Fannie Mae Needs a New Day Job

Within the past few days I’ve come to understand something more about exactly how Fannie Mae managed to blow a whacking great hole in the American housing market and crash the world’s largest economy into the bargain.

Our firm has run a title company since the mid-1960s. Knock on wood, but not a single policy we’ve ever written has had to pay or defend a claim. A large measure of that is attributable to the fact that we’ve always done our searching in-house, and for 38 or so years we had a title searcher with a nearly photographic memory for deeds, titles, and people. She also had the kind of personality that is nearly impervious to tedium. A further reason is that our philosophy has always been that land titles must be like Caesar’s wife; “Oh let’s get it closed and we can take care of that later,” as a point of departure has been a non-starter in our office (and yes, it’s lost us a lot of business over the years, but either you do your job right or you’re an ass-hat). All of which is to say that, very humbly, I submit that we in our office know just a bit about land titles in our state and how to convey them correctly so everyone knows what he’s getting and gets what he’s been wanting. 

A few years ago two things happened, more or less simultaneously. 

The first things was that some bureaucrat at HUD who had obviously never practiced law – and more to the point, never searched a title anywhere outside the cookie-cutter subdivisions of northern Virginia – decided that he knew how to set up and close a residential real estate transaction better than the people who’d been doing it for several generations. The upshot was new regulations for closing real estate transactions subject to the Real Estate Settlement Procedures Act (RESPA), which if anything made the process less transparent for the borrower/buyer, provided an incentive for everyone to mark up his prices and generally put his thumb on the scale, and slowed down the loan approval process measurably. Whoever this pin-head of a government employee was required a bank to promise a hard number for “title services” within 72 hours of loan application. “Title services” was to include title examination, title insurance, closing agent’s fees, document preparation, and several other things that should never have been lumped together, and which in fact the “old” Form HUD-1 – the settlement statement – broke out, so that you could actually tell, you know, what you were paying for. The new HUD-1 required it all to be lumped in together and forbade anyone to break it out. 

Now, maybe you can reliably get a good title examination back on a cookie-cutter subdivision in northern Virginia in less than 72 hours. Folks, outside those sorts of environments that just doesn’t happen. You get all manner of cock-eyed legal descriptions, estates that either were never opened or nor properly administered (like having a personal representative without authority executing a deed), multiple chains of title that split, join, and split again, minors’ interests, gores in multi-tract parcels, unrecorded conveyances . . . just all kinds of stuff that can take days to do, if you do the work correctly. And of course until you know what’s out there you can’t quote a fee for what it’s going to cost. You just can’t assume that every title search will take your searcher 45 minutes. But that’s what the new RESPA rules required the bank to state to the borrower. Oh, if you discovered something in the search you could drag the borrower back to get a new good faith estimate, but then your borrower begins to get cold feet. So the situation HUD created was to pit lenders against title service providers, with the lenders having an incentive to low-ball and lean on the service providers to cut every corner they could to get it done as cheaply as possible. How’s that likely to work out? 

The second thing that happened was that our three senior staffers took one look at the new RESPA regulations and retired. As in we all attended a seminar on the new rules and within three weeks we had their letters on our desks. They took 45, 40, and 38 years experience with our firm out the door and left us majorly under-staffed. 

So we quit doing RESPA closings for a while until the dust settled (HUD kept changing the RESPA rules and the HUD-1 rules for months after they were supposed to have taken effect). But now we’re doing them again and finding out what’s changed while we were out. 

Fannie Mae, the clowns who brought you the sub-prime crisis, have a set of uniform instruments which it promulgates and requires be used for loan transactions in which it is buying or guaranteeing the paper. Those instruments vary by state, but the whole idea is that someone can buy several billion dollars of bond backed by thousands of these notes and deeds of trust (or mortgages, if your state rolls that way), and every note and security document in the package that backs those bonds will grant to the beneficiary of the note and security documents rights which are in all material respects uniform, no matter in which state the land happens to lie. Makes a great deal of sense, and in fact if were it not for the uniform instruments, the secondary market for residential loans would not exist, meaning much, much, much less home mortgage lending could occur. The secondary market is, after all, a good part of how the money gets into the system. 

Life is simple as long as you have married couples who both own the property and who both sign the note. Drop out one or the other and things get interesting. 

The instructions for our state-specific Fannie Mae uniform instrument set out those local alterations to the form document that must be made or that may be made, each depending on the precise circumstances. F’rinstance, if the trustee(s) of a “living trust” is to be the property owner, Fannie Mae wants certain portions of the document phrased certain ways. Again, makes sense. But their instructions contain no guidance at all to the situation in which both spouses are owners, but only one is the borrower (happens all the time, too). 

The instructions do contain language that applies when you have only one borrower spouse and one owner spouse (presumably the same spouse, but that’s not necessarily the case, is it?). The instructions tell you to provide that the non-debtor spouse “signs as Borrower solely for the purpose of waiving dower rights without personal obligation for payment of any sums secured by this Security Instrument.” There are several things wrong there. For starts, one does not “sign as Borrower” unless one is actually the borrower (I cannot sign “as” the president of a corporation if I am actually the janitor). Secondly, the uniform instrument contains a raft of affirmative obligations, many of them requiring financial imposition, but which are completely extrinsic to and unrelated to paying “any sums secured by” the instrument. The only sums “secured by” the instrument are those payable under the promissory note. Thus, the non-debtor spouse who “signs as Borrower” is in fact signing up for all manner of personal obligation. You as a closing agent dare not tell that non-debtor spouse that “Oh, honey, you’re not signing up to pay any money; they just need you to sign here to make sure the bank gets a good lien on the property.” Can you say, “consumer fraud,” anyone? 

But the most hilarious thing about this form document and its instructions is that “dower” as an estate in property was abolished in our state . . . in the spring of 1977. And by the way, males had “curtesy,” not “dower.” We now have “marital rights” in property, including especially property used as one’s principal residence, but those rights are very much distinct from the rights an owner has in that property (e.g., an owner has her own homestead exemption; a non-owner has only the inchoate right to her husband’s homestead exemption, should he die first). 

So if you have a non-debtor owner spouse sign the Fannie Mae uniform instrument, using the language they provide, you’ve just created an invalid lien on the property, and one which can’t be insured. The non-debtor spouse may have waived, for example, the right to claim the deceased spouse’s homestead exemption in the property, and waived the right to an elective share in the property on the first spouse’s death, and waived any right to participate in the property’s division in divorce (that, too, is a marital right against the property). But actual ownership as a cotenant far exceeds any of those inchoate interests – the tenant by the entireties owns an undivided whole interest in the entire property. 

So Fannie is only about 35 years behind the power curve, and of course does not understand the distinction between marital rights and ownership rights, it seems, at all. 

Is anyone still wondering how these muddle-headed imbeciles managed to get the housing market so wrong?

 

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