The blog focuses on the COVID-19 impact on the Title Companies.
This is true that like many other businesses, the real estate has also received a sudden blow owing to the COVID-19 pandemic. Many transactions are either cancelled or delayed. County offices are closed. Some borrowers are asked to sign affirmations stating that they will not opt for Refinance or Loan Modification during this time. According to anticipations once the pandemic subsides and businesses normalize with the extent of economic damage getting clearer, there will be a definite surge in Bankruptcy.
As per the revised CARE Act (new federal stimulus bill), the debt limit for minor bankruptcies has been increased from 2.7 million to 7.5 million for a year in the small bankruptcy section. This means almost 90% of the total filed cases will earn eligibility to avail bankruptcy provisions. There will be an inevitable surge in bankruptcy filings because unlike the 2005 bankruptcy amendments the new provisions are more debtor-friendly.
Now, what does this indicate for the Title Industry? What will be the COVID-19 impact on Title Companies?
Unfortunately, debtors and bankruptcy trustees are making claims to sidestep mortgages as preference recordings. The same issue arose in the early 2000s when the register of deeds was flooded with a lot of refinancing transactions. That led to a backlog of almost nine months in the recording.
The main problem here is created by the Bankruptcy Code Preference Provision itself. The time limit allowed by the Bankruptcy Code to perfect an interest is only 30 days. Therefore, a mortgage which is to be perfected and not subjected to a preference is needed to be recorded within 30 days with the register of deeds. If it is not done in the stipulated time and the debtor files bankruptcy say within 90 days (or if the mortgage is not recorded even at the time of bankruptcy filing,) the debtor or bankruptcy trustee can go ahead and file a lawsuit accusing the lender to be unsecured thus avoiding the mortgage.
For instance, Max and Donna opted for Refinance on March 30th this year. At that point in time, the register of deeds was closed and no mortgage could be recorded. The register of deeds reopened on May 15th and there was already a backlog of 45 days in recordings. On June 15th Max and Lorry filed for bankruptcy after Max lost his job as a construction worker. They had already exhausted their stimulus checks and Max’s unemployment checks were not enough for the bill and revenue coverage.
Now as per preference, the mortgage is subject to avoidance since it was not perfected within 30 days since execution. Luckily there was a case in Michigan which might apply here. The court ordered to release Equitable Relief as the mortgage could not be recorded within the set period for an unavoidable circumstance and there was a backlog in the register of deeds. It further affirmed that as long as the mortgage would be in recordable form and could be presented to the register of deeds within 30 days, it would be considered recorded. Given the situation of the government shutdown, following the Michigan case verdict, the title companies might have to beseech equitable principles for unrecorded mortgages this time as well.
In fact, during the early 2000s, title agents were permitted to bring forward their recording logs to state the dates of document submission for recordation. We have to wait and watch if the same practice will recur this time.
There’s another issue which is going to crop up under all probabilities – the issue of dodgy debtors going for refinancing or opting for several mortgages on their houses taking undue advantage of the shutdown as the title companies could not even track or check the register of deeds. This also happened in the early 2000s when many unscrupulous debtors played the system by taking out manifold mortgages with diverse lenders that too in rapid succession. They took full advantage of the register of deeds being distressingly behind. The fraud was exposed much later; the corrupt borrowers encountered lawsuits and adversary proceedings but for the time being the title companies were faced with a lot of difficulties.
The current times are undeniably tough but can be controlled with an effective contingency plan at place. The title companies need to:
- Act extremely vigilant while documenting attempts of mortgage recording
- Monitor the act of taking out multiple mortgages on the same property closely
- Pursue bankruptcy claims actively by filing adversary proceedings on time
- Engage Bankruptcy Counsel well in advance given the limited period for defending and pursuing claims
While these are some of the added missions of the title companies brought forward by the pandemic, the usual title services of examination, audit, imaging, indexing, closing etc. need to also get done on time. This means the title companies would require additional resources to serve their clients properly. Having a new team of trained and experienced resources ready is literally impossible going by the time shortage. A rather viable option would be outsourcing some of your title works to an equipped team who can effectively support you in bearing this uneven workload.