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Why TITLE INSURANCE?

These 12 stories from the claims files of First American First American may refer to:
  • First American (comics), A superhero from America's Best Comics
  • First American, a division of the now-defunction Bank of Credit and Commerce International.
 demonstrate the need for title insurance as a vital protection for lenders.

SWEPT ALONG WITH CHANGE AND BUFFETED BY competition, mortgage 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 in·con·spic·u·ous  
adj.
Not readily noticeable.



incon·spic
 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.

Covered risks

Title insurance is in many ways casualty insurance. First, it protects the lender against a host of risks that may not be detectable even with the most careful search of records. These risks include forgery, fraudulent releases, disputed powers of attorney, incompetency The lack of ability, knowledge, legal qualification, or fitness to discharge a required duty or professional obligation.

The term incompetency has several meanings in the law.
 or lack of capacity of a person who's signed a document, ambiguous or erroneous legal descriptions, ambiguous judgment liens, misindexing of documents in public records or databases 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, are 12 true stories from the claims files of Santa Ana Santa Ana, city, El Salvador
Santa Ana (sän'tä ä`nä), city (1993 pop. 129,873), W El Salvador. It is the second largest city in the country and the commercial and processing center for a sugarcane, coffee, and cattle region.
, California-based First American Title Insurance Company.

A forgery in the chain of title

First American insured a first (purchase money) mortgage for $105,000, against a home on Kenneth Street Sir Kenneth Whistler Street, K.C.M.G., K.St.J., (1890 – 15 February 1972) was an Australian Jurist.

He was Chief Justice of the Supreme Court of New South Wales between 1950 and 1960.
 in Newton, Massachusetts The City of Newton in Middlesex County, Massachusetts, is an important residential suburb of Boston, which abuts it on the east. According to the 2000 census, the population of the Newton was 83,829, making it the tenth largest city in the state. . 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' claims, then settled by paying them $50,000, which was the estimated value of the property as vacant land.

Court orders

We insured a first (refinancing) mortgage for $260,000, against a home on Abby Court in Bloomfield Hills, Michigan Bloomfield Hills is a city in Oakland County of the U.S. state of Michigan. It is located in the Metro Detroit area, nearly completely surrounded by Bloomfield Township; it also borders the city of Birmingham. As of the 2000 census, the city population was 3,940. . The borrower was a single woman who'd recently acquired the home through a divorce decree. The title agent confirmed the vesting and legal description of the property by reading the property settlement provisions in the recorded judgment 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 court, 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 Unsecured debt

Debt that does not identify specific assets that the debtholder is entitled to in case of default.
, a $70,000 loan. Thus, under the marital debt provisions of the judgment 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.

A resale was completed, and the company paid the lender's unsatisfied loan balance of $54,375.

Life estate

We insured a first (purchase money) mortgage for $173,250, against a duplex on Penn Avenue Penn Avenue may be the longest street in Pittsburgh. Its western terminus lies at Gateway Center in downtown Pittsburgh. Its eastern portion exits the city at Wilkinsburg where it continues to exist as Penn Avenue with a numbering system that begins anew using small numbers.  in Staten Island Staten Island (1990 pop. 378,977), 59 sq mi (160 sq km), SE N.Y., in New York Bay, SW of Manhattan, forming Richmond co. of New York state and the borough of Staten Island of New York City. , New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
. 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 An individual who conveys or transfers ownership of property.

In real property law, an individual who sells land is known as the grantor.


grantor n.
 retains a life tenancy in the six-room apartment located at [number] 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 evict Mary, but she successfully defended herself as the holder of a life estate unburdened by the insured mortgage. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently
, 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, the company purchased the insured mortgage for $160,000. Mary continues to live in the apartment.

