RateWatch #428 Reason for Unemployment, Escrows

October 9, 2004 by Dick Lepre

What's Happening

The BLS Employment Situation Report is weak. It shows 96,000 new jobs in September which
is below expectation. Private sector jobs were up only 59,000. There were losses in manufacturing and retail but gains in all service sectors except for retail. The Unemployment Rate held at 5.4%. Average job growth for the past 3 months is 103,000.  The Average Hourly wage was up 3 cents.  That and the weak headline number are helping Treasuries (lower yields and mortgage rates) as they minimize inflation concerns. While some may read the weak jobs report as a sign that the Fed will relent its series of increases we are still of the mind that they will continue to hike the Fed funds rate until it reaches a "natural level" of about 2.5%.

The underlying reality is that the jobs market continues to improve but at a pace which folks view as too slow.

Buried within the report is the underlying reason for lack of employment (see:

- people with less than a high school education have an unemployment rate of 8.8%
- high school graduates with no college have an unemployment rate of 4.8%
- people with some college have an unemployment rate of 4.0%
- people with a bachelor's degree or higher have an unemployment rate of 2.6%.

The jobs market in the U.S. has changed.  Now, more than ever, education is required for the jobs that are here.


I love movies. I have a weakness for action-adventure movies.  These often involve crime. How many times on TV or in the movies do you see 2 groups of people who barely know each other trying to perform some large financial transaction; say, selling 100 kilos of cocaine or 30 cases of automatic weapons for a few million dollars. These jerks meet in a parking lot or a warehouse and, due to distrust, someone usually gets shot or they all get arrested. The problem that these folks have is that they need an escrow service. If I wanted to sell you 1,000 automatic weapons for $1,000,000 we should use an escrow agent. I'd give them the weapons, you'd give them the cash. They would guarantee that the weapons were the product that you ordered, they would guarantee that the cash was not counterfeit and they the would give me the cash and you the weapons. Neither of us would be shot. We would both be happy.

Real estate transactions often have an anxiety no less severe than some of these deals. This
anxiety is ameliorated by the existence of escrow agents. In some states attorneys perform this
service. In other states escrow agents who work for escrow companies perform the service. Let's
say that I want to sell you my house for $900,000 (hey, I live in San Francisco). You want to wind up owning the house. I want the money and a whole bunch of people want their piece of the action. The escrow company takes care of all of this.

In a purchase transaction the escrow officer obtains information from all parties involved and makes sure that everyone's demands are met. The escrow agent gets funds from everyone
who has to put money in and distributes those funds to everyone who has to be paid.

The inflow of money will come, generally, from two sources, the buyer and the lender who
provides the new loan. The buyer will give money to the escrow company as an initial deposit
as specified in the purchase agreement. The buyer will also provide the remainder of the down payment. The lender will, on the funding date, wire the loan proceeds (less their fees) to a bank account specified by the escrow officer.

The funds are then disbursed to cover the following demands:
1) property taxes due
2) principal and interest on the loans with which the seller has encumbered the property
3) any miscellaneous involuntary liens - old refuse bills or water bills or whatever else might
encumber the property
4) the commissions due to the Realtors as specified in the sales contract
5) all of the costs generated by the new lender and the mortgage broker
6) fees generated by the escrow company itself.  Escrow fee, title insurance fees, notary fees,
and other fees that they paid for and are recovering such as messenger and Fed-Ex fees
7) miscellaneous fees generated by other parties such as the county recorder, cities or counties
for transfer taxes, or the appraiser
8) the rest goes to the seller

A refinance is somewhat simpler. Funds come from the new lender and, perhaps, from the borrower and cover items 1, 2, 3, 5,6,and 7 above. Ultimately the purpose of the escrow is to protect the property rights and financial interest of all parties concerned.

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