One of my lawyer friends forwarded a story to me yesterday. He isn't involved in real estate law, but thought I might like to know what was going on. I won't copy the whole article here, but unfortunately I can't find it online in a format that doesn't require a subscription.
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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.
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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.
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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.
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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.
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This explains some of the emails I've been receiving from various closing attorneys stating that they are still closing loans. I didn't get it until I saw the letter.
Personally, I've been calling or emailing my mortgage brokers and seeing if they are ok, and making sure they are still in business. I've started adding my closing attorneys to the list of people to check on.
Just thought I would pass this along, since I hadn't really seen this angle mentioned by the mainstream press.
(The author of the article is Andy Peters, and I think this is from Daily Report Online, however, there is no link in the article or in the headers or footers)
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