Can title insurance save your home?
Lenders require title insurance to issue a mortgage. Now, some title insurance companies are re-examining if and how they should cover homes that have gone through foreclosure.
Following are seven questions foreclosure owners and potential buyers must ask about title insurance.
What does title insurance do?
Title insurance safeguards the title, which is your claim to a home. The title company searches to see if anyone else has any claims to the property. Any problems that arise are dealt with before closing.
However, if you’re buying a foreclosure and the title company doesn’t like what it sees, it may not sell you a policy.
Homebuyers need title insurance protection. Such a policy asserts the policy holder has the true claim to the property and promises to defend the policy holder in court if the claim is ever challenged.
In the event of a loss of that claim, the insurance company also promises to reimburse the policy holder up to the insured value of the house.
“In this environment, you’re basically buying litigation insurance,” says Kurt Pfotenhauer, CEO of the American Land Title Association, a title insurance industry trade group in Washington, D.C.
Who does the policy protect?
There are two kinds of title insurance: lender’s and owner’s. A lender’s policy is required for a mortgage. Many buyers don’t realize the lender’s policy only protects the lender.
“A lender’s policy is not going to help the person who owns the house at all,” says Ronald Mann, law professor at Columbia University in New York.
Don’t have owner’s title insurance? You still can buy an owner’s policy after closing. Many foreclosure buyers make substantial additions or improvements to the property. In such cases, update the coverage to protect your full investment, not just the purchase price of the home.
When purchasing owner’s title insurance, contact the company that issued your lender’s policy, Pfotenhauer says. The rate they give you often will be similar to a “refi rate,” he says.
Title insurance covers you from the day you purchased the policy back through the home’s entire history. So, your coverage will be as complete as if you’d purchased it at closing, Pfotenhauer says.
What are the foreclosure protections?
Will owner’s title insurance protect you from a flawed foreclosure? Yes, Pfotenhauer says.
“We have the duty to defend you in court — the end,” he says.
What if the claim is a result of mistakes made by the former mortgage servicer or lender, and records detailing the title are inaccurate?
“No, there isn’t a way we could slip the noose,” Pfotenhauer says. “Our obligation is actually to defend the title in court when it’s challenged.”
And it doesn’t matter who was initially to blame for the issue, he says.
But not everyone agrees. In some instances, title insurers could step aside, especially if they believe the claim is baseless, says Joyce Palomar, law professor at the University of Oklahoma in Norman.
She urges homeowners to ask the title insurer for an endorsement that specifies “that the insurer will pay the insured’s defense costs for a lawsuit about the validity of the foreclosure even if the insurer believes the insured will win the suit.”
Will I be able to get title insurance?
Homebuyers who purchase a foreclosure may or may not get title insurance. It varies on a case-by-case basis, says Michael Waiwood, president of EnTitle Insurance Co. in Independence, Ohio.
“It goes from A to Z, (as) far as the industry’s position” on insuring foreclosures is concerned, Waiwood says.
“We’re not saying no, but we’re very cautious,” he says.
Orlando Lucero, attorney and vice president of Stewart Title of Albuquerque, N.M., agrees.
“I think the companies are going to be looking at them much more closely,” he says.
And, in many cases, it makes a difference if you’re buying from a bank or on the courthouse steps. It also matters if you live in a judicial foreclosure area or a nonjudicial foreclosure area.
Another factor: Which institution foreclosed on the property? Did the owner have a lawyer? And is the institution willing to indemnify the title insurance company against any mistakes it made during foreclosure.
“Going forward, title insurance companies are going to be looking at banks to provide indemnification to the title insurance company,” Lucero says.
What should I do if I’m purchasing a foreclosure?
If you’re buying a foreclosure, you definitely want to purchase an owner’s policy.
“This is a time when, as a buyer, I’d want to make sure I had that policy,” says Joseph Pigg, vice president and senior counsel for the American Bankers Association.
Before closing, get a copy of your title insurance policy and read it. Pay special attention to Schedule B, where the title company spells out what it won’t cover, says Georgette Chapman Phillips, professor of real estate and law at the University of Pennsylvania in Philadelphia.
“Schedule A giveth, and Schedule B taketh away,” she says.
Are some foreclosures riskier to buy than others?
There are generally two ways to buy a foreclosure: on the courthouse steps or from the foreclosing lender — also known as “real estate owned,” or REO.
An REO sale is similar to the traditional buying process, except the home has gone through foreclosure.
Especially these days, a courthouse foreclosure sale is seen as much riskier than an REO sale when it comes to securing title insurance.
“We are less likely to insure these than if it’s coming directly from a lender,” Waiwood says.
Because it’s a bidding situation, it’s harder to have title insurance already in place before you buy the property. If you try to get it after the fact and there’s a problem with the title search, coverage may not be available.
“I recommend waiting until it goes through the process and buying it REO,” says Ron Phipps, president-elect of the National Association of Realtors. “You’re much better off buying it as REO knowing you can get title insurance.”
Should I worry if I’ve purchased a foreclosure?
Probably not. Experts generally do not expect courts in the vast majority of cases to start handing homes back to former owners as a result of the flawed foreclosure issue.
“I think you have some due process issues, but the reality is most people would not have a defense to the foreclosure,” Lucero says.
However, there could be claims.
“The owners who were foreclosed on may have a legal basis for claiming they may have some equity left in the house which may not be recorded, says Joseph W. Eaton, co-author of “The American Title Insurance Industry.”
That’s where an owner’s policy can come in handy.
If you bought a home in good faith, the courts likely will honor that — either by making sure you’re not out any money or by letting you stay in the house, Mann says.
It likely would require additional factors in the original mortgage or foreclosure — such as fraud — to justify giving the home back to the previous owner, he says.
Even in that instance, a bona fide purchaser “should be restored to their position before the sale,” Waiwood says.
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