A Real Crisis

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troll's picture
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The crisis expands.
Apparently there are attorneys holding millions, perhaps billions, of dollars in bad checks issued by mortgage companies and banks.
Apparently this is what happens in the process of closing a mortgage.
The closing attorneys maintain an escrow account that is used to pay all of the costs in closing--INCLUDING PAYING OFF THE EXISTING MORTGAGE.
They use money that was sent to them by the new mortgage company as well as a bank check presented by the new buyer for their downpayment.
Well, those new mortgage company checks are bouncing--leaving the attorney with a negative balance in their escrow account and not much recourse to collect from the failed mortgage company.
This is a real crisis boys and girls.

troll's picture
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DAtoo wrote:
Well, those new mortgage company checks are bouncing--leaving the attorney with a negative balance in their escrow account and not much recourse to collect from the failed mortgage company.
This is a real crisis boys and girls.

I don't believe a word of that.

troll's picture
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mikebutler222 wrote:DAtoo wrote:
Well, those new mortgage company checks are bouncing--leaving the attorney with a negative balance in their escrow account and not much recourse to collect from the failed mortgage company.
This is a real crisis boys and girls.

I don't believe a word of that.

I didn't think you were bright enough to grasp it.

ezmoney's picture
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DA,
I don't think you're too bright.
 

troll's picture
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mikebutler222 wrote:DAtoo wrote:
Well, those new mortgage company checks are bouncing--leaving the attorney with a negative balance in their escrow account and not much recourse to collect from the failed mortgage company.
This is a real crisis boys and girls.

I don't believe a word of that.I would rather not believe it, but can conceive how it could be happening.I rather doubt that it could be in the billions or even the high hundreds of millions, but even relatively small amounts could be enough to hurt real estate sales cause further problems with any related transactions, including wholesale funding to otherwise stable lenders.

troll's picture
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ezmoney wrote:
DA,
I don't think you're too bright.
 

I think he is bright. Let me explain...This guy's mind runs a million miles and hour and the only way he can slow it down is to hyperfocus on something. I feel sorry for him. He's not doing this because he's an asshole (like me). He's absolutely powerless over choosing not to do this. This guy cannot walk away. Even if he wants to, which he probably does, he CAN'T do it. Nobody that CAN stop would choose to give up life's pleasures to haunt people on the internet. I will pray for him.

troll's picture
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DAtoo wrote:mikebutler222 wrote:DAtoo wrote:
Well, those new mortgage company checks are bouncing--leaving the attorney with a negative balance in their escrow account and not much recourse to collect from the failed mortgage company.
This is a real crisis boys and girls.

I don't believe a word of that.

I didn't think you were bright enough to grasp it.

 
You're one dimbulb, DA. You provide zero supporting information and you provide an extremely unlikely scenario, that mortgage companies are writing bad checks. Not having access to new capital to write new mortgages (until they can be packaged and sold) is one thing, writing bad checks for closing is another. Until I see some supporting evidence, I call BS on this one.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
 You’re not only an OCD victim, you’ve proven over and over again here that you’re panic prone. It’s a good thing you never handled people’s money for a living.
 

