'I don't need title insurance, I think.'
In an earlier post, I addressed the 16th President of the United States and his family's involvement in a somewhat unforgiving property dispute resulting in loss of land and money. Some of us might ask: 'Old Abe had title problems with his real estate, but that was over a century and a half ago. Surely I won’t have such title and real estate problems in this modern age of technology.'
Theoretically, that person may be 100% correct—a defective title may never arise in a residential or commercial purchase of real estate, period. In a perfect world, that would be totally accurate. In the same vein, when it comes to our hard earned income, we are somewhat reluctant to part with our funds for something that does not give us immediate feedback like, for example, a diamond necklace, new car or 58 inch television.
It is because of this we begrudgingly pay items on a settlement statement for an insurance we essentially do not understand-- why we are charged this fee at all. This is a legitimate question which I will answer in this line of posts as we will delve into this grayish hue known as title insurance.
Up to the Minute...
Prospects for the U.S. commercial real estate appear promising for next year, with broad rent increases as well as tighter vacancy rates in most major sectors, according to the National Association of Realtors.
'Solid economic growth in the third quarter proved that the second quarter wasn't an anomaly, as business spending increased, commercial construction rose and the labor market continued to make positive strides,' he said. 'Job growth is the catalyst to improved demand for commercial real estate leasing and new construction projects.' Lawrence Yun, National Association of Realtors chief economist.
I don’t understand why title insurance is needed.
In the title insurance industry, 'insurance' essentially has the same meaning as any other type of insurance—it is needed when a triggering event occurs thereby invoking immediate need for coverage.
Title insurance is risk-based in nature. A good analogy in the insurance industry is automobile insurance—you may never need its protections, but it is there when an event occurs requiring protection in the form of payment of losses associated with the accident. So too on a snowy day you may be the most careful driver and have never been involved in so much as a 'fender bender.' However, because another person does not see that ice patch in the road, their inattention results in an accident that is wholly not your fault. You, however, have to pay out of pocket a deductible that results in monetary loss to you.
Title insurance is based upon the same principle—someone you do not know has caused a defect or lien to be placed on the real estate you are about to purchase. If you did not take proper steps to protect yourself from the losses that spring directly from these defects, you could be held responsible for them and suffer a loss as a result of not finding them out beforehand (not swerving to miss the other guy). It is at this point title insurance takes the wheel. Don't let another's acts adversely affect your large investments—obtain title insurance on your property.
Do I make claims against anything that may be wrong with my title?
In further explaining title insurance and the need for it, we must bear in mind that Title insurance is not title Assurance. It does not assure you that you have immaculate and impeccable title to your land. It is actually a contract of indemnity. By its very terms, it only pays a loss when there is damage suffered. So if you refinance your property, and you find out there was a defect 30 years ago that does not affect the marketability of title, (say there was still due an inheritance tax payment to the PA department of Revenue of $110.00, the title company may continue to insure that property without clearing that small matter up or paying it at all). Thus, the company cannot be forced to clear items of record such as in this example. Additionally, an insured cannot make a claim against the title company for the value of their home ($100,000) due to the inheritance tax scenario set forth above because the policy pay for actual loss suffered by the insured.
Up to the Minute….CFPB Takes Enforcement Action Against 'Buy-Here, Pay-Here' Auto Dealer for Alleged Unfair Collection and Credit Reporting Tactics
On November 19, the CFPB announced an enforcement action against a 'buy-here, pay-here' auto dealer alleging unfair debt collection practices and the furnishing of inaccurate information about customers to credit reporting agencies. 'Buy-here, pay-here' auto dealers typically do not assign their retail installment sale contracts (RISCs) to unaffiliated finance companies or banks, and therefore are subject to the CFPB’s enforcement authority. Consistent with the position it staked out in CFPB Bulletin 2013-07, in this enforcement action the CFPB appears to have applied specific requirements of the Fair Debt Collection Practices Act (FDCPA) to the dealer in its capacity as a creditor based on the CFPB's broader authority over unfair, deceptive, or abusive acts practices.
Caveat Emptor—I've heard of it, but how is it related to me getting title insurance?
This translated to English means: Buyer Beware.
