A Legal Look
For average Americans, the purchase of a home is the single largest financial transaction that takes place in their lives. Even for the most savvy consumer, the real estate transaction can be daunting, to say the very least. The terms and acronyms used (escrow, amortize, equity, rescind, APR, FICO, TILA, HUD, PMI, YSP, etc.) are like a foreign language, and the mountain of paperwork involved can be mind-numbing. It would take all day to read every word of every document. The whole transaction feels like organized chaos.
The purchase of that first home should be, and for many Americans is, a very satisfying and rewarding experience. But for many others, it is a nightmare. And the nightmare starts with the simple fact that they had no representation at the closing table. In the flurry of paperwork, they signed the closing attorney's statement that states that she is working for the lender; they were handed a Mortgage Loan Inspection Survey (MLIS, one of those acronyms), which they mistook for a boundary survey; and they saw a Commitment for Title Insurance issued to the lender. To put icing on the cake, they signed various agreements to hold everyone and his brother harmless.
The homeowner eventually moves into the new place, happily, and time goes by. Five years later, a new neighbor moves in next door and this time a boundary survey is performed. The boundary survey reveals that the happy homeowner's driveway and garage encroach on the neighbor's property. Understandably, the homeowner is upset but he remembers where he put all of those papers from the loan closing. He remembers that he saw something about title insurance and a survey. He pulls out this paperwork; this is when our happy homeowner becomes not so happy. Many phone calls and Internet searches later, he comes to realize that he purchased a title policy for his lender but no policy for himself. He also comes to realize that the Mortgage Loan Inspection Survey was performed for the benefit of the lender and that it's not a boundary survey. Why wasn't he told about this at the closing table? Well, he was. These were options that cost more money and he opted for the less expensive route. Presented with an option to pay more or to pay less, most reasonable people would want to pay less-and they do.
Links to the Closing TableThis situation happens all the time. The genesis of the problem goes back to the closing table. There is tremendous pressure to lower the cost of closing a real estate deal. This was the thrust behind the Owner's Affidavit regarding survey matters and the continuing pressure to keep the cost of surveys low. And let's face it, this is the driving force behind Mortgage Loan Inspection Surveys.
We aren't the only ones on this unfortunate bandwagon, though. The legal profession allows one attorney to conduct a loan closing as long as all of the parties are made aware of it. This was a piece of paper that was also signed by our happy homeowner in that mountain of paperwork. And the attorneys aren't shy about cutting their fees for a closing if they can make it up in volume. This was one of the most disappointing facts that I discovered when I entered the legal profession and started to look at the possibility of doing loan closings. For me, as a land surveyor who once did mortgage surveys, it was dÃ©jÃ vu. What had once been a comfortable living for attorneys has turned into a low-price, high-volume pressure cooker of a business. Sound familiar?
Another Acronym: MLIS
Some states are now allowing for a hybrid survey known as the Mortgage Loan Inspection Survey (MLIS). They come by many other names, but they are all very similar: the survey is provided in a report form, a map form, or both. The biggest distinguishing characteristic between an "inspection survey" and a "boundary survey" is that with the inspection survey no corner monuments are set and less time is expended. The two most obvious reasons for having these types of surveys is to bring the costs of a loan closing survey down and to keep surveyors employed.
The MLIS is generally performed for the benefit of the lending institution. In every real estate transaction requiring a loan, the lending institution, unquestionably experienced and wise in the nuances of real estate transactions, will require the buyer to purchase a Lender's Title Insurance Policy that will protect the lender's interest in the title to the property should there be a problem. A Lender's Policy offers no protection to the homeowner. Even if the lending institution did not know to require the borrower to purchase this policy for them, the attorney at the closing table is working for the lender and could be sued for malpractice should that attorney not advise the lender in this matter. Since the surveyor is working for the lender and the attorney is working for the lender, who's working for the buyer? Unless the buyer brought his own attorney and his own surveyor to the table, no one is advising the buyer.
Title InsuranceA Lender's Title Policy will be issued in every loan transaction. If it isn't, it's malpractice on somebody's part-malpractice on the part of the attorney who did not recommend it or malpractice on the part of the loan officer who waived it. In order to remove the "survey exception" for the Lender's Policy, it seems that more and more lenders are turning to the MLIS. This may also be one of the forces behind the movement to create this hybrid survey service. There is another title policy that can be issued at the same time and for a nominal additional charge: an Owner's Title Insurance Policy. All of the work to issue this policy has already been done and the bulk of the premium has already been paid by the purchase of the Lender's Policy. So for an additional charge, an Owner's Policy can also be issued in favor of the buyer. By and large, I believe that most buyers are steered toward purchasing this protection, but depending on how the closing costs are arranged and presented, there is no guarantee that the buyer will receive an Owner's Policy, and the fact is many do not. And it's not until a title issue comes up, often many years later, that they come to the realization that they do not have title insurance.
Assuming that the buyer did receive title insurance coverage, relative to surveying matters, the biggest issue is the survey exception. Title insurance is coverage for defects in title, with certain exclusions and exceptions. Under the exceptions listed in Schedule B is the "survey exception." Generally, this exception from coverage includes language such as: "Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate (or correct) survey and inspection of the premises." Now, if the buyer had no survey performed, if the buyer accepted an Owner's Affidavit relative to survey matters based on some old survey, or if an MLIS was performed for the benefit of the lender, this could mean that the driveway and garage over the line in our example above are the problem of our happy homeowner. If an accurate survey would have revealed the encroachments, and no survey was done, it would be excluded from coverage.
There is an important exclusion to coverage as well. This exclusion is usually pre-printed on the front of every policy. Excluded from coverage are: "Defects, liens, encumbrances, adverse claims or other matters: (a) created, suffered, assumed or agreed to by the insured claimant" and "(b) attaching or created subsequent to Date of Policy." Let's assume for a moment that the MLIS will remove the "survey exception" previously discussed. Now there are two issues going on simultaneously. Since the survey wasn't accurate enough to disclose the adverse possession claim and an accurate survey would have, the survey exception may still apply. At the same time, since the survey should have disclosed the encroachment, an argument could be made that the homeowner was on notice of the encroachment and simply "suffered" and "assumed" the encumbrance, thus excluding it from coverage. Another argument could be made that the claim attached "subsequent to the Date of the Policy." Since an accurate survey would have revealed this situation, and a survey was performed, it could be construed as a subsequent event excluded from coverage under the policy.
Conditions and SolutionsI've heard the arguments both for and against the Mortgage Loan Inspection Surveys. In my home state, I have no idea how our State Standards of Practice can be met and a full-blown boundary survey performed for the amount of money that these types of surveys go for. I can't afford to do them and I'm a solo practitioner. I've heard the argument that the MLIS is just as accurate as a complete boundary survey. But I know that the reality is that surveyors have a hard enough time agreeing on the position of a corner when monuments are being set (can you say "pincushion"?). I can only imagine the conflicts that could arise when subsequent MLISs are compared to previous MLISs and to adjoining MLISs. The other big problem with the MLIS is that, knowingly or unknowingly, the surveyor is being put in the role as an advocate for the lender to the possible detriment of the buyer.
An accurate, on-the-ground boundary survey including corners found or set, along with an Owner's Title Policy is the best assurance that a homeowner can have to enjoy peaceful and quiet title to land. A lender is going to require the buyer to purchase a Lender's Policy in favor of the lender. The seller should be required to purchase an Owner's Policy in favor of the buyer. This is only logical given that the buyer is the one representing good title. And the buyer should purchase a boundary survey of the property. This makes perfect sense since it is in the buyer's best interest to know of any possible encumbrances or adverse claims before closing. It is only before closing that the buyer is in a position to force the seller to clear any defects or clouds on the title. After the closing, it's too late. The defects come along with the property, and as we have discussed, there may or may not be any help or recourse for the unsuspecting buyer. If the legal profession isn't going to step up to the plate and insist that every buyer be represented by counsel at the closing table, then the land surveying profession should take the lead and insist that every buyer be represented by an accurate boundary survey.