Law.com - Lawyers Learn From HomeBanc's Demise
Closing attorneys vow to accept only wire transfers after dealing with lender's bounced checks
Andy Peters
Fulton County Daily Report (full text)
August 23, 2007
Even though a bankruptcy judge in Delaware this week saved them from financial ruin, real estate closing attorneys said they learned a powerful lesson from the collapse of HomeBanc Corp. -- never accept anything but a wire transfer at closing.
At least a dozen Atlanta-area law firms received bounced checks from HomeBanc last month, before the company filed for Chapter 11 bankruptcy protection Aug. 9. By HomeBanc's count, it bounced 134 checks worth at least $18 million, but the Georgia Real Estate Closing Attorneys Association estimates the figure was $28 million.
Assuming HomeBanc's checks were backed by sufficient funds, lawyers had disbursed the money at closings -- not only to the home's seller and the previous mortgage holder, but also to agents for their commissions and to surveyors, court clerks and others whose payments occur at closing.
When the checks bounced, lawyers had to scramble to find ways to cover their positions. Some took out home equity loans, others filed claims on their Errors & Omissions insurance policies.
On Tuesday, the bankruptcy judge handling HomeBanc transferred ownership of the loans to the closing attorneys. This move lets the lawyers recover their money by selling the loans to banks or other mortgage lenders.
The bounced checks occurred as a result of HomeBanc getting squeezed by broad turmoil in the U.S. housing market and the global credit market. As the market tanked, HomeBanc's primary source of funds, JPMorgan Chase, on Aug. 6 cut off money for the mortgages HomeBanc sold, according to HomeBanc's court filings.
Regardless of the problems in the market, attorneys said the rubber check problem could have been prevented simply by requiring HomeBanc to fund its loans with wire transfers.
As a result, "some law firms are requiring 100 percent wired funds from everybody -- lenders, buyers, even other attorneys," said closing attorney Jennifer L. Dickenson of Dickenson Gilroy. "There is a really high sensitivity right now to how we get the money into our accounts."
Why HomeBanc was allowed to fund mortgages with company checks, when the large majority of other mortgage lenders paid only by wire transfer, speaks to the clout HomeBanc carried in metro Atlanta -- if not its level of intimidation.
"They were big enough they could frankly bully everybody," said Jeffrey P. Ganek, managing partner of Ganek, Wright & Dobkin's Midtown office. "You had to follow their rules."
HomeBanc, or any mortgage lender, benefits by funding loans with checks as opposed to wire transfers, Ganek said. While wire transfers represent an immediate shift in money, checks take days to clear a bank, allowing HomeBanc to earn more interest on the money as it sat in escrow, Ganek said.
"Even if it's only a day or two extra it's sitting in an interest-bearing account, if you're doing enough loans, it's a lot of money," he said.
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