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Don't spend that escrow windfall

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POSTED January 12, 2012 6:50 p.m.

DEAR BENNY: We moved to Jacksonville, Fla., in 2010, but still own a home in Pensacola that we are renting to some friends. We got a check in the mail for an alleged overpayment from escrow. I remember telling my wife that the home insurance (was listed wrong) on the HUD-1 form, so we figured it was discovered, and we were reimbursed. We used the money to pay bills.

Next thing we know, we're getting a notice that our Jacksonville home insurance hasn't been paid. We spent many hours over several days trying to find out what happened, and got a pretty good runaround. We got them to check the address on the request, and they finally realized the mistake: the address was for the Pensacola house, not the Jacksonville house. The insurance had been double paid.

They asked for the money back and we told them we used it to pay our bills, so we didn't have it. Now the lender has notified us that it has to increase our mortgage payments by $300, so a roughly $700 monthly payment is now over $1,000.

Now, we will be at risk of losing the property because we won't be able to make the payments. Any advice you could give us would be greatly appreciated. --Bruce

DEAR BRUCE: I believe I am a strong consumer advocate, but try to be fair to everyone. I do not agree that your lender has the right to increase your monthly mortgage payment based on its mistake. But at the same time, you have to admit that you were unjustly enriched. You got money that you were not entitled to receive.

I would first contact your insurance carrier. If, in fact, the insurance for the Pensacola property has been double paid, you should be able to get that money back.

Has the insurance on the Jacksonville house been paid? That, in my opinion, is the most important issue. While you and your lender are arguing over who pays what, you have to be sure that there is insurance coverage on your house.

I would also talk to the lender, explain the situation, and see if a more modest payment plan can be worked out.

But, in my opinion, the bottom line is that you should not have used those funds until you were satisfied they really belonged to you.

DEAR BENNY: I am a one-third owner in the family home, along with my sister and sister-in-law. My sister has been living in the house since my father died 20 years ago, rent free. She has not and will not communicate with me. I know nothing about the house or the finances.

What do I have to do in order to be brought up to date on the property? I am 85; she is 89. It is a two-family house with the upper apartment rented. I don't know what the rent is, or what bank is being used. The property is in Connecticut, I live in upstate New York. --Joseph

DEAR JOSEPH: It's always a shame when brothers and sisters squabble, especially after reaching adulthood. I know that it may cost you some money, but you should consult a real estate attorney in Connecticut, where the property is located. The lawyer should first determine the status of title. Are you certain that you are a one-third owner?

You should also discuss the matter with your sister-in-law. Does she have any more information she can share with you?

Your attorney will write a friendly letter to your sister, advising her that you want information, and that if she does not cooperate, you will have to file suit against her. While I am sure that you would prefer not to do this, you have potentially lost (and may still be losing) a lot of money.

More importantly, you want to make sure that your last will and testament properly disposes of your one-third share in the house.

DEAR BENNY: My wife and I signed a purchase agreement in June 2011 with anticipated delivery of November/December. In September, we were advised that delivery would be delayed until March/April of 2012. When we asked the reason for the delay, we were eventually told that the developer did not have the finances in place yet to begin development of that phase.

This is the first we had heard that there even were phases. We initially stated which lot we wanted, and the sales agent said he had to get permission to release that particular lot. He never stated that, in fact, the lot we had purchased was in phase two. Can this be considered nondisclosure? Is there any way out of this contract? Ten months versus five months is an unreasonable time for the seller to deliver a house, in our opinion. Any guidance you can provide would be greatly appreciated. --Emory

DEAR EMORY: Yes, it is a long time to wait, and the delay could cause you to have problems getting a good loan.

However, I need more information. Is the home in a community association? If so, does your state have laws requiring the seller to provide you with the right to cancel the contract within so many days after receiving the information about the association (usually called a "public offering statement")? If so, was there any information about phasing?

Equally important is the real estate contract you signed. Does it spell out a time for settlement? The typical new-home sales contract is very friendly to the seller; usual language says "settlement will take place within one year from date of contract execution."

However, there is also language regarding "force majeure." That means that if circumstances outside the control of the seller occur -- such as bad weather or inability to get bricks from China, etc. -- the settlement date can be postponed.

I would have to read your contract before giving you a legal opinion. If you really want to get out from under that contract (something that is not always easy) please consult a local real estate attorney.

DEAR BENNY: My wife and I own a condo that is subject to a mortgage. The mortgage document is an Illinois Single Family Fannie Mae/Freddie Mac Uniform Instrument Form 3014 1/01. It is my understanding that Fannie Mae and Freddie Mac are agencies regulated by HUD (the U.S. Department of Housing and Urban Development. How can I find out whether our mortgage document is regulated by HUD? --Sidney

DEAR SIDNEY: Great question, and easy answer. You are correct that Fannie Mae and Freddie Mac are regulated by the Department of Housing and Urban Development. Both of these agencies are currently in deep trouble -- and debt -- based on their activities with subprime mortgages and syndication, but that is a subject for another column.

Typically, when you borrow money to buy (or refinance) a home, you sign two important documents: a promissory note and a deed of trust (although some states still use mortgage documents). Years ago, when mortgage brokers were making mortgage loans, they often used different legal forms.

To get more money so as to make more loans, those loans were sold to such secondary lenders as Fannie Mae and Freddie Mac. The secondary lender would then bundle these loans up and sell them to investors throughout the world (this is a very oversimplification of syndication). But these investors were troubled; the forms were different and thus could cause problems if and when the borrowers went into default.

As a result, Fannie and Freddie created uniform instruments, which all mortgage lenders and brokers had to use. However, the lending laws in the various states also differed, so a separate state form was created. The state form tracks local law, where applicable, but in general is consistent with all other state forms.

So, long story short: Your loan is on an Illinois state uniform document. It is regulated by HUD, and you have all of the protections under Illinois law as well as federal lending laws.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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