As in the case of a seller offering to sell you the Brooklyn Bridge, the burden is on the buyer to make sure any defects in title and its ownership are not transferred from the seller (or their predecessor) to the buyer. Experts in title to land is not something all buyers cannot be. Thus, we turn to title insurance companies to locate any defects in the chain of title that may be 'inherited' by the buyer in a sale. Title insurance agents sift through countless documents to bring to light defects that may exist in the title chain. Thus buyers rely heavily on the insurance companies when purchasing a property—lessening the threat of the purest application of the doctrine of Caveat Emptor.
'I don't need Title Insurance, I think...' The Human Factor:
Searching title to real estate is both a science and art. Human error in data input and recognition causes us to experience bumps on that snowy road thereby detouring us from our once deliberate path in home buying. The potential information negatively affecting your home varies as much as the types of liens that can attach to your property (we'll get to those in subsequent posts). Even misspelled creditor names or parties to the transaction can result in your purchase not closing on time or at all.
Whenever the human factor is brought into the equation—just as the ice on a snowy day, insurance is there to cover the loss under the terms of the policy. In effect, title insurance shifts the burden of loss from the buyer or insured to the insurance company under the terms of the insurance policy.
Did you Know? About 95% of the time and resources necessary for a successful real estate closing occur before actual settlement?
'I don't need Title Insurance, I think...' The Agent’s role:
Many times at real estate closings all the time and effort going into the transaction happens before the actual sit down at settlement. As only about 5% of the real estate transaction activity occurs at the face-to-face closing, it is the agent's responsibility to coordinate not only the closing, but all activities in a similar way a conductor of an orchestra directs the symphony.
Each party to the closing is a musician in their own right, handling that aspect of what they have been trained for and are experts in themselves, while at the same time they feed information to the title agent like spokes on a wheel. Agents correlate all data in tandem with the schedules of the parties to ensure a seamless and efficient real estate closing.
An Agent's Role—Fraud
Are there levels of fraud that can be perpetrated at a closing? Well, from a realist answer, no—fraud is fraud. There are however situations that can arise in a real estate closing that may have a lesser gradient of fraudulent conduct. For example, a direct fraud is normally something we all can all spot when we are aware of it. However, even in direct fraud scenarios, we still may be deceived as we see in the following Life Lesson:
There was a guy that went on the 'World Wide Web' in its early days and visited an online auction site. He spotted an Abraham Lincoln picture and pounced with a buy it now feature for $76.95! After it arrived 3 days later he ripped through the bubble wrap and beheld it in all its glory-—a photocopy of an original with photo jet printer cardstock for a backing. With no insurance and a seller that disappeared into cyberspace, he was taken quite frankly he and mad. To this day I have kept that fake at the center of my Civil War collection to remind me that never again will I be taken by such an unethical transaction.
All of us may not have been a victim of fraud, but in the real estate industry, countless attempts at fraudulent transactions occur regularly. Fraud may also not be as direct as the Lincoln picture in the last post, but it can be hidden with more far reaching consequences than $76.95. It could take the form of a party hiding notices received for delinquent taxes, hidden liens against the property the seller is only aware of or an act of drawing on a line of credit immediately before closing, resulting with the property being encumbered with a lien for $50,000 nobody at the closing table was aware of—except the seller. Title insurance agents are trained to look out for these types of acts.
'I don't need Title Insurance, I think...' Acts of the parties that can jeopardize the entire transaction: Lesser forms of fraud that, on their face, may seem harmless, but their consequences can be devastating.
One example of a 'lesser' attempt at fraud by a party was from a closing about 10 years ago that involved signatures on the documents.
We were doing a refinance at the home of the owners in Pennsylvania at their rural farmhouse. Both borrowers were there. Both courteous and polite to me and even offered some fresh baked cookies. By the time we sat for the closing, I had within those five minutes noticed something about the wife that seemed odd—nothing blatant, just a feeling as to her only; her age. When I asked for the photo ids at the start of the closing, she indicated she left it at work. I proceed to tell her the other forms of id we accept, but she had none. At that moment the husband took me aside and explained that that was his daughter in law, and asked if we can have her sign for the wife as she was working the night shift at Walmart in town. How they thought I would not eventually know this is beyond me.
Well, you can guess what happened next: we closed the loan on the hood of his Dodge in the Walmart parking lot at 10:00 PM.
There is always that aspect of 'fraud' that we, as title agents and underwriters, must be cognizant of at every phase of the closing process. Had there been a loss due to a forged signature, the burden is shifted to the title insurance company to address its coverage from the terms of the policy—leaving the insured with something more than caveat emptor.
Up to the Minute...
CFPