Dennis' Mortgage Blog

Question of the week:  What exactly is “escrow?”

Answer:   Escrow is the settlement procedure used in California and about eight or nine other states for real estate transactions.  Being an “escrow state,” California real estate transactions, sales, refinances, use an escrow agent to handle proceeds, and instructions from buyer, seller, lender, title, etc to ensure all parties are being given the necessary information for closing the transaction.

Types of Escrow Companies

There are three types of escrow companies in our region. 

First are escrow divisions of title companies.  In some parts of the state title company owned and operated escrow companies predominate the market, in other parts of the state they are significantly less prevalent.  Most builders and lenders selling property dictate the use of title company owned escrow companies for transactions on their properties to take advantage of bulk transaction discounts and the ability for their sales and REO department personnel to have only one escrow company to stay in contact with while managing many sales simultaneously.

Next are broker owned escrow companies.  In the State of California if someone holds a Brokers License from the Department of Real Estate that licensee can operate a real estate company, broker mortgages and conduct escrow agent activities on transactions in which the broker, or one of the licensees working for the broker are involved.  Many large real estate companies also own their own escrow companies for transactions involving the listings and sales through the real estate agency.  If you are involved in a transaction using a broker owned escrow company it must be disclosed to you up front the relationship between the escrow agent and the real estate broker.

Third are independent escrow agents and companies that are licensed by the Department of Corporations.  These companies are more prevalent in Southern California than Northern California.  As independent agents they have no legal or fiscal obligation or ties to anyone involved in any transaction beyond their duties as escrow agents. 

Duties of Escrow

Another way to look at the role of the escrow company is to consider it the agent for the deal.  If you are buying a home you will most likely have a real estate agent representing you and your interests as will the seller.  Once the price and terms are agreed to between the buyers and seller they, the terms, are given to an escrow agent and an escrow account is opened.  Once that account is opened the escrow officer becomes the “agent” for the transaction.  No party can alter or change the agreed to price and terms without consent from all parties for the change to occur. 

Escrow officers are also the great collectors.  They collect documents from the buyer and seller, the title policy, the loan documents so all parties have the information needed to approve the mortgages, issue the title insurance, record the deeds that transfer title of the property.

Escrow is also the bank for transactions.  Buyers’ initial deposits, down payment and closing costs are deposited in the escrow account.  Lenders fund loan proceeds through escrow.  All parties involved, real estate brokers, loan originators, title companies, termite companies, home owners associations, tax agencies, insurance agents, the escrow company itself, are paid through escrow.  For the seller the existing mortgages are paid through escrow and any net proceeds distributed according to the sellers’ instructions.

Selecting Escrow

In purchase transactions it has become customary in our local market for “seller choice of services” allowing the seller, but realistically the seller’s agent, to select the title company and escrow company that will be used for the transaction—hence the number of broker owned companies.  While not mandatory for the buyer to agree to the choice of escrow from the seller it usually works out that way.  As a buyer you can write in a specific escrow company in your purchase contract, and the seller can then put in a different escrow company in any counter-offer, to which you can counter back, to which the seller can counter the counter to the counter, and on and on.  I have not seen a transaction ever come apart because of a disagreement upfront over which escrow company to use. 

In refinance transactions the loan originator typically selects the escrow company that will be used, although the borrower certainly can ask that a specific company be used.

Since you will be paying the escrow fees it is ultimately up to you to use the escrow agent suggested by your real estate agent or loan originator.

Undervalued

In closing let me say that I have always felt that escrow agents are the most undervalued piece of the real estate transaction puzzle.  My summary above of their duties is just a part of all they do.  When looking at your total costs and fees in a transaction and for all parties involved and their compensation weighed against the responsibilities, liabilities and amount of communication and work that occurs through escrow you will probably agree with me that the fees paid to the escrow agents on transactions are a tremendous bargain for the service.

Have a question for me?  Ask me!

