NO TITLE INSURANCE ON FORECLOSED HOMES

Some of the nation’s largest title insurance companies have threatened to stop issuing title insurance for Chase and GMAC foreclosure properties. See, Washington Post article here. See, My Fox Phoenix report here.  The reason is that the so-called “robo-signers” have created a situation where title insurers feel uncomfortable issuing polices on these banks’ properties. (See my previous post). The supposition is that defects in the foreclosure process have caused defects to title. However, there are reports that some title insurers will issue insurance so long as Chase and GMAC agree to indemnify the insurer should the foreclosure be found defective. See, Miami Herald article here. It remains to be seen how this will affect Arizona home sales.

So, what does this actually mean? Title insurance is a policy that a buyer obtains when property is purchased to protect the buyer from defects in “title.” Title is the legal elements that constitute the right to control and dispose of real property. When title is “defective” the seller cannot legally convey clear title. No purchaser of property in their right mind would purchase without title insurance. Most lenders require that title insurance be purchased at the time of sale, otherwise they will not lend for the property.

Consider the following example: John buys a home from Frank. Frank sold the home in his capacity as personal representative for his father’s estate. Unknown to John, Frank failed to give notice in the probate action to certain heirs who were entitled to the home per the will. Thereafter, the disenfranchised heirs bring suit to recover the home. John is protected from financial losses by his title insurance.

Consider another example: John purchases a home from Frank. According to the county records, Frank “purchased” the home from Sue some 6 months previous. The only problem is that Sue never “sold” the property. The deed from Sue to Frank was an absolute forgery. When Sue returns from her 2 year Christian mission to Africa, she finds John living in her home. Sue sues anyone and everyone, including John, so she can recover her losses. John is protected by title insurance.

Consider a final example: Bill owns a home he purchased with a loan from Chase bank. The home has significant equity. Last June and July Chase misapplied two of John’s mortgage payments. Thereafter, Chase initiated foreclosure proceedings during which Chase failed to provide notice to John about the proceedings. Last week Bill found out his home was sold at a foreclosure auction to Sue. Bill sues anyone and everyone, including Sue, so he can recover his losses and/or receive a return of the home. Sue does not have title insurance because the insurer refused to issue a policy on Chase properties. Sue must defend title and her investment with her own money.

These examples may seem far fetched, but they are not as rare as one might expect. Moreover, the fee for title insurance is a good investment to protect from these types of harms. In light of these examples, it is easy to see the importance of the announcement that title insurance companies will not issue polices for Chase and GMAC foreclosure properties. How much would you pay for a home with no ability to purchase title insurance?