troll's picture
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Thursday, August 16, 2007Closing attorneys see red after receiving bad checks from HomeBanc Mortgage
JOHN K. HALEY, a real estate closing attorney in Buford, left work July 31 thinking the HomeBanc mortgages he’d closed earlier that day had cleared.
That turned out not to be true. Haley was one of dozens of Atlanta-area real estate closing attorneys who received bounced checks last month from HomeBanc Mortgage Corp. Lawyers estimate HomeBanc may have issued $20 million or more in bounced checks July 30 and July 31. HomeBanc filed for Chapter 11 bankruptcy protection Aug. 9.
Because HomeBanc’s primary lender, JPMorgan Chase, stopped financing the company around the end of July, HomeBanc could no longer provide funds on the mortgages it had sold. That caused a big problem for some lawyers: HomeBanc had already issued checks to these lawyers, who then disbursed the money to sellers, real estate agents, surveyors and others.
That left numerous lawyers high and dry.
“These lawyers are really scrambling right now,” said C. Scott Logan, president of the Georgia Real Estate Closing Attorneys Association.
While the state’s “good funds” law requires lawyers to wait until checks have cleared the bank before closing a mortgage, in practice most real estate closing attorneys close mortgages when they have the check in hand, without waiting for the money to clear, Logan said.
In addition to being stuck with thousands, if not millions of dollars in bounced checks, these lawyers also worry they may have violated State Bar of Georgia rules. That’s because they could have disbursed money from an escrow account when the money really wasn’t there, creating a negative balance. It’s a violation of Bar rules for a lawyer to have a negative balance in an escrow account.
Senior staff members with the State Bar met Tuesday morning to review the situation and determine whether the lawyers were in violation of bar rules. As long as the lawyers took steps to ensure the money disbursed to home sellers was covered, they aren’t in violation, said State Bar General Counsel William P. Smith III.
“[The lawyers] have to take steps to prevent any other funds in their escrow account from being adversely affected,” Smith said. “Some of those funds in the escrow are other people’s funds. If the lawyer doesn’t step in and make certain those other funds are not affected,” they could be subject to disciplinary action.
Unfortunately for many real estate closing lawyers, that has meant taking out home equity loans on their own homes, maxing out credit cards or scrounging up money in some other way from their own personal accounts to cover for HomeBanc’s mistake.
The State Bar’s Smith also suggested that lawyers affected open a second escrow account for collecting money on any future real estate closings, for the purpose of limiting their exposure to their initial escrow account.
The matter is further complicated because HomeBanc was one of a very small number of mortgage lenders who continued the practice of funding the mortgages they sold with company checks, rather than via wire transfers, said Dickenson Gilroy managing partner Jennifer L. Dickenson.
“Having that check from HomeBanc had never been a problem before,” said Dickenson, whose firm did not receive a bounced check from HomeBanc.
Logan said the real estate closing attorneys group, likely would lobby the state Legislature to change the “good funds” law to disallow the use of company checks from mortgage lenders in closings, requiring them to use wire transfers or certified checks. That would protect real estate closing attorneys if other mortgage lenders collapse.
Most real estate closing lawyers probably never dreamed they would be in a position of having to front their own money for someone else’s mortgage, Logan said. “None of us had ever really contemplated that scenario,” he said.
But State Bar Advisory Opinion No. 28, issued Nov. 20, 1981, warns that lawyers are “personally responsible” for checks that are issued.
“Any attorney who closes a real estate transaction on a sight draft or a similar item is personally responsible for any check written by such closing attorney on such a transaction,” the opinion reads.