In its Weekly Application Survey released on Wednesday the Mortgage Bankers Association announced that total applications for the week ending April 9^th were down 9.5% from the week before, the third lowest number of weekly applications since June 2009 and the fifth consecutive week the number of applications dropped.  Most notable in the data was a 19.1% drop in government mortgage applications, i.e. FHA and VA mortgages.  This huge drop is attributed to the implementation on April 5^th of a higher fee for FHA’s upfront mortgage insurance premium, an increase from 1.75% to 2.25%.  Also in the survey the percentage of refinance mortgage applications is down to 58% of total applications, for much of the past year refinance applications have exceeded 65% of total applications.

Also announced by the MBA recently was data regarding households.  From 2005 to 2008 there was an estimated 3.4 million increase in the population of the United States.  During that same period the number of households declined by 1.2 million.  More people living in fewer households means a lot of families are doubling up, kids moving back into their parents’ homes, or parents moving into their children’s homes.  A big factor of course is the jump in foreclosures during the period.

Speaking of foreclosures the number of foreclosures in the first quarter of 2010 are 35% higher than the first quarter of 2009.  With several million Americans losing their jobs in the past twelve months and the failure of the majority of loan modifications banks have provided borrowers the increase is not a big surprise.  Further adding to the numbers has been the increasing frequency of commentators in all media discussing the merits of voluntary foreclosures for borrowers not because of inability to make payments but because their loan balance is greater than their home’s value. 

In economic news this week positive signs continue for the economic recovery, though as it has been for the past several months the news is sporadic indicating no consistent direction towards recovery.  Retail sales were hot in March compared to February, but that could have been better weather getting consumers out who stayed home in February’s lousy weather.  Inflation is dead flat zero for March and only 2.3%  (1.1% for core value) year over year.  Combined these two numbers speak to spurts and sputters of recovery with no positive continuous growth.  Further evidence is an increase of over 40,000 American applying for first time unemployment insurance with 484,000 applications for the week. 

Jobless recovery is the only way we will get any recovery at this stage.  Companies are reporting earnings on Wall Street and many have favorable numbers due to cutting expenses, i.e. payroll and benefits, more than due to increased revenues.  As companies see profits accrue or even grow with current staffing levels do not expect them to take hits on their income statements if they do not need to.  A further sign that employment will be lacking for a while is the small business confidence level has dropped to a seven month low.  Low confidence in small businesses means low chance of that sector adding jobs.  The vast majority of Americans are employed by small and medium size businesses.

Rates getting boost and stocks getting smashed this morning after the SEC has announced a law suit against Goldman Sachs with defrauding for its subprime mortgage trades.  Wall Street and investors hate uncertainty and when the government agency charged with oversight of a company lets it operate a certain way for many years and then years later charges them with fraud it makes everyone nervous as to who may be next.  Uncertainty leads investors in a “flight to quality” which is defined as selling stocks and buying bonds.  When that happens Mortgage Backed Securities, i.e. mortgage rates, benefit.

Volatile is the only word to describe our current mortgage market.  Since the Federal Reserve exit from the MBS market we have seen huge swings in price daily as there is not big buyer in the room to add stability and direction to the market.  We have seen big gains and sell offs in one day and from one day to the next.  This makes it incredibly difficult to predict direction and strategy.  When that happens my strategy is always: lock as soon as can through the end of your escrow period.  Take away risk for a higher mortgage rate and higher monthly mortgage payment.

Rates for Friday April 16, 2010: Big ups on Monday and Friday with some downs in between generate mixed results from flat to down for rates depending on the product.  Note we have some “tweener” rates that are not exactly priced on the one point number with possible credit towards some costs this morning.  Call for your scenario and accurate numbers for your specific situation.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.875%                            FLAT

30 year conforming-jumbo 5.00%                     Down 0.125%

30 year FHA    4.75%                                      FLAT

30 year FHA jumbo 4.875%                            Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked. 

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Big weekend for Long Beach as the Grand Prix makes its annual appearance, the city is literally buzzing with the sounds of the race cars! Vrrroooommmm! Sounds like commerce to me!

Have a great weekend everyone, let me know how I can be of service to you.

Dennis