Dennis' Mortgage Blog

Question of the week:  What is escrow?

Answer:  This is a question that has not been visited in a while and was asked by first time buyers last weekend so I thought it time to give a brief overview of one of the most important services in any real estate transaction.

Dictionary.com defines escrow as “a contract, deed, bond, or other written agreement deposited with a third person, by whom it is to be delivered to the grantee or promisee on the fulfillment of some condition.” 

By this definition escrow is a third person with whom a contract is deposited.  For a contract to be valid it needs two parties, so part of the contract is that both parties agree who will be the escrow, the holder of their contract.

In real estate escrow is a third party that buyer and seller, or in the case of a refinance the borrower and the lender, use to transact funds from one party to the next; escrow is also referred to as the settlement agent.  Given instructions agreed to by both parties, the escrow holder agrees to accept funds from the buyer, and the buyer’s lender if necessary, and then after paying costs for other services involved in the transaction, deliver the funds to the seller once all promises are fulfilled in exchange for a grant deed from the seller that is delivered to the buyer.

Escrow is neutral and has no agency contract with the buyer or seller, its agency is with the transaction.  A simpler way to look at this is that the Smiths are selling their home to the Joneses.  The Smiths are represented by Mary as their real estate agent and the Joneses are represented by Joe as their real estate agent.  Once an agreement to price and terms is made an escrow account is opened with Sally at the escrow company, at that point Sally is the agent of the transaction representing the agreement the Smiths and the Joneses made.

If the Joneses wish to make a change to the agreement, say have $3000 credited to them to off-set some repair costs discovered during their home inspection, they notify Sally at the escrow company.  Sally cannot just make the change, she first must get consent from the Smiths for the credit.  Once both parties agree to any changes then Sally can amend the transaction.

Escrow plays a vital role in real estate transactions.  Large sums of money flow through escrow companies on a daily basis for purchase and refinance transactions.  Escrow is not only charged with making sure the initial instructions are followed but also that neither party is able to change the transaction without the consent of the other.  At closing escrow is responsible to disbursing funds to all the parties and services involved in the transaction, refunding overages to buyers or borrowers, fees to termite, title, home warranty, lender and themselves, and net proceeds to the seller.  After the closing escrow provides a very detailed accounting of all funds received and disbursed to all parties.

Escrow companies and officers in California can be independent of any other affiliation or may be part of a title company or owned and operated by a real estate brokerage.  If the escrow company for a purchase transaction is owned by the real estate broker representing the buyer or seller this must be disclosed to all parties.

Agents and lenders cannot require that a particular escrow company be used on any transaction, buyers and sellers have the opportunity to request a specific company if they choose, though customary in our marketplace the seller, or the seller’s agent, is given the choice of this service.

A good escrow officer and company is like a good umpire in a baseball game, you don’t always know how good they are until you get a bad one; thankfully the latter are very few and far between these days.

Have a question?  Ask me!

Italy.  Ha! Thought I’d say “Greece” didn’t you?  Greece has sort of maybe perhaps settled some of its issues with the resignation of Prime Minister Papandreou resigned and then after many, many hours of negotiations a new Prime Minister, Lucas Papademos, was sworn in as leader of a “unity government.”  (In European nations Prime Ministers are generally the head of the majority party in Parliament, if no single party has a majority and a coalition is formed then the parties negotiate whose leaders gets to be the PM.  In Greece Papademos has been selected PM with support from several parties, thus the “unity government.”)  Papademos is an economist who and former vice-president of the European Central Bank, who is crucial to Greece securing funding to continue to operate as a government. With Papademos at the helm it appears Greece will agree to austerity measures required to get the funding, i.e. bailout, needed from other European Union countries to prevent economic collapse.  So with Greece settled focus switched to Italy. 

Also getting a new Prime Minister, Italy’s Senate has passed its 2012 budget which includes its own austerity measures relieving interest rates on Italian debt that had soared from 5% in August to 7.5% on Tuesday.  With the budget passed rates have eased some and kept Italy from its rush to the brink of financial collapse and it resumes a steady pace to that brink.  With debt problems that far exceed Greece’s, Italy has been labeled at the same time too big to fail and too big to save; not an enviable position for its new Prime Minister who has not been selected.  Italy’s current PM Silvio Berlusconi has agreed to resign once a budget was passed.

Following a large drop in stock prices on Wednesday, when Italy and Greece were still muddled, stocks have rebounded the past two days as investors now think that everything is hunky-dory in Europe.  Of course it is not hunky-dory but it is a bit further away from seeing collapse of Greece and Italy, but since collapse is not happening this month investors seem happy to pump money into stocks. 

At home investors reacted favorably with stock purchases today on some positive domestic economic news this week.  First time unemployment claims on Thursday were again under 400,000 claims at their lowest number in seven months, a sign the markets took that the job market is recovering.  Today the Michigan Consumer Confidence for November was 64.2, up from 60.9 in October, a good signal for retailers heading into the Christmas season.  Perhaps the GDP gains in the third quarter were not based on consequential individual acts but instead was a sign of economy picking up a bit of momentum.  I am rather cautious with any optimism that such a reversal is taking place, but good news is always good news.

Rates for Friday November 11, 2011: Bond markets are closed today for Veteran’s Day and that is good for interest rates through the weekend. Stocks soared today which typically means mortgage rates push higher, since lenders are closed and rates are not changing from yesterday until Monday today’s rates are really yesterday’s rates.  Unless craziness occurs in Europe or elsewhere over the weekend or before markets open on Monday we probably will see rates up a little.  Rates up from last Friday as Mortgage Backed Securities bounced off of their highs last week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.875%             Up 0.125%

30 year high-balance conforming           4.125%             Up 0.125%

30 year FHA*                                       3.75%               Flat

30 year FHA high-balance*                   3.75%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Current rates include credit towards closing costs, call for quote on rate and credit.

11-11-11 A day that will get a lot of recognition for the numerology is important instead as the anniversary of the end of the "War to end all wars." When the Treaty of Versailles was signed at the eleventh hour on the eleventh day of the eleventh month it ended World War I, or as it is called in Europe the “Great War.”  Never before had mankind seen such devastation and loss of life as modern machinery was adapted to create modern warfare.  Expected to end conflicts in Europe that would range around the world to European colonies and spheres of influence, the harsh and punitive terms from Versailles directed at Germany were in no small part the beginning of the next Great War that truly engulfed the globe in armed conflict. 

On November 11, 1919 President Wilson proclaimed the day as “Armistice Day,” in 1938 November 11^th became an official federal holiday to celebrate the Armistice of World War I and to recognize the veterans of that conflict.  In 1954 President Eisenhower signed into law the bill that changed Armistice Day to  Veterans Day and a celebration of thankfulness and gratitude to all veterans who have served in our nation’s military.

Unfortunately the “War to end all wars” has not been the case and thankfully our nation has courageous men and women who volunteer themselves to defend our freedom and liberties. Thank you veterans and active duty military for your service.

Have a great week,

Dennis