The opinion goes on to say that the lawyer hasn’t violated the bar’s ethical rules if the lawyer was unaware the funds were insufficient. “Such a closing attorney has not acted unethically unless it was known, or there was reason to know, that the sight draft or similar item would not be honored,” the opinion reads.
It’s likely that some ethical issues will arise when checks don’t clear their banks, Smith said. “We may see a ripple effect in the next couple of weeks,” Smith said.
In the meantime, the law firms that received bounced checks from HomeBanc must proceed with trying to be made whole. Some of those law firms formed a committee in federal bankruptcy court in Delaware. Members of this committee include Morris, Manning & Martin; Weissman, Nowack, Curry & Wilco; and Neel & Robinson.
Several other Georgia law firms were listed by HomeBanc in court filings as creditors, but as of Tuesday afternoon these firms had not joined the bankruptcy court committee. These include Morris Hardwick Schneider; Hudnall, Cohn & Abrams; and Smith, Welch & Brittain of McDonough.
HomeBanc’s collapse
HomeBanc collapsed even though the vast majority of its loans were floated to so-called prime borrowers—in other words, borrowers with good credit who appeared able to pay off their debts.
Several other U.S. mortgage companies that have collapsed in recent weeks had floated most of their loans to sub-prime borrowers, people with poor credit scores.
“To my knowledge, HomeBanc did things the right way. They did very little sub-prime lending,” said Richard T. Smith, managing partner of real estate firm Smith, Ronick & Corbin, which wasn’t affected by the HomeBanc bankruptcy.
But the crash of the broader U.S. housing market brought HomeBanc down with it. As an increasing number of borrowers defaulted on their mortgages, and as housing prices plummeted, HomeBanc and others were squeezed along with the sub-prime lenders.
Logan said some Atlanta lawyers expect HomeBanc to ask the bankruptcy court to approve the transfer of ownership of the loans for which its checks bounced to the real estate attorneys who closed those loans.
But Haley, the Buford real estate attorney, said he’d oppose such a move, because it would put him in the position of becoming a mortgage bank. “That’s a losing proposition for us,” Haley said. “That’s not our business. We wouldn’t know what we were doing.”
Other lawyers might support such a move by HomeBanc, because it would allow them to recover some of their assets, Logan said.
HomeBanc’s collapse was not an isolated incident—dozens of other mortgage lenders have filed for bankruptcy in the past month, including New Century Financial Corp. of California, American Home Mortgage Investment Corp. of New York, and Aegis Mortgage Corp. of Texas. The biggest independent U.S. mortgage lender, Countrywide Financial Corp., also could be forced to file for bankruptcy, Bloomberg News reported Thursday.
Although it’s a felony to bounce a check for more than $500 if the check-writer knew there weren’t sufficient funds to cover the check, it’s unlikely HomeBanc executives will face criminal charges from the bounced checks, said Atlanta criminal defense attorney Steven H. Sadow. That’s because bankruptcy laws will trump other laws, he said.
“I would think that anyone who receives a bad check notice will immediately go to the bankruptcy judge and seek some form of an order,” Sadow said. “It’s a horrible situation for a lawyer to be in, but if HomeBanc is in bankruptcy, that’s going to take priority over everything.”
The judge assigned to HomeBanc’s case is Kevin J. Carey of the U.S. Bankruptcy Court, District of Delaware. The case is In re: HomeBanc Mortgage Corp., No. 07-11079.
In the bankruptcy case, Morris Manning partner Frank W. DeBorde is representing the committee of real estate closing law firms. The Wilmington, Del., law firm Ashby & Geddes is working with DeBorde on the matter. DeBorde declined to comment on the case.
Young Conaway Stargatt & Taylor partner Joel A. Waite of Wilmington, Del., is lead counsel to HomeBanc on its bankruptcy proceedings. Alston & Bird partners Dennis J. Connolly, Matthew W. Levin and Jason H. Watson and associate Jennifer M. Meyerowitz are co-counsel to HomeBanc.

