Real Estate Articles
Why have Title Insurance?
These 12 stories from the claims files of First American Title Company demonstrate
the need for title insurance as a vital protection for lenders.
SWEPT ALONG WITH CHANGE AND BUFFETED by competition, mortgage
lenders continue to rethink and reinvent their business. Every expense that
can't be justified has been -- or will be -- eliminated. Not unexpectedly,
some have asked: “Do we really need title insurance?”
We in the title industry have mainly ourselves to blame for the question being
asked. For too long we've been content to remain an inconspicuous participant
in residential lending, and for too long we've characterized our work as “risk
evaluation,” to the detriment of an understanding of title insurance
as a true insurance product.
COVERED RISKS -
Title insurance is in many ways casualty insurance. First, it protects the
lender against a host of risks that may not be detectable even with the most
careful search of records. These risks include forgery, fraudulent releases,
disputed powers of attorney, incompetence or lack of capacity of a person who's
signed a document, ambiguous or erroneous legal descriptions, ambiguous judgment
liens, incorrectly indexed of documents in public records or databases and
federal estate tax liens (which, by law, may attach without the recording of
any notice).
Second, extended coverage policies are available to protect the lender against
off-record interests. This includes claims by third parties based on adverse
possession or past use, which in turn may involve rights to access adjoining
lands, to maintain underground pipelines or encroaching improvements constructed
by neighbors. The newest extended coverage forms even include coverage against
building permit violations, post-policy forgeries and post-policy encroachments.
Third, title insurance insures the process of closing -- also known as the
escrow or settlement -- by protecting the lender against risk from erroneous
payoffs, intervening liens and mortgages (recording just before, or after,
closing), defective documents going to record and failure to get releases for
paid off debts.
And fourth, it provides for a legal defense, if needed, against claims that
may threaten the lender's security interest.
Here, for example, are 12 true stories from the claims files of Santa Ana,
California -- based First American Title Company.
A Forgery in the Chain of Title -
First American insured a first (purchase money) mortgage for $105,000, against
a home on Kenneth Street in Newton, Massachusetts. Three years later, the lender
was contacted by an attorney for 14 heirs of a former owner of the property,
Maria Richards. The attorney claimed the heirs' interests in the land had never
been legally terminated, and he threatened to file suit to quiet title and
take back the property.
Our insured title was traceable back to a deed from Maria Richards to one William
J. Richards, which was signed and recorded in 1978. Later, the property was
conveyed to a builder who constructed the home on the land.
The problem was that Maria Richards, the real Maria Richards, died on August
15, 1942, at 80 years of age. Obviously, the deed produced 36 years later was
a forgery.
The company paid legal expenses of $43,266 defending against the heirs' claims,
then settled by paying them $50,000, which was the estimated value of the property
as vacant land.
Court Orders -
We insured a first (refinancing) mortgage for $260,000, against a home on Abby
Court in Bloomfield Hills, Michigan. The borrower was a single woman who'd
recently acquired the home through a divorce decree. The title agent confirmed
the vesting and legal description of the property by reading the property settlement
provisions in the recorded judgment of divorce.
Years later, the loan was foreclosed and the insured lender was the successful
bidder. But when the lender went to resell, it learned of a previously undisclosed
prior lien against the home.
It seems that when the divorcing couple went to court, it was decided the wife
would get the marital residence (their most valuable asset) and, in exchange,
would assume responsibility for payment of an unsecured debt, a $70,000 loan.
Thus, under the marital debt provisions of the judgment of divorce, it was
ordered that the husband would have a lien against the marital residence to
secure payment of this debt. When the wife failed to pay, the ex-husband satisfied
the $70,000 loan. Now, he wanted to enforce his lien against the home.
Resale was completed, and the company paid the lender's unsatisfied loan balance
of $54,375.
Life Estate -
We insured a first (purchase money) mortgage for $173,250, against a duplex
on Penn Avenue in Staten Island, New York. The buyer (Jeffrey), the seller
(Mary) and an attorney for the lender attended the closing, conducted by our
title agent.
The closing was unusual because Mary was the mother of Jeffrey. In this cordial
setting, apparently no one noticed the following provision in the deed: “Grantor
retains a life tenancy in the six-room apartment located at [number] Penn Avenue,
S.I., N.Y.” Meanwhile, a mortgage was given to the lender, signed only
by Jeffrey.
Years later, Jeffrey moved out and the property was foreclosed. The insured
lender was the successful bidder. The lender tried to evict Mary, but she successfully
defended herself as the holder of a life estate unburdened by the insured mortgage.
In other words, Mary is entitled to occupy the apartment, rent-free, for life.
After paying more than $60,000 in legal expenses on behalf of the lender, the
company purchased the insured mortgage for $160,000. Mary continues to live
in the apartment.
