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Covered Risks
• A Forgery in the Chain
of Title
• Court Orders
• Life Esate
• Power of Attorney
• Legal Descriptions
• judgement Liens
• Incorrectly Indexed
• Conditions, Covenants
and Restrictions
• Intervening Lien
• Factory Seconds
• Release "to come"
• Defective Documents
• Conclusion
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SWEPT
ALONG WITH CHANGE AND BUFFETED BY
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| Competition, mortgages 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. |
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Covered Risks
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| Title insurance is in many ways
casualty insurance. First, it protects the lender
against a host o frisks that may not be detectable
even with the most careful search 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 judgement
liens, incorrectly indexed of documents in public
records or database 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, there are 12
true stories from the claims files of Santa Ana;
California based First American Title Insurance
Company. |
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A Forgery in the Chain of Title
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First American insured a firs
(purchase money) mortgages 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' claim, then
settled by paying them $50,000, which was the estimated
value of the property as vacant land. |
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Court Orders
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| We insured a first (refinancing)
mortgages for $260,000, against a home on Abby Court
in Bloomfield Hills, Michigan. The borrower was
single woman who'd recently acquired the home through
a divorce decree. The title agent confirmed the
vesting and legal description of the property reading
the property settlement provisions in the recorded
judgement 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 count, 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 judgement
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. |
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Life Esate
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| We insured a first (purchase money)
mortgages 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 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 evoct
Mary, but she successfully defended herself as the
holder of a life estate unburned 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, tje company
purchased the insured mortgages for $160,000 Mary
continues to live in the apartment. |
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Power of Attorney
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| 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 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.
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Legal Descriptions
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| We insured a first (refinancing)
deed of trust for $441,500, against a home on Bursea
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 posted
to the property in our automated title plant. |
| The company paid $149,672 to release
the missed deed of trust. |
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|
judgement Liens
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| 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 judgements in local lien indices against a Van
Pounds. The borrower denied being the judgement
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 judgement debtor. |
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Incorrectly Indexed
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| We insured a first (purchase money)
mortgages for $137,350, against a home loan on Lakeview
Trail in Danbury, Connecticut. Soon after closing,
the lender learned there was a prior missed mortgage,
now threating 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. |
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Conditions, Covenants and Restrictions
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| We insured a first (refinancing)
deed of trust for $$425,000, against a new home
on Lake Vista Drive in Bonsall, California. Unbeknown
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&R's) |
| The property consisted of two
lots on a hillside. The CC&R's 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 wither
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 a different judge
ruled in favor of the lender, holding that the CC&R's
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. |
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The neighbors did not appeal this decision which
we fortunate because 16 months later the basis for
the judge's ruling was over turned by a decision
of the state Supreme Court. |
| The company paid more than $50,000
in legal expenses for this successful defense. |
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Intervening Lien
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| 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 snaf 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. |
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Factory Seconds
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| 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. |
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Release "to come"
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| We insured a second (refinancing)
mortgages for $40,000, against a home on 19th Street
on 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 credit line loan account.
After receiving a monthly statement showing the
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 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 know to 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. |
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Defective Documents
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| 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
mortgages as required by Tennessee statues and promptly
filed an adversary proceeding in the bankruptcy,
seeking to avoid the mortgage as an interest in
the debtor's 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 avoid 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 no 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. |
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Conclusion
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| 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
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 any one 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 things up while also reducing risks. |
| In Canada, for example,
First American began offering title insurance in
1991. With insured transactions, we reduce the time
form loan application to closing by 90 percent and
the overall costs to the consumer by 60 percent.
Likewise in the United Kingdo, were for insured
transactions we offer to reduce the period between
application and closing from six to 12 weeks down
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 the 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. |
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