change locations to Chicago, Houston, San Francisco or Los Angeles?)

We have no way of knowing whether or when this program might be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in similar money laundering schemes. Will South Carolina closing attorneys enjoy ferreting out this sort of information for the Government? We will keep a close watch on what occurs in New York and Florida during the first 180 days of this program.

American Land Title Association is Working for Us

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Letter to CFPB asks for clarity.

mountain climbers helping handAmerican Land Title Association’s January issue of TitleNews reports that ALTA reached out to the Consumer Financial Protection Bureau by letter dated Nov.23, asking for clarity in three areas of the TRID regulations.

The first area of concern is generating a great deal of angst among South Carolina closing attorneys, that is, the attempt by lenders to shift liability to settlement agents for all compliance issues, including compliance with the new federal law.

Here in South Carolina, we are seeing modified closing instructions that explicitly shift this liability to closing attorneys and often include indemnity language. The attorney is being asked to indemnify the lender for the liability the federal law has clearly imposed on lenders.

By the way, I urge South Carolina real estate lawyers to become members of the South Carolina Bar’s Real Estate Section. The Real Estate Section provides its members with access to its Listserv, which can be found at realestatelaw@scbar.org. The forum is a great place for South Carolina real estate lawyers to share ideas and frustrations as well as a place to seek information and advice from peers.

The frustration of real estate lawyers regarding this issue is obvious in that forum. It is a great place for lawyers to share their ideas as well as their frustration.

Michelle Korsmo, ALTA’s Executive Director, said in the Nov. 23 letter to the CFPB, “These instructions are in contrast to the clear public policy underpinning this rule, as well as language in the rule stating that lenders bear ultimate liability for errors on the Closing Disclosure form.” According to TitleNews, ALTA provided the CFPB with several examples of the offending closing instructions.

The second area of concern is the disclosure of title insurance premiums on the Closing Disclosure and particularly the very odd negative number that appearing for the cost of owner’s title insurance. The calculation methods of the CFPB seem to be dictating this negative number in many cases, but in what world is that logical? And how does that negative number supply clarity to consumers?

The third and final area of concern expressed ALTA’s Nov. 23 letter is the confusion surrounding seller credits on the Closing Disclosure. Lenders and closing attorneys are struggling with whether to list seller credits as individual line items on the CD or to consolidate them and disclose them under a general “seller credits” heading.

All of us in the industry should be appreciative of ALTA’s efforts to assist in this push for clarity. I urge South Carolina lawyers to join ALTA and to pay attention to and support its efforts in our behalf.

County May Owe Duty to Lot Owners in Failed Subdivision

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Infrastructure regulations were not followed

scales - blue backgroundOn January 6, the S.C. Court of Appeals reversed the Georgetown County Circuit Court’s directed verdict and remanded a case involving failed West Stewart Subdivision.* The developer, Harmony Holdings, LLC, went belly up in 2007, leaving the lot owners without roads and utilities after the County failed to follow its own regulations that provided a safety net for such catastrophes.

The plaintiff owned two lots in the subdivision, and filed a negligence action, arguing that Georgetown County had a “tort-like” duty to lot owners under the plain language of its development regulations. The County denied that it owed a duty to lot owners.

The County attorney explained the administrative issues at trial. He testified that in South Carolina, a developer is generally not allowed to sell lots that do not have infrastructure (roads, water and sewer). County regulations, however, allow the County to accept cash, bonds, financial guarantees or letters of credit to ensure money is available to complete infrastructure in case a developer fails.

Under the regulations in question, the County had discretion to accept a letter of credit equal to 125% of the cost estimate to complete the infrastructure. In this case, the developer posted a letter of credit on May 23, 2006 in the amount of $1,301,705 based on a cost estimate of $1,040,000.

Also under the regulations, the County had the power to approve reductions in the letter of credit upon receipt of an engineer’s certification that a certain amount of the work had been completed and sufficient funds were available for the remaining work. Other technical procedures were also required. The County allowed for a reduction in the letter of credit on July 20, 2006, October 9, 2006 and November 8, 2006, reducing the letter of credit to $553,370. In December of 2006, the County was advised that the estimated cost to complete the infrastructure was $1,153,205, which was higher than the original estimate. Despite this information, the letter of credit was reduced again on March 9, 2007 to $156,704.

The letter of credit expired in May of 2007, and the developer gave the county a check for $140,000. In August of 2007, the developer informed the County that it no longer had the financial means to complete the construction. Then the developer declared bankruptcy.

Repko described his lot as “woods” accessible by a path but inaccessible by a road. He testified that he believes his property is valued at “zero”. He said he pays property taxes on his lot, but the County will not allow him to build because of the absence of basic utilities.

The trial court directed a verdict in favor of the County on the grounds that the regulations do not create a private duty to lot owners. (Other issues were argued that will not be discussed here.) The Court of Appeals agreed with the lot owner that the County owed a special duty to him with respect to the County’s management of the financial guaranty that allowed the developer to sell lots.

inigo montoya memeThe County had relied on a 1993 Hilton Head case.** In that case, the preamble to the development ordinances stated, “The town council finds that the health, safety and welfare of the public is in actual danger….if development is allowed to continue without limitation.” When the development failed, a lot owner sued the Town, claiming it had negligently administered its ordinances. The Supreme Court held that the ordinances did not create a special duty to lot owners because their essential purpose, according to the preamble, was to protect the public from overdevelopment.

