Who was the very first title agent in America to disburse escrow funds? That question is very hard to answer. There is no clear point in time that use of closing agents and “escrows” became commonplace in our real estate system. Each state took a different road to the use of escrow agents, attorneys or title agents to conduct escrows. To explore the process, we have to go back to the 19th century and understand the evolution of our real estate system.

The word “escrow” originally comes from the Middle English word “Escrowl” which translates to mean “scroll;” essentially meaning a checklist. All through history, buyers and sellers have used trusted third parties to hold money, important documents and deeds until the obligations of the parties were met. In the history of real estate, this has meant many things, but our modern term “escrow” mostly refers to receiving and disbursing funds for a real estate transaction.

In the 1800s, real estate was transferred mostly on paper, and not with much money. Back then large sums of cash for such transactions were not common. Local banks kept very small amounts of cash on hand for protection from robbery. Transactions very often involved the seller holding the buyer’s mortgage So imagine the closing of the 1800s – buyer and seller met with a scrivener or lawyer, they drew up the paperwork for the sale, and they signed. If money was exchanged, it was small amounts and payments were made over time to the seller.

In the last part of the 19thcentury and the first part of the 20th century, banks began loaning money for the purchase of residential real estate. These loans were typically interest only, and required hefty down payments (usually 50%) and would balloon in five years. The financial collapse of the Great Depression prevented hundreds of thousands of borrowers from refinancing these types of loans and lenders ended up foreclosing on many properties. Banks handled closings back then and sellers often received their check directly from the lender at the closing. After the Great Depression, the Federal Housing Administration developed the fully amortized fixed rate mortgage we know today. This began the march towards the type of closing we see today.

Sometime in the early 20th century, banks began using attorneys, title companies and/or escrow companies to handle closings and disburse funds, but that was still not the norm. Many closings happened like this: Buyer and seller would show up to closing, and the buyer would sign loan papers for the lender. Next, the lender would deposit the loan funds in the buyer’s bank account at their institution. The buyer would then proceed to write several checks according to the closing statement. Those checks would include the seller’s proceeds; seller’s mortgage payoff; real estate commissions; taxes; recording and title fees. This was an inefficient way to conduct closings and required a lot of faith in the buyer using loan funds properly.

The image to the left is a closing statement from a transaction in 1943 where San Jose Abstract & Title Insurance Co. provided closing and escrow disbursement for a home on Spring Street.

When title companies began taking on the responsibility for paying off the seller’s prior mortgage, it was the impetus lenders needed to choose title companies to disburse their loan funds. If the title company disbursed the mortgage payoff, the lender expected to get a clean title insurance policy showing them in first lien position. This was more advantageous than relying on other methods of closing.

The next biggest change in the way closings were handled was in 1974 when the Real Estate Settlement Procedures Act (RESPA) was passed and signed into law by President Ford. This put certain regulatory functions in the Department of Housing and Urban Development, including creating a standardized closing statement form called the HUD-1 Settlement Statement. The preparation of the HUD-1 became a function of the title agent, closing lawyer, or escrow company. In 1974, less than half of all residential mortgages involved use of an escrow agent. In 2019, forty-five years later, some estimates are as high as 98% of residential transactions are completed with the use of a neutral third party handling the escrow.


Originally published by Michael Holden

DISCLAIMER: The opinions expressed herein are those of the author, Michael Holden, and do not represent any company or organization. While the information presented is believed to be accurate, it should not be a substitute for legal advice, and readers are strongly encouraged to seek independent legal counsel.