After Foreclosure, a Focus on Title Insurance

October 8, 2010

After Foreclosure, a Focus on Title Insurance

By RON LIEBER

When home buyers and people refinancing their mortgages first see the itemized estimate for all the closing costs and fees, the largest number is often for title insurance.

This moment is often profoundly irritating, mysterious and rushed — just like so much of the home-buying process. Lenders require buyers to have title insurance, but buyers are often not sure who picked the insurance company. And the buyers are so exhausted by the gauntlet they’ve already run that they’re not interested in spending any time learning more about the policies and shopping around for a better one.

Besides, does anyone actually know people who have had to collect on title insurance? It ultimately feels like a tax — an extortionate one at that — and not a protective measure.

But all of the sudden, the importance of title insurance is becoming crystal-clear. In recent weeks, big lenders like GMAC Mortgage, JPMorgan Chase and Bank of America have halted many or all of their foreclosure proceedings in the wake of allegations of sloppiness, shortcuts or worse. And a potential nightmare situation has emerged that has spooked not only homeowners but lawyers, title insurance companies and their investors.

What would happen if scores of people who had lost their homes to foreclosure somehow persuaded a judge to overturn the proceedings? Could they somehow win back the rights to their homes, free and clear of any mortgage? But they may not be able to simply move back into their home at that point. Banks, after all, have turned around and sold some of those foreclosed homes to nice young families reaching out for a bit of the American dream. Would they simply be put out on the street? And then what?

The answer to that last question may depend on whether those new homeowners have title insurance, because people who buy a home without a mortgage can choose to go without a policy.

Title insurance covers you in case people turn up months or years after you buy your home saying that they, in fact, are the rightful owners of the house or the land, or at least had a stake in the transaction. (The insurance may cover you in other instances as well, relating to easements and other matters, but we’ll leave those aside for now.)

The insurance companies or their agents begin any transaction by running a title search, sifting through government filings related to the property. They do this before you buy a home or refinance your mortgage to help sort out any problems ahead of time and to reduce the risk of your filing a claim later.

But sometimes they miss things, and new issues can arise later.

For instance, the person doing the title search may not notice that a home equity loan is still outstanding or that a contracting firm filed a lien against the owner years ago. That could create problems for you later, when you try to sell the home.

Then there are the psychodramas that can ensue. The previous owner’s long-lost heirs or a previously unknown love child could show up, saying that they never agreed to the sale of the property. Or perhaps there was fraud against a seller who was elderly or had a mental disability, or forgery of an estranged spouse’s signature. It’s rare, but it happens, and when it does, your title insurance company is supposed to provide legal counsel or settle with whomever is making a claim.

Title insurance companies would like you believe that they are the good guys standing behind you. After all, you are the customer who owns the policy.

In fact, many of the title insurance companies are more concerned about the real estate agents, lawyers and lenders who can steer business their way. The title insurance companies are well aware that most people do not shop around for title insurance, even though it’s possible to do so — say through a Web site like entitledirect.com.

While the title insurers are not supposed to kick back money directly to companies or brokers that send business their way, various government investigations over the years have turned up all sorts of cozy dealings that make you shake your head in disgust.

But since you have to buy the insurance if you need a mortgage, there is not much you can do except hold your nose.

That’s what John Kovalick did in January when he bought a foreclosed house in Deltona, Fla., for $102,000 from Deutsche Bank. But in recent weeks, he’s seen the headlines about other banks halting foreclosures and wondered whether something might have gone wrong with the foreclosure on his new house. A spokesman for Deutsche Bank declined comment.

Mr. Kovalick is not the only one pondering what could go wrong. While the banks were pressing the pause button on many foreclosures, some title insurers were growing concerned as well.

On Oct. 1, Old Republic National Title Insurance Company released a notice forbidding any agents or employees to issue new policies on homes that had been recently foreclosed by GMAC Mortgage or Chase.

Clearly, the title insurer was also worried about a situation in which untold numbers of former homeowners have their foreclosures overturned. At that point, those individuals might claim the right to take back their old homes, but they’d also be responsible for, say, a $400,000 loan on a home that is worth half that.