Power of Attorney

We insured a third deed of trust A document that embodies the agreement between a lender and a borrower to transfer an interest in the borrower's land to a neutral third party, a trustee, to secure the payment of a debt by the borrower.  for $40,000, against a home on Old Chesterbrook Road in McLean, Virginia McLean is an unincorporated community located in Fairfax County in Northern Virginia. A small geographic area along Chain Bridge Road in Arlington County has a 22101 zip code and is also part of McLean. . 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 we 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.

Legal descriptions

We insured a first (refinancing) deed of trust for $441,500, against a home on Bursera Way in Palm Desert, California Palm Desert is a city in Riverside County, California, in the Coachella Valley (Palm Springs area), approximately 11 miles east of Palm Springs. The population was 41,155 at the 2000 census. . 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.

Judgment liens

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 Fayetteville is a city in Fayette County, Georgia, United States. The population was 11,148 at the 2000 Census. Census Estimates of 2005 indicate a population of 14,363. The city is the county seat of Fayette CountyGR6. . The borrower's name was Robert Van Pounds, Our agent's search turned up two judgments in local lien indices against a Van Pounds. The borrower denied being the judgment debtor A party against which an unsatisfied court decision is awarded; a person who is obligated to satisfy a court decision.

The term judgment debtor describes a party against which a court has made a monetary award.
 and signed an affidavit saying he was lien free.

Later, the loan became delinquent and the borrower filed bankruptcy. The judgment creditors showed proof the borrower was their debtor, so the judgment liens enjoyed priority over our insured deed to secure debt.

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 judgment debtor.

Misindexing

We insured a first (purchase money) mortgage for $137,350, against a home on Lakeview Trail in Danbury, Connecticut “Danbury” redirects here. For other uses, see Danbury (disambiguation).
Danbury is a city in Fairfield County, Connecticut, United States. It has an estimated population as of July 1, 2005 of 78,736.
. Soon after closing, the lender learned there was a prior missed mortgage, now threatening foreclosure.

The missed mortgage was overlooked by our searcher because it was misindexed in the Fairfield County Fairfield County is the name of three counties in the United States:
  • Fairfield County, Connecticut
  • Fairfield County, Ohio
  • Fairfield County, South Carolina
 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.

Conditions, covenants and restrictions

We insured a first (refinancing) deed of trust for $425,000, against a new home on Lake Vista Drive in Bonsall, California Bonsall is a census-designated place (CDP) in San Diego County, California, United States. The population was 3,401 at the 2000 census. Geography
Bonsall is located at  (33.279630, -117.193489)GR1.
. Unbeknownst to us, at the time our title policy was issued, the owner was entangled en·tan·gle  
tr.v. en·tan·gled, en·tan·gling, en·tan·gles
1. To twist together or entwine into a confusing mass; snarl.

2. To complicate; confuse.

3. To involve in or as if in a tangle.
 in litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.

When a person begins a civil lawsuit, the person enters into a process called litigation.
 with neighbors who claimed his home violated height restrictions contained in recorded conditions, covenants and restrictions (CC&Rs).

The property consisted of two lots on a hillside. The CC&Rs 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 either 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 roof·line  
n.
The profile of or silhouette made by a roof or series of roofs.
 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 different judge ruled in favor of the lender, holding that the CC&Rs 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.

The neighbors did not appeal this decision--which was fortunate, because 16 months later the basis for the judge's ruling was overturned by a decision of the state Supreme Court.

The company paid more than $50,000 in legal expenses for this successful defense.

Intervening lien

We insured a first (refinancing) deed of trust for $98,000, against a home on Albion Lane in Longmont, Colorado The City of Longmont is a home rule municipality located in Boulder County and Weld County, Colorado, United States. Longmont is the 13th most populous city in the State of Colorado. The word "Longmont" comes from Longs Peak, a prominent mountain named for explorer Stephen H. . The borrowers signed loan documents on November 8. Because of Veterans Day falling on November 11, the three-day rescission The abrogation of a contract, effective from its inception, thereby restoring the parties to the positions they would have occupied if no contract had ever been formed. By Agreement  period expired the following day, November 12.

