The last thing most homebuyers want to think about at their closing is title insurance. They’ve already been through the ringer, paying thousands of dollars in often-confusing fees and signing mountains of documents.
Title insurance is almost certainly an afterthought.
But homebuyers may want to think again.
The messy fallout from badly -- and, in some cases, perhaps fraudulently -- processed foreclosures has cast into sharp focus the need for comprehensive title insurance. As always, homebuyers should make sure they’re getting a policy that covers any costs tied to hidden fees or liens placed against the property that may have not been detected during a title search.
But, now more than ever, homebuyers, especially those purchasing homes through a foreclosure or a short sale, need a policy that covers legal fees if someone challenges the validity of their title.
Lita Epstein, a foreclosure expert and author of several personal finance books, said one of the root causes of the recent financial crisis -- a rush by lenders to sell mortgages willy nilly to as many investors as possible -- can also be blamed for the current mess.
“These loans were sold so many different times that no one knows who has the original paperwork. That really gets to the core of the financial scandal. The original closing documents for these properties have been lost as those loans were sold and spread out among many investors,” said Epstein.
In recent weeks, many of the major mortgage loan servicers, including Bank of America (NYSE:BAC), Ally Financial’s GMAC Mortgage, and JPMorgan Chase (NYSE:JPM), have suspended foreclosures in the wake of legal challenges charging all manner of improprieties. And as of Wednesday all 50 state attorneys general have said they will investigate how foreclosures were conducted in their states.
The investigations will attempt to determine if loan servicers handling foreclosures processed all the paperwork properly. In affidavits made public since the foreclosure mess gained steam, some loan servicers, dubbed robo-signers, have acknowledged signing off on hundreds of foreclosures each day without ever verifying or even reviewing the documents included in the paperwork crossing their desks.
Thousands of homeowners whose mortgages were foreclosed on are now challenging the loss of their homes, and that number is rapidly climbing. These challenges throw into question the rightful ownership of homes sold through foreclosures.
“There are going to be cases where a homeowner has a right to walk back in that home,” said Matt Weidner, a Florida-based real estate attorney. “The title industry has to decide how they’re going to deal with these cases.”
That’s why comprehensive title insurance has suddenly become so important. So what is title insurance and why is it required by all banks making mortgage loans?
Title insurance is defined as protection against losses stemming from any problems connected to the title of a piece of property. So if there were homeowners’ association fees that went unpaid by a previous owner, or liens against the home placed by local tax assessors that weren’t detected during the title search conducted while the home was being purchased, those costs would be covered by title insurance. The insurance company will also cover all legal fees rising from the dispute.
The problems that have arisen in the wake of the real estate craze early last decade stem from the fact that mortgages and titles changed hands so quickly and so many times that, in many instances, no one knows how to track down all the original paperwork.
In regions hard hit by foreclosures -- Florida, for example -- much of that paperwork isn’t showing up when title searches are being conducted on sales of foreclosed home. Consequently, lots of potential problems are going undetected.
“There is information that isn’t making it to the proper place quickly enough and it’s making it difficult to be certain that the title has completely cleared,” Epstein explained.
Epstein said there are cases in which mortgages were split up among several investors and those separate investors have foreclosed on the same mortgage at different times, leaving the current title holder in an uneasy state of legal and financial limbo.
That’s the sort of dispute that title insurance is designed to settle.
At least one large title insurer isn’t exactly embracing these issues. On Oct. 1, Old Republic National Title Insurance Co., a unit of Old United International Corp (NYSE:ORI), announced it wouldn’t issue new policies on homes recently foreclosed by GMAC or JPMorgan Chase.
Old Republic did not return calls seeking comment on its new policy.
Weidner said the title insurers should have seen this coming.
“Now they’re looking at all these allegations, and they’re asking how big is the risk and wondering what are we gonna do about it. The magnitude and the proportions are so big, you struggle to find an adjective,” he said.
According to Weidner, Florida alone has more than 500,000 foreclosure cases pending.
“Even if there’s a problem with a small fraction of these, it’s incredibly destabilizing to the real estate industry and financial markets in general,” said Weidner.