So what would happen next? The banks that foreclosed might start the process over again. At that point, lawyers for the people who had been foreclosed upon might take the next logical step and try to show that the banks never had the documents to prove ownership of the mortgage in the first place. The banks might settle at that point, writing checks to everyone who had gone through a disputed foreclosure in exchange for each of them giving up the title.

But if banks did not settle, or the evicted homeowners refused to settle and fought on and won, they might end up owning their homes once again and not owing the bank either.

Or banks might agree to slice a big chunk off the remaining balance in exchange for a release from any liability for the errors it made.

At that point — and again, this is what Old Republic and investors in other title insurers fear — those homeowners might actually want to move back in. But some foreclosed homes were sold by the banks to others who now live there. And those new residents would have big, fat title insurance claims if their predecessors ever turned up at their doorsteps, proclaimed them trespassers and told them to leave.

“All of these Joe Schmos who did everything legally would then be in the middle of it, too,” said Mr. Kovalick, who manages an auto repair shop and is now hoping not to be one of those Schmos.

“Now, you’d have two total disasters,” he said. “How would you like to be the judge to get that first case?”

While homeowners like Mr. Kovalick may have title insurance, it generally covers them only for the purchase price of the home. When you buy a home out of foreclosure, however, it often needs a lot of work. “If I bought it at $200,000 and it’s a steal but I had to gut it and sink $100,000 more in, my recovery is limited if there is a problem,” said Matthew Weidner, a lawyer in St. Petersburg, Fla.

Indeed, this possibility has occurred to Mr. Kovalick, who has plans to put an addition on his home and is asking how he could extract that investment if someone ever turned up on his doorstep and asked him to leave. “What do I do, take the paint off the walls and the custom blinds off the windows?”

Chances are, it will not come to that. After all, title insurers could settle with the previous residents, allowing them to walk away with a big check to restart their lives elsewhere.

Still, for anyone considering buying a bargain home out of foreclosure anytime soon, consider asking your title insurer if any special riders are available that can cover appreciation on your home in the event of a total loss.

That said, if you can possibly help it, stay away from foreclosed homes until the scene shakes out a little bit.

Some people will undoubtedly make a fortune investing in these properties in the next few months. But if your down payment represents most of what you have in the world, it’s hard to justify betting it all on a situation like this one.

16 Responses

  1. TIME AGAIN TO PUT PRESSURE ON WHITE HOUSE–David Axelrod of the White House is all over headlines today as saying no need to put a moratorium on foreclosures!!

    Start calling and faxing the White House.

    David Axelrod needs to shut up about a big problem he knows nothing about.

    He has just stepped into a giant, wet cow patty!

  2. Gwen

    You are right. Many sitting with mortgage loans (not in default/foreclosure) that cannot be refinanced due to flawed mortgage title – and the home is not vendible. But, too busy to even realize – they are on the wrong “tea party” path – and they do not even know it!!!.

  3. bird

    Sorry to answer – but just want to say – THAT is the way it is supposed to be. Supposed to be is not the same as the way it is.

    help

    Nevertheless, assignments have to be accurate as of the date of foreclosure action – even if not recorded. And, assignments must comply with the Prospectus/PSA – or you have investor fraud. Hey, but investors have an advantage – big law firms.

  4. Neil, does the statute of limitations not begin when the fraud is discovered, thus voiding any subsequent action if fraud is proven?

  5. David-
    Claims in nonjudicial states depend if the state required title policies to record assignements and note ownership transfers, sometimes. I know in some states there is no law making lenders record assignments or when they sell loans

  6. Something else, All of the Title policy’s written are written pre close of about a month’s time. So the fraud started prior to any closing date or table. The one loophole seems to be that the policy’s state that there needs to beTitle fraud to collect. Is’nt the reference to Title enough in these cases? They may not have acually falsified a real Deed but “referered” to the deed in the discription under a false act. This is most likely a big part of why all these pretender loan mods where put out there. No one really gets a loan mod, if they do it’s very few. It’s all a ploy to gain information they do not have. Thousands have fallen for this and have lost because of it. I do hope everyone gets the shot at recourse.