Power of Attorney -
We insured a third deed of trust for $40,000, against a home on Old Chesterbrook
Road in McLean, Virginia. The owners were a mother and daughter who were Korean
citizens living in Japan. The loan was closed relying on power of attorney
instruments given by the owners to a relative, Alex (Their son and brother,
respectively).
When the loan fell delinquent, the lender received a letter from an attorney
for the owners, claiming fraud. An investigation confirmed that the loan was
unauthorized, and the power of attorney instruments were forged.
We paid the lender $40,000 and incurred legal expenses of $17,221. But we weren't
alone as victims. A second deed of trust for $239,000 had been given to a different
lender, also based on forged power of attorney instruments. It was likewise
unenforceable.
Legal Description -
We insured a first (refinancing) deed of trust for $441,500, against a home
on Bursera Way in Palm Desert, California. When the loan fell delinquent, it
was learned there was a prior “missed” deed of trust against the
property, securing $150,000.
It seems the property was originally conveyed to the borrower with a metes-and-bounds
legal description. Later, a subdivision map was recorded, assigning lot numbers
1 and 2 to the property.
Both our insured deed of trust and the one it refinanced referred to the metes-and-bounds
legal description, while the missed deed of trust referred to lot numbers 1
and 2 on the recorded subdivision map. As a result of the different descriptions,
the missed deed of trust was not properly pose\ted to the property in our automated
title plant.
The company paid $149,672 to release the missed deed of trust.
Judgement Liens -
We insured a first (refinancing) deed to secure debt (similar to a deed of
trust) for $247,125, against a home on Northwind Trail in Fayetteville, Georgia.
The borrower's name was Robert Van Pounds. Our agent's search turned up two
judgments in local lien indices against a Van Pounds. The borrower denied being
the judgment debtor and signed an affidavit saying he was lien free.
The company paid a total of $55,000 to satisfy one lien and arranged for the
other to be subordinated to our insured. We also paid legal expenses of $31,310
to reach these settlements and to pursue the judgment debtor.
Incorrectly Indexed -
We insured a first (purchase money) mortgage for $137,350, against a home on
Lakeview Trail in Danbury, Connecticut. Soon after closing, the lender learned
there was a prior missed mortgage, now threatening foreclosure. The missed
mortgage was overlooked by our searcher because it was incorrectly indexed
in the Fairfield County land records. Having been given by a former owner whose
last name was Taouil, it was erroneously shown under “Taquil” in
the alphabetical listing of the grantor/grantee index book.
The company paid $53,772 to satisfy the missed mortgage.
Conditions, Convenants, and Restrictions -
We insured a first (refinancing) deed of trust for $425,000, against a new
home on Lake Vista Drive in Bonsall, California. Unbeknownst to us, at the
time our title policy was issued, the owner was entangled in litigation with
neighbors who claimed his home violated height restrictions contained in recorded
conditions, covenants and restrictions (CC&Rs).
The property consisted of two lots on a hillside. The CC&Rs prohibit any
building “in such location or manner as will unreasonably obstruct or
interfere with the view of other lots in the tract or which exceeds either
twenty-four (24) feet in height above the existing grade of the high point
of the lot or the elevation shown in the box on each lot on the attached map,
whichever is less.”
The case went to court, and the judge ordered that the roofline of the insured
home be lowered by seven feet. The exasperated owner stopped making mortgage
payments, letting the property be foreclosed.
The insured lender was the successful bidder. Since the lender was not a party
to earlier proceedings, the neighbors now sued the lender to enforce the height
restrictions. This time, a different judge ruled in favor of the lender, holding
that the CC&Rs were unenforceable as to the lender because they were not
mentioned in any deed to be found in the lender's chain of title, as required
by common law and California case precedent.
The neighbors did not appeal this decision -- which was fortunate, because
16 months later the basis for the judge's ruling was overturned by a decision
of the state Supreme Court.
The company paid more than $50,000 in legal expenses for this successful defense.
Intervening Lien -
We Insured a first (refinancing) deed of trust for $98,000, against a home
on Albion Lane in Longmont, Colorado. The borrowers signed loan documents on
November 8. Because of Veterans Day falling on November 11, the three-day rescission
period expired the following day, November 12.
On Monday, November 15, there was a funding snafu involving a local originator,
so the closing was rescheduled for the next day. On November 16, the loan closed
and the borrowers collected a check for net loan proceeds of $30,000.
The insured deed of trust was recorded on November 18. One week later, we learned
that an IRS tax lien for $139,007 had been recorded in the “gap”
just before the closing, on November 15, at 10:41 a.m. This deprived the lender
of any security.