blarmston's picture
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And to think... About 18 months ago real estate "could only go up..." It's quite a debacle...

pretzelhead's picture
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DAtoo:  There's always a crisis, too bad you don't have an FA to assuage your concerns.

Big Taco's picture
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I don't think I'm alone in smiling a little whenever I read that a bunch of lawyers are getting screwed.

troll's picture
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Good for you, DA, you should have considered offering evidence with your opening. Now, I'm unfamiliar with "The Daily Source", and it's interesting that they would be the people to get the scoop, but at least it's a source.
Let's take a look at what happened here, to see if your panic is warranted.
“These lawyers are really scrambling right now,” said C. Scott Logan, president of the Georgia Real Estate Closing Attorneys Association.
While the state’s “good funds” law requires lawyers to wait until checks have cleared the bank before closing a mortgage, in practice most real estate closing attorneys close mortgages when they have the check in hand, without waiting for the money to clear, Logan said.
Something tells me this isn't the first time a lender has gone under, or the first time a lawyer that didn't follow the lawe and wait for the checks to clear got caught short. "Laywers say" $20MM was involved. Reason to panic? Not in my book, but it is good to know.

liquid's picture
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Where's the crisis, HMB with $119 mil sales and $15 Mkt Cap was a small time player?

troll's picture
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Twenty million here, twenty million there and pretty soon we're talking about serious money.
The boys and girls can sit out there like Alfred E Neuman muttering, "Hold your position" if you want to--but what you fail to grasp is the Dow could lose half it's value--we could see well below 10,000.
Clients figure you're dumb as a stump, they'll never trust you again and you can forget about referals.
What do you see as the good news to turn the market around?  What is going to bring the bids back?

whitewlfz's picture
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You might want to check out www.ml-implode.com .. they also have one for hedge funds linkes..it is basically a bot that is admined occassionaly to determine when lenders go belly up .. interesting site ... they have had over 10 new additions since I found the site referrenced on here actually.. check it out ..that article is on there also ..as well as Chayuga (spelling ) county is refusing to let certain banks do business..
 

troll's picture
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DAtoo wrote: <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Twenty million here, twenty million there and pretty soon we're talking about serious money.
Tell us, Nervous Nelly, how many 20 millions would it take to reach the "possibly billions" you mentioned? IOW, yawn….
DAtoo wrote:
The boys and girls can sit out there like Alfred E Neuman muttering, "Hold your position" if you want to--but what you fail to grasp is the Dow could lose half it's value--we could see well below 10,000.

And we "could" well see it snap back after bed-wetters like you return sanity. You can babble about “hold” being having an element of risk, but you never seem to mention the element of risk that comes from acting in a panic, as you’re doing now. Which would have the most devastating effect on a client’s long term financial health, holding quality and even adding to positions, or panicking and going to cash?
What experience and training do you have that makes you think you can time the market with other people's money?
DAtoo wrote:
Clients figure you're dumb as a stump, they'll never trust you again and you can forget about referals.
Clients who expect you to time the market are clients you don’t want. Remind them that when we started this journey you told them that market downturns were common, often strong and couldn’t be timed with any real accuracy. They look to you to be the strong hand, not the sob sister you’re being.
This is a rerun of your panic of March, and is another fine example of why it’s a good thing you were never allowed to handle the money of other people for your livelihood
 
DAtoo wrote:
What do you see as the good news to turn the market around?  What is going to bring the bids back?

The market, short term, is a popularity contest, in the longer term, it’s rational valuation process. Bids will return when sanity returns and people realize that Apple isn’t at risk because some lawyer in <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Atlanta who didn’t allow a mortgage company’s check to clear before he closed on a property.
 
 

blarmston's picture
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This is a rerun of your panic of March, and is another fine example of why it’s a good thing you were never allowed to handle the money of other people for your livelihood.
Thats not entirely true. A couple years ago he told the story about some little old lady who came to him with $800k or so. He blew her up by putting it all in muni bonds. May have been in a single issue or two but I cant recall exactly.
He has vast experience.

troll's picture
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blarmston wrote:
This is a rerun of your panic of March, and is another fine example of why it’s a good thing you were never allowed to handle the money of other people for your livelihood.
Thats not entirely true. A couple years ago he told the story about some little old lady who came to him with $800k or so. He blew her up by putting it all in muni bonds. May have been in a single issue or two but I cant recall exactly.
He has vast experience.

 
You're right, I should have said something along the lines of "it's a good thing you quickly failed at this, and didn't handle other people's money for very long"....

EDJ4now's picture
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I don't remember the details, but back when I was an attorney something similar happened when a mortgage company went belly up.  I believe that ultimately the title insurance company had to pay up to cover the bad check.  Something in the fine print of those title policies.
This may not be the case here, and they may not have title insurance, but my (very limited) experience with this the title insurance company made everyone whole. 

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