  7. This Title Insurance thing has been a sore spot here in mass since I learned about the fraud involved with these policys from the start, right at the closing table. Here in Mass most closing agents for the “Bank” are or where also the Title company agent’s. So right there there is a conflict of interest. But In seeking remedy’s post I also have statements that the title policy is to be assigned to MERS on the policy instuctions but it states not to disclose this act. So, I did question this and no one seems to know the answer. But it was most likely a ploy to slide the policy along with the next “pretender lender” without need to rewrtite it? Anyway, it got alot deeper here with the policy’s at the hands of the closing agent as they were the one’s in control of these policy’s here. There have been false Deeds refered to in the policys adding or deleting names and putting into different names alltogether. The only way to correct a policy was to pretend to offer a modification to the owners and “correct” the policy as new if the modification stuck. I have been through all of this here in Mass over the last 3 years. Problem is the more they try to cover the fraud the worse it get’s. I would like more information on sueing the current owner’s of the “Banks” policy as I have an owner’s policy as well. This is what got me started to begin with learning about all the things that were done on the Title policy alone.

  8. I had problems concluding a loan mod with Bank of America (another story). At any rate, I sued them. Then they tried to foreclose on me (wrongfully) and I sued them more and after extensive investigation discovered how clouded my title was by reviewing recorded docs (I’m a former trial lawyer). I sued MERS, WILSHIRE, COUNTRYWIDE, CITI AS TRUSTEE for MLMI2006-HE5, Kozeny & MCUBBIN trustees, etc. etc on various theories of law AND A QUIET TITLE ACTION. . BUT NEXT, the light dawned. I went to Chicago title and had them do a preliminary TITLE search for a homeowners title policy. Lo & behond it came back with so many exceptions it was was uninsurable unelss a QT order was obtained. It absolutely shocked the Chicago Title folks I assure you. Anyway. you ought to do this

  9. title insurance… is just like ALL insurance..
    a scheme that is by the very design of – NOT TO PAY.
    Insurance is the biggest scam on the planet.

  10. Here is a correspondence in Florida between two realtors in regards to an REO After Foreclosure possible transaction this is from last week.

    Hello,

    I wanted to touch base with you regarding the offer you have submitted on this property. I’m sure your buyer is becoming weary as to whether or not their offer has been accepted so I wanted to give you an update. There are currently 12 offers on this property and I have not heard back from the asset manager on any of them. I have given you some links below to try and help you and or your buyer understand why there has been such a delay. I do apologize for this inconvenience and will let you know as soon as I hear something.

    http://www.foreclosureindustry.com/tag/foreclosure-moratorium-chase-halts-foreclosures-gmac-foreclosure-robo-signers-foreclosure-defense/

    http://money.cnn.com/2010/10/08/real_estate/foreclosure_halt_QA/

    http://www.palmbeachpost.com/money/gmac-troubles-threaten-to-halt-foreclosure-sales-936241.html

    IT IS REALLY HALTED AND THIS IS IN REGARDS TO PROBABLY TITLE INSURANCE.

  11. OR DOES THIS APPLY

    Commingling can take several different forms and meanings so we are going to focus on the root of the word. According to Wikipedia, Commingling literally mean “mixing together.” This is a common concern in the Real Estate world when it comes to collecting Earnest Money deposits and such. Taking a clients money and mixing it with your own personal funds is illegal. Financial advisors and attorneys also run the risk of serious legal action if they were to commingle funds.
    It is when a fiduciary mixes funds that he holds in care of the client with their own funds. This makes it difficult to determine who’s funds are who’s and in the case of financial investment how to distribute gains.

  12. commingling of funds law definition
    n
    The mixing by a fiduciary, trustee, or lawyer of the money or property of a customer or client with his own without a detailed and exact accounting of which part of the common funds and property belong to the customer or client.

    does this apply to us

  13. Riddle me this, Batman!! 🙂

    Ok, so I paid for the title insurance on my refi. The Title Company notorized and executed the loan. They listed themselves as the Trustee, and the beneficiaty of the TITLE INSURANCE POLICY IS MERS!!! Hmmm, did they know something? I have NEVER seen MERS and the beneficiary of the TITLE INSURANCE policy!

    Any of you legal eagles out there…..what do you think about this?

  14. yes

  15. Can one who is non judicial pre forclosure make a title company insurance claim when they find fraud, missing assignments and broken chain of title?

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