Short Sales Pose Risk for a Release to Come After Closing

Robert P. Lindfors

In the course of closing an escrow transaction, title agencies are expected by their customers to assume the risk that a release of a deed of trust will be promptly returned by the lienholder after the creditor collects its entitled portion of the closing proceeds. Lenders will not ordinarily deposit the Release and Reconveyance into escrow before closing. Rather, title agencies rely upon the lender’s written payoff statement.

This longstanding “to come” process is supported by the Arizona statutes. A.R.S. § 33-712 obligates a creditor to return its Release within 30 days of receipt of monies to satisfy the debt secured by the deed of trust or mortgage. As closers have sadly learned, there are some out-of-state lenders who have not honored their payoff statements and have neglected to return the Release. Judicial intervention is then necessary.

Title agencies are cautioned to be especially vigilant about relying upon a Release “to come” after closing in this season of discounted loans. The Short Sale is closed with discounted loan amounts.

A short sale of a house for a sales price that is less than the cumulative amount of the loans can only be closed if the mortgage holders consent to a discount. There are perils to closing a short sale. The discounted loan amount is often negotiated verbally on the eve of a scheduled foreclosure auction. The sellers or their agent are negotiating with the loan servicer rather than the lender. The identity of the lender may not even be known where the lienholder appears of record to be MERS.

Closers are cautioned to not close and not commit to insure the buyer and their lender free and clear of the deed of trust with the Release “to come” after closing:

• Unless the discounted payoff loan amount is committed and documented in a payoff statement furnished to the closer by a servicer authorized to commit the lender to the discount, or

• Require the buyers to assume the risk thereof and decline to insure over the unreleased deed of trust and, instead, show it as an exception from coverage in Schedule B of the buyers’ owners policy until the Release is returned and recorded.

The closing of a short sale poses extra hazardous risks. To safeguard against those risks, title agencies are recommended to not rely upon the Release “to come” after closing without a written payoff statement for the discounted loan amount.

This article is made available with the understanding that it is informational only, and it has not been prepared to provide specific legal advice that may be relied on by a reader. The author is under no obligation to update the information in the event of a change in the law.