Why Title Insurance on "Securitized" Properties are Worthless

Jul 19, 2012

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COMBO TITLE AND SECURITIZATION REPORT COMEBACK

BUYERS START ORDERING INDEPENDENT REVIEWS

TITLE CARRIERS DENY TITLE REPORT IS RELIABLE

Editor’s Comment:

If you can’t rely on the title report issued by the title agent and title carrier, what chance do you have of getting clear title to that bargain you were picking up dirt-cheap?

While many writers are theorizing about title problems, there are actual cases being litigated but are largely missed in reporting because nobody catches their significance. It all boils down to this: title insurance companies are (a) going to avoid paying or defending a claim that they deemed is not covered by the title policy and (b) generally, even when you would expect that they would be liable for such damages they cannot responsible for damages caused by title defects arising out off record transactions like in MERS. The courts are heavily favoring the title companies in most cases.

Hot off the presses, Mark A Brown and Christopher W Smart have published an article in The Florida Bar Journal July/August Edition starting on page 47–see link below. While they disagree with some of the rulings contained in that article it is obvious that one way or the other, you are pretty much screwed when dealing with foreclosure properties unless you have safeguards in place by renegotiating the contents of the title policy (something we were successful at here in Arizona), AND by obtaining cures of all potential title defects via Court Order. While this increases the expense of closing, is assures the buyer of something he is not getting now — clear title without clouds or defects and real insurance if the defects cannot be cured.

In cases involving foreclosure resulting from off record activity, even if the title insurer wins it will be years before the issue is resolved and if a temporary injunction is not entered preventing the new foreclosure from a pretender lender, the foreclosure will be allowed and so will the eviction. The worst case scenario is that the person buying such property for use or investment ends up, at a minimum, out of the house, no right to possession, no way to sell it, and no way to refinance it. No title, no possession and clawing their way back to the money or the house with the former “owner” and the title insurer fighting you every step of the way.

As the authors point out, if you have a contract to sell or finance your property, the buyer or financing entity is not going to wait around for 3 years while you figure out how to offer clear title. The very fact that there are many decisions, each in conflict with the other, presents an obvious cloud on title, which will stop any sale or financing, and probably presents a fatal defect in title for which the title carrier should pay you in full but (a) only if you make them through additional litigation and (b) without the damages you suffered during the long delays of seeking curative title instruments and litigating the rest of the case.

Does this make title insurance worthless? Yes, if you allow them to make exceptions for properties on which there was off record activity and they disclaim that that title is as reported in the policy. The position of the carriers, apparently supported by the courts, is that the title report given to you by the title company does not need to be correct and could even be negligent without any liability arising out of their conduct. Their liability is limited strictly to what is in the title insurance contract in its FINAL form, which often differs remarkably from the policy COMMITMENT.

For “unreasonable” delays there are a few scattered cases in which the insured buyer was allowed damages but then there is another fight over the right to recover attorney fees when you finally get them to pay — and no lawyer is going to take one of these complex cases on contingency.

If you already own property and you took no protective measures then you might want to initiate a transaction in which the property is refinanced or title changes to a trust or another party in which new title insurance is required. Then hire someone who knows what they are doing to hammer out the right title policy terms, and file a quiet title action to confirm that title is as reported. If you don’t own the property yet, then operate on the same assumptions and (a) make sure you actually have good title and (b) you actually have a title policy that will pay if the title had defects or was clouded.

It is insane that the title carriers are getting away with this. Everyone relies on the title report from the title agent and the title carrier. The way these cases are going, the buyer must always get an independent title and securitization review if they want to sleep at night. And closing without a licensed, competent attorney who is familiar with off record transactions like MERS, maximizes your risk even though it minimizes your expense. My suggestion is that you treat it as part of the cost of the house. If you spend another $3,000 it is money well spent.

At a minimum it would seem that if you are buying property you should obtain the combo title and securitization report here or elsewhere from someone who knows what they are doing.

Are Consequential Damages Recoverable Under a Title Insurance Policy for the Time it Takes to Attempt to Cure a Title Defect?