It seems one of the borrowers -- the husband -- had received a lump sum payment
of $270,000 in connection with termination of his employment at the Rocky Flats
nuclear weapons plant, for which he failed to pay any taxes. Much of this lump
sum had been invested in a martial arts school that failed.Although they denied
it, there's little doubt that at least one of the borrowers knew the tax lien
was coming. It became a race to the recorder's office, with the borrowers'
equity at stake.
The company paid $30,717 for a release of the tax lien. Our claims against
the borrowers are considered uncollectible.
Factory Seconds -
We insured a second mortgage for $90,000, against a home on Selden Boulevard
in Centereach (Long Island), New York. The lender conducted the closing on
September 3, and the original mortgage was forwarded to our title agent, who
received it on September 15.
After checking its legal description for accuracy, the agent submitted the
mortgage to the Suffolk County recorder's office on September 23 -- but it
was rejected and returned because of some “illegibility.”
The agent returned the mortgage to the lender's office in New Jersey for correction.
In turn, the New Jersey office sent the mortgage to the lender's national correction
center in Sacramento, California. The mortgage was returned to the agent and
finally recorded on November 6 -- two months after closing.
During this period of delay, the borrower proceeded to give nine more mortgages
to different lenders, all of which recorded before our insured mortgage. The
total amount secured by the intervening mortgages was more than $750,000. The
property was appraised for $135,000. The borrower is now believed to be in
Greece.
The company paid its insured the policy amount of $90,000.
Release "to come" -
We insured a second (refinancing) mortgage for $40,000, against a home on 19th
Street in Rockford, Illinois. Our title agent handled the closing, paying $35,785
to satisfy a prior mortgage securing a line of credit.
The prior lender negotiated the check, but failed to close the credit line
loan account. After receiving a monthly statement showing the old line of credit
with a zero balance and available credit of $40,000, the borrower drew again
from the old credit line. After the insured mortgage fell delinquent, the lender
discovered it was in third priority, with the home seriously encumbered.
We filed suit to establish our insured lender's priority, but our hopes were
dashed by a state court of appeals decision. The court held that the prior
lender had a contractual obligation to continue making advances until the borrower
gave written instructions to close the loan account -- which was not done --
and there was insufficient evidence that the prior lender should have known
that a release of its mortgage was expected in exchange for the payoff.
After paying more than $100,000 in legal expenses, the company paid its insured
the loan balance of $30,000.
Defective Documents -
We insured a first deed of trust for $71,200, against a home on Hillsdale Drive
in Springfield, Tennessee. Ten years late, the borrowers filed bankruptcy and
a trustee in bankruptcy was appointed. The trustee noticed that a notarial
seal was not affixed to the insured mortgage as required by Tennessee statutes
and promptly filed an adversary proceeding in the bankruptcy, seeking to avoid
the mortgage as an interest in the debtors' real property under Bankruptcy
Code section 544(a). This is the so-called trustee avoiding power, which permits
the trustee (or a debtor-in-possession) to avoid interests in a debtor's real
property that are not perfected as of commencement of bankruptcy.
The bankruptcy judge asked the Tennessee Supreme Court to decide whether omission
of the notary seal would render a deed of trust null and void even though the
deed of trust had been recorded. The Supreme Court said yes, holding that absence
of the seal deprived the deed of trust of authentication, and in spite of being
recorded it was legally ineffective.
The insured deed of trust is now certain to be avoided under section 544(a),
because it will be deemed unperfected as of the date of commencement of the
bankruptcy. We're preparing to reimburse the lender for any loss it may suffer
from becoming an unsecured creditor in this case, plus legal expenses.
CONCLUSION -
These stories illustrate some of the risks covered by title insurance. More
importantly, they show how title insurance works on different levels for lenders:
by providing experienced people to eliminate risks before closing; insuring
against hidden risks that can't be detected; insuring the process of closing
and perfection of the security interest; and paying legal expenses when the
lender's security is threatened by a title dispute.
In other words, the stories show how title insurance works like casualty insurance
for today's mortgage products and changing origination processes.
To anyone still asking, “Why title insurance?” we should also mention
our experience in other countries, where we've found land conveyancing processes
to be slower and more labor intensive than in the United States. By offering
to insure the process, we're able to speed thins up while also reducing risks.
In Canada, for example, First American began offering title insurance in 1991.
With insured transactions, we reduce the time from loan application to closing
by 90 percent and the overall costs to the consumer by 60 percent. Likewise
in the United Kingdom, where for insured transactions we offer to reduce the
period between application and closing from six to 12 weeks down to six to
12 days.
The U.S. system is the envy of other countries worldwide. It has benefited
from stable land titles as well as expedited processes and savings made possible
by title insurance for more than 100 years. We're excited about the future
and look forward to working with mortgage bankers to achieve faster, better,
cheaper mortgage originations.
Courtesy: First American Title.
