Title Insurance and Foreclosures in 2022
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Disclaimer: I’m a paralegal, not an attorney and cannot give you legal advice. This is not meant to be legal advice, and there is no guarantee that the information in this post will work for your individual situation. Please consult with an attorney if you have questions about your individual situation.
The foreclosure crisis was unprecedented and we found out about all sorts of questionable things going on. One of the concerns I still have about the last real estate crisis is title insurance and whether the new owner really has clear title to the property.
The courts largely ignored standing early on in the foreclosure crisis. I think this was because there was a huge narrative at the time that people took on more debt than they should have. I called it the “deadbeat homeowner” narrative.
In reality, though the real estate crash was caused by the banks, and since many of the regulators at the SEC and OCC and others had close ties to the banks, their conduct was largely overlooked.
It took several years before homeowners began getting good outcomes in their foreclosure cases, but a lot of people had millions of wealth wiped out, the economy was tanked and arguably never recovered. Wealth inequality has continued to erode the middle class, and today most of us are tired of doing all the work and not getting a fair share of the productivity gains in the form of profit sharing.
The people have had enough and we can see this everywhere now.
But I digress…and let’s back up for a moment.
What exactly is title insurance? From First American Title Insurance Company’s website:
“When you buy title insurance for your property, a title company searches these records to find - and remedy, if possible - several types of ownership issues. First, the title company searches public records to determine the property's ownership status. After this search, the underwriter will determine the insurability of the title.
Even the most skilled title professionals may not find all problems associated with a property, though. Some risks, such as title issues due to filing errors, forgeries, or undisclosed heirs, are difficult to identify. So after the title company finishes its searching, it also provides a title insurance policy that will help protect you from a variety of issues that might be uncovered later. (Emphasis is Christine’s – I’ll come back to this later in this post)
If you take out a mortgage loan when you buy your property, your lender will require a loan policy of title insurance. This protects the lender's interest in your property until your loan is paid off or refinanced.
On the other hand, an owner's policy of title insurance insures your ownership rights to the property. Even though you'll pay for this policy only once, your coverage will last as long as you own your home.”
So essentially you pay a title insurance company to search to make sure there are no liens or other title issues with the property before you buy it. There is usually also a page with exceptions on it, which are the issues they will not cover.
And by the way…I think it’s fairly easy to find a forgery. I used to find suspected forgeries all the time. There were robosigners, remember? People that were signing other people’s names, and you could find multiple examples of their signatures on the internet.
I don’t know why title companies think this stuff is hard to find, although I’m sure they aren’t looking in the same way that I look at people’s loan documents.
Also, I have seen undisclosed heirs show up too – this happened in one of my lawyer client’s legal practice.
I’ve been wondering whether we’d see foreclosure related exceptions on title insurance for at least the last decade.
Title companies could not/cannot search the MERS database, as an example. They likely can only insure based on their own search of the recorded documents, but I am not aware of anyone at a title company that critically reviews the documents at the recorder.
As such, I read this article from Law.com and the New York Law Journal with much interest. The article discusses how title insurance in New York is narrowed for properties sold through foreclosure.
This article is from March 2021, but is still relevant considering that a lot of people are expected to go into foreclosure as the pandemic moratoriums are being lifted.
The author, Jason Bergman, says in the article that “[p]assage of a recent statute creates a significant new impediment to title insurance for home loan mortgages devolving through a foreclosure sale.”
The tone of the article makes it sound as if foreclosures have been problematic for title insurance companies for awhile. I’m surprised to read that, because a decade ago nobody cared about all these issues.
There is a recent statute in New York, RPAPL §1302-a, effective December 23, 2019, which provides that the defense of lack of standing is no longer waivable where the mortgage is categorized as a home loan [as defined in RPAPL 1304(6)(a)]. Even if the defendant does not raise the issue of standing in a pre-answer motion to dismiss or in a responsive pleading, they have the ability to raise this defense right up to the time the home is sold at auction.
This kind of statute is necessary after the last foreclosure crisis that was complicated by the securitization of residential home loans.
What is securitization of home loans?
It used to be that the bank that gave you the loan on your home kept your Note and Deed of Trust/Mortgage in their vault somewhere, and they made you your home loan out of their own funds.
Around 2000, the bankers started securitizing home loans. The typically filed a prospectus with the Securities and Exchange Commission and disclosed a bunch of stuff to comply with securities laws. These are all public record.
The money in these pools usually came from institutional investors, such as pension funds. The money was pooled together and used to make home loans. Mortgage brokers had access to this money, which usually had variable terms and balloon payments and other exotic features. I saw a lot of people get pushed into these exotic loans who would have qualified for a standard 30 year loan with a fixed interest rate.
At the closing table, these loans had a big bank name as the lender, but in truth, the bank on the loan was usually not the real lender. That party was the securitized mortgage pool.
Most people had no idea this is what was happening until they went into foreclosure.
After closing, the Deeds of Trust/Mortgages were recorded in the county where the property was located with the big bank name shown as the lender, and typically that was the only document filed at the recorder’s office until these loans went into foreclosure.
Because there are multiple transfers of the loans during the securitization process, these would traditionally have all been transferred on paper and recorded with the county recorder’s office.
The banks didn’t do this, though. Instead, the bankers used an electronic mortgage tracking database, called MERS. There were all kinds of legal questions with MERS, but I’m not going to get into those issues at the moment.
When the real estate market collapsed, the banks had a problem showing standing to foreclose. There was absolutely nothing recorded in the county that showed they had standing to foreclose. The loan had been transferred multiple times and so the party who was owed the money wanted to foreclose, except they had never transferred the loans on paper.
So, the banks had to fabricate all that paperwork before they began the foreclosure process, and then document mills sprung up. You might remember hearing the term “robosigner” to describe people that did nothing but sign stacks and stacks of foreclosure paperwork, which then had to be notarized and then recorded.
This is all paperwork that is usually full of “errors” and inconsistencies, and homeowners began raising the issue of standing after people like me began pointing out the inconsistencies in these documents.
The statute in New York is brand new and it will be interesting to see what happens as more cases go into foreclosure this year.
I’m surprised to see title companies taking notice of the standing issue. At this point, I’m guessing that when they say they are narrowing insurance, it means there will probably be quite a few exceptions on new title insurance polices where there are unresolved questions of standing.
That means if someone buys a home through a foreclosure sale, and the previous owner comes forward and says their house was foreclosed improperly, the title insurance might not cover those kinds of claims. The new owner will have to hire their own lawyer and pay for the claims out of pocket.
I’m fascinated by this issue and will post more as I learn more about it.