1999 Practice Update - Issues Affecting Real Property
Chris Burti, Vice President and Legal Counsel

What does the future hold in store for real property practitioners? It seems that this is the topic of the most intense interest at every gathering of real property practitioners that we have attended recently. Opinions abound and run the gamut from doom and despair to wishful optimism. We believe that the doomsayers are premature in their predictions, but they will be proved correct if appropriate action is not taken in time. Times change and with time the practice of law changes also. Often the changes are viewed with regret as they occur, but with the further passage of time, most changes are viewed, in large part, as beneficial.

Some changes such as the adoption of the Rules of Civil Procedure alter an area of practice virtually overnight. Other changes are more in the nature of trends and actually occur over decades. The change in real property practice has been the latter kind. However, cultural and technological advances have dramatically accelerated the pace of this change.

One of the trends having the most impact on our area of practice is the increasing demand by the consumer for faster delivery of services. Consumers are able to walk into a car dealership, negotiate a deal, secure financing and drive their new vehicle away in less than two hours. These consumers want to be able to do the same with their land transactions and are unwilling to accept the traditional 30 to 60 day timeline. They will place their business with the lender who can deliver a competitively priced financial service in the shortest time. This in turn drives the lenders to place pressure on all of their service providers. Ultimately providers that are unwilling or unable to deliver are eliminated from the process or they are actually absorbed by the lenders.

Often this process of elimination favors providers who are efficient and can meet the demands of the consumer. However if the particular service industry in its entirety cannot, or will not, deliver it will be virtually eliminated from the process or absorbed by the lending industry. If you believe that this is merely academic conjecture, observe the acquisition of life, casualty and title agencies by banks. The banking industry is pressing for legislation to allow them to own title companies and already have attempted to secure approval to conduct closings in North Carolina. Consider also, the examples of pest inspectors and surveyors. In the mid-eighties, liability verdicts caused termite inspectors to report every spot of damage observed no matter how minor or irrelevant. These reports often required costly, and often unnecessary, inspections or repairs resulting in delayed or canceled closings. As a result, Fannie Mae and Freddie Mac have eliminated pest inspection as a loan condition. Surveys take time and are subject to weather. Too many firms were unwilling to invest in staff and technology needed to keep up with the demand for services resulting in unacceptable delays. This too has resulted in the elimination of the requirement for a survey, as a loan condition, in most instances. Appraisals are perceived as necessary, but the delay in obtaining a traditional one using market comparables is becoming unacceptable. Electronic appraisal services utilizing huge databases and complex formulae are proving to be accurate enough to reduce risk to an acceptable level in residential transactions. These services are steadily supplanting the traditional appraisal at an accelerated pace, and we have heard the end of traditional appraisals in residential transaction being predicted to occur within the next five years.

The secondary mortgage market has made a decision, based upon risk analysis, that loan defaults arising from termite damage cost less than lost business due to delays. Some lenders have made an internal decision to continue the requirement. Some realtors and attorneys are successful in counseling their clients to obtain an inspection so that the practice continues although much diminished in many areas. Likewise, title insurers have made a similar risk decision with regard to surveys. Title companies have concluded that they pay no more claims resulting from the lack of a survey than from inaccurate ones. Consequently, surveys are rarely ordered in residential transactions unless the attorney is persuasive in explaining the benefit to the consumer relative to the cost. Time pressures on the attorney are beginning to reduce the effort expended in this area resulting in consumers making less well informed decisions or, worse, decisions by default. Since the owners policy will except to survey matters, the consumer bears all risk of loss.

Real property practice in attorney states is under the gun. Title assurance in such states is moving to the forefront of services perceived as extending the timeline from loan application to sale of the paper. Lenders are putting ever-increasing pressure on the providers of these services to shorten the time from order to delivery. Title companies are investing huge sums of money in technology to enable on line document transfer and improve service delivery. Some of this development will be available to the attorneys and will help their ability to shorten service delivery times. Title companies are also loosening underwriting guidelines. Search period requirements are being dramatically shortened, defects are routinely insured without corrective action, and the resulting risk of loss is being shifted to the consumer through owner’s policy exceptions.