The Court of Appeals in the current case held that, unlike the Hilton Head ordinances, the Georgetown County regulations contained no express language declaring their purpose, but reviewing them as a whole, the purpose is to protect lot owners in the event the developer does not complete infrastructure.

I expect we have not seen the end of this case!

* Repko v. County of Georgetown, Opinion 5374, January 6, 2016.

** Brady Development Co. v. Town of Hilton Head Island, 312 S.C. 73, 439 S.E.2d 266 (1993).

Creative Use of Google AdWords Gets SC Lawyer in Hot Water

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Supreme Court is not amused by timeshare attorney’s advertising technique


yellow card - suitThe South Carolina Supreme Court handed down a public reprimand last year against a Hilton Head lawyer for his resourceful use of Google AdWords.*

According to the Court, Google AdWords is an Internet marketing technique in which the advertiser places bids for “keywords”. When a Google search includes the advertiser’s keywords, the search results list may or may not include the advertiser’s ad. The advertiser pays Google for clicks on the ad from the search results.

The lawyer and his partner (the “law firm”) handled timeshare litigation and had filed numerous lawsuits against a particular timeshare company. The law firm bid on key words including the timeshare company’s name and the names of three lawyers who represented that company. The law firm’s ad appeared in some Internet search results when those names were used. The ad read:

“Timeshare Attorney in SC – Ripped off? Lied to? Scammed” Hilton Head Island, SC Free Consult”

Sometimes the law firm’s ad appeared as the first result and other times, it appeared later in the list. The law firm paid for its advertisement each time an Internet searcher clicked on the firm’s ad.

The Court held that the attorney violated the Lawyer’s Civility Oath by using the names of opposing parties and their counsel in this manner. By taking the oath, a lawyer pledges to opposing parties and their counsel fairness, integrity, and civility in all written communications and to employ only such means consistent with trust, honor and principles of professionalism.

Marketing is now virtually a necessity for successful lawyers. Attorneys are exploring many avenues in their marketing efforts, including numerous Internet marketing techniques. But, beware, this one is not a good idea!

 

*In the Matter of Naert, S.C. Supreme Court Opinion No. 27574, September 30, 2015.

So You Say Ninety Percent of TRID Loans Contain Violations?

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Worse than rocket science? Perhaps.

thumbs downAccording to a news report from American Land Title Association, Moody’s Investors Services has written that several third-party firms found TRID violations in more than 90% of the loans that were audited.

ALTA states that Moody’s report indicates that this “informal feedback” was based on reviews of around 300 mortgages from around a dozen unidentified lenders, and that many of the violations were “only technical in nature”, like spelling errors. But Moody’s is apparently concerned that the secondary market may be affected by the sheer number of violations.

There appears to be a disconnect between this reporting and the perception of Director Richard Cordray of the CFPB. In a speech at the Consumer Federation of America, Director Cordray recently said that the housing industry’s concerns about TRID appear to have been “overblown”. He said that reports from industry participants across the market seem to be indicating that implementation of the new rule is going “fairly smoothly”. He even stated that the anxieties in the market were much like the predictions of technological disasters stemming from Y2K, which never materialized.

What do we, as South Carolina attorneys, do with this information?

  1. Take some comfort in the fact that we are not the only ones struggling with TRID.
  2. Do the best we can to comply with TRID rules.
  3. Do the best we can to comply with South Carolina Supreme Court requirements that we fully disclose all funds involved in closings. I believe we must prepare and deliver closing statements, in addition to TRID required Closing Disclosures, to make the proper disclosures. ALTA’s closing statements, which should be available on all the closing software programs, are excellent forms to use.
  4. Talk to each other about the struggles. Collectively, we should be able to resolve some of the problems.
  5. If you need backup on a position, call your title insurance company lawyers. They are hearing it all these days and may be able to help with a particular lender or an odd position.
  6. Lenders are attempting to shift the burden of compliance to closing attorneys through indemnity
    language being inserted in closing instructions or by separate letter. Closing attorneys should resist
    agreeing to this additional liability if at all possible. Negotiate! Be strong!

And if all else fails, I understand that NASA is taking applications for the next class of astronaut candidates. Maybe alternative employment is possible.

astronaut

 

Federal Housing Finance Agency Announces Conforming Loan Limits for 2016

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The maximum remains the same in most markets

FHFA LogoSpeculation earlier this year was that the Federal Housing Finance Agency (FHFA) would increase the limits for conforming loans in 2016 above the current amount of $417,000. But FHFA recently announced that the current limit would remain in place for most of the country.

The limit is increased above $417,000 in only 39 counties in the United States. The so called “high cost” counties are located in the metro areas surrounding Denver, Boston, Nashville and Seattle as well as four counties in California.

By way of background, a conforming loan is a mortgage loan that meets the guidelines established by government-sponsored enterprises Fannie Mae and Freddie Mac. Conforming loans require uniform mortgage documentation and national standards dealing with loan-to-value ratios, debt-to-income ratios, credit scores and credit history. Conforming loans are repackaged to be sold on the secondary market. Because Fannie and Freddie do not purchase non-conforming loans, there is a much smaller secondary market for those loans.

The FHFA publishes conforming loan limits each year. Loans above the conforming limit are considered jumbo loans, which cannot be purchased by Fannie and Freddie and which typically have higher interest rates.

The Housing and Economic Recovery Act of 2008 established a baseline loan limit of $417,000 and required that after a period of housing price declines, the baseline loan limit cannot be increased until housing prices return to pre-decline levels.