A Home Equity Line Of Credit (HELOC) was so very popular back in the early 2000’s when homeowners were using their principal residences as a piggy bank. Get a line of credit for $150,000, or whatever equity you had left (or more!) and you can use it to pay off credit cards, buy that new car or boat, or just spend it on vacations all over the world. Those were the days… and was one of the contributing factors to the economic crash in 2007-2008 as homeowners overextended and were unable to meet their debt payments.
After the crash Lenders stopped giving out HELOCs, but it is getting a resurgence the last year or so. When that happens, the Escrow Officer is again put on notice on what can happen when the loan is being paid off through a refinance or sale.
The sale was closing and we obtained a payoff statement from the existing first loan lender as well as the HELOC lender. The statement on the HELOC loan stated that the credit line was being frozen and no further withdrawals were allowed. The transaction closed smoothly and the unpaid balances for both loans paid in full.
A month later we received notification from the HELOC lender that the amount they received was not sufficient to pay off the loan and could you send the balance?
Come to find out although we thought that the HELOC lender froze the account after we requested a payoff statement the Seller managed to draw one more time for $20,000 – the remaining allowable draw amount in this line. Did he tell us that he was going to do this two days before the closing? No. Was he seeking to defraud us or was that a simple error? We don’t know what was his thought process at the time.
Here we are, months later, the Seller did not have the funds to pay the balance, the HELOC lender refused to give a Release of this loan, the Buyer does not have clear title, and his new lender does not hold the position of the first loan on the property. What a mess. Under the policies of title insurance that the Buyer and Lender received, they proceeded to submit a claim to the Title Company to have this lien cleared. The Title Company will probably pay the amounts owed (plus interest accrued) by the Seller and then go ahead and sue the Seller for “unjust enrichment”.
In hindsight, it’s hard to say what else we could have been done to prevent this. All the proper procedures were done: The Seller was notified that the lien was frozen, his signature on the freeze letter is proof. The Title Company sent the signed freeze letter to the lender and called the lender to verify the amount owed before the amount was sent out. Unfortunately, the draw, the freeze letter, and the call crossed in transit and fell through the cracks on the lender’s side.
Moral of the story: Sometimes there are things (and people) that we have no control over, but if we always follow the proper procedures that will stand up in the court of law, that will be the best that we can do.
It’s just another day in Viva Escrow!
Remember, if you have questions, we have answers!