Attorneys are responding to these developments in a profusion of courses of action. In order to keep this editorial comment focused we are oversimplifying our characterization of these responses. Some attorneys are digging in their heels, adamantly proclaiming their refusal to change in any way and insisting that those who do so are lowering professional standards. Some of these take an inordinate amount of time to complete a search, demand cures for minor defects that do not affect marketability of title and refuse to comply with loan closing instruction. Other attorneys are taking advantage of every opportunity to lessen the search requirements and utilizing non-attorney personnel for more tasks with minimal or non-existent supervision. They are minimizing the attorney involvement throughout the entire process while requiring the insurer to insure over disclosed defects without being cured. This is actually shifting risk from the attorney to the consumer, title insurers and malpractice carriers. Other attorneys are using technology and well-trained and supervised staff to effectively reduce the time involved while maintaining prudent and professional standards in their title examination and curative practices. Finally, the response of most attorneys involves some aspect of all of the foregoing.

The first two types of response and the last combine to form a strategy that may bring about the predictions of the doomsayers. In the first example, attorneys will be perceived as adding value by increasing certainty and assuming risk. The value these attorneys add is largely offset by the reduction in value caused by their delay. They are considered anachronistic obstructionists and will, ultimately, be legislated out of the process. In the second example, attorneys bear little risk and add little value to the process that cannot be done by non-attorneys. If attorneys are not discovering title defects and curing the ones that actually affect the marketability of title, then title insurance essentially becomes casualty insurance, much like fire insurance, and attorneys will be viewed as unnecessary to the process. The final example is the classic case of too little, too late. Lest we think we are invulnerable, we need look no further than many of our sister states and the examples of surveyors, inspectors and appraisers cited above.

One solution to the dilemma is for the attorney to continue to add value to the process by assuming a reasonable share of the title risk as has been traditionally done and to deliver service as quickly as possible. The use of well-trained and supervised paralegals will help speed the process and free up the attorney’s time for curative and counseling activities that add the most obvious value to the consumer and lender. Don’t ask title insurers to insure over defects that will have to be dealt with on each successive transaction. Curative measures do not always delay the closing and are often fairly easy to accomplish.

Efficiency is fundamental to the process of shortening turn times. Application of advanced technology is absolutely necessary to obtain the efficiency required to remain competitive. It is faster, less expensive, easier to use and implement than ever before. Standard programs are inexpensive and readily available everywhere. These programs have capabilities that far exceed those available only in expensive custom applications in use just a few years ago. Training is also readily and inexpensively available. Word processing programs have the capability of easily automating document production, retrieval and indexing. Title abstracts can be indexed and retrieved in word processing or closing software simply and efficiently. Electronic research is quickly overtaking traditional printed formats. Much of what was previously only available in expensive supplements, arriving weeks after the fact, is now instantly accessible on the Internet without charge. Document transmittal is now being done electronically, it is no longer just a promise for the future.

Many attorneys acknowledge that they are moving toward technological upgrades. When pressed as to why they delay, they express concern about their personal ability to use the new technology. You don’t have to be a mechanic to drive a car or a pilot to fly in a airplane. If the attorney’s staff is trained sufficiently to use the technology efficiently, they will be able to give good advice on upgrade timing and product choice. Since they are the ones who will be the primary users of the technology, they have a personal stake in sound choices.

We make no apology for the didactic tone of this editorial comment. Real property attorneys are so accustomed to the public’s lack of understanding of our part in the process that we lose our own perspective of the significant value that we actually contribute to the process. It is a fact that all parties, including consumers, lenders, title companies and attorneys, are benefited most by preserving the real property system as it presently exists in North Carolina. North Carolina enjoys one of the lowest title insurance claims rates in this country together with the lowest premium rate. We have the second lowest cost of title assurance (title premium plus attorney’s fee) in this state. We also reflect the highest consumer satisfaction index rating for closings. The obvious conclusion to be drawn from these statistics is that when you remove professionals and professionalism from title assurance process you increase losses. The cost of these losses is passed on to the consumer in the form of higher premiums, higher risk, higher cost of ownership, less protection and less confidence in the system.

Some common observations bear repeating. Buying technology without extensive planning of its implementation and training in its effective use is a waste of money. Minimal disclosure of limited title searches may not constitute informed consent by the client. Title insurance is no substitute for good and marketable title. Malpractice insurers are not obligated to insure everyone. If your services are perceived to add value and move the transaction forward, you will be adequately compensated; if not, you will be avoided. When title problems arise, the attorney is the first one blamed. Clients in our culture rarely recall being advised of a way to have avoided the problem if it cost money. Even more rarely do they accept responsibility for that decision.