On Monday, November 15, there was a funding snafu 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 An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  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 Lump sum

A large one-time payment of money.
 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.

Factory seconds

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 il·leg·i·ble  
adj.
Not legible or decipherable.



il·legi·bil
."

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.

Release "to come"

We insured a second (refinancing) mortgage for $40,000, against a home on 19th Street in 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 the credit line loan account. After receiving a monthly statement showing the old 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 overencumbered.

We filed suit to establish our insured lender's priority, but our hopes were dashed by a state court of 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 insufficient evidence n. a finding (decision) by a trial judge or an appeals court that the prosecution in a criminal case or a plaintiff in a lawsuit has not proved the case because the attorney did not present enough convincing evidence.  that the prior lender should have known that a 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.

Defective documents

We insured a first deed of trust for $71,200, against a home on Hillsdale Drive in Springfield, Tennessee. Ten years later, the borrowers filed bankruptcy and a trustee in bankruptcy trustee in bankruptcy n. a person appointed by a bankruptcy court to supervise the affairs of person or business which is in bankruptcy, determine both assets and debts, marshal (gather) and manage the assets if necessary, and report to the court.  was appointed.

The trustee noticed that a notarial no·tar·i·al  
adj.
1. Of or relating to a notary public.

2. Executed or drawn up by a notary public.



no·tar
 seal was not affixed af·fix  
tr.v. af·fixed, af·fix·ing, af·fix·es
1. To secure to something; attach: affix a label to a package.

2.
 to the insured mortgage as required by Tennessee statutes and promptly filed an adversary proceeding Any action, hearing, investigation, inquest, or inquiry brought by one party against another in which the party seeking relief has given legal notice to and provided the other party with an opportunity to contest the claims that have been made against him or her.  in the bankruptcy, seeking to avoid the mortgage as an interest in the debtors' 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 The Tennessee Supreme Court is the highest appellate court of the State of Tennessee. Unlike those of other states, the Tennessee Supreme Court is responsible for the appointment of the state attorney general.  to decide whether omission of the notary notary
 or notary public

Public officer who certifies and attests to the authenticity of writings (e.g., deeds) and takes affidavits, depositions, and protests of negotiable instruments.
 seal would render a deed of trust null and void 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 now 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 Unsecured Creditor

An individual or institution that lends money without obtaining specified assets as collateral. This poses a higher risk to the creditor because they have nothing to fall back on should the borrower default on the loan. A debenture holder is an unsecured creditor.
 in this case, plus legal expenses.

Conclusion

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 interest; and paying legal expenses when the lender's 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 anyone still asking, "Why title insurance?" we should also mention our experience in other countries, where we've found land conveyancing con·vey·anc·ing  
n.
The branch of legal practice dealing with the conveyance of property or real estate.


conveyancing
Noun

the branch of law dealing with the transfer of ownership of property

 processes to be slower and more labor intensive Labor Intensive

A process or industry that requires large amounts of human effort to produce goods.

Notes:
A good example is the hospitality industry (hotels, restaurants, etc), they are considered to be very people-oriented.
See also: Capital Intensive, Trading Dollars
 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 from loan application to closing by 90 percent and the overall costs to the consumer by 60 percent. Likewise in the United Kingdom, where for insured transactions we offer to reduce the period between application and closing from six to 12 weeks down to six 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 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.

Albert Rush is senior vice president and national counsel for First American Title Insurance Company in Santa Ana, California Santa Ana is the most populous city in Orange County, California and is the county seat. It lies approximately 10 miles inland from the Pacific Ocean, on the largely seasonal Santa Ana River. .
COPYRIGHT 2000 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2000 Gale, Cengage Learning. All rights reserved.

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Author:RUSH, ALBERT
Publication:Mortgage Banking
Geographic Code:1USA
Date:Aug 1, 2000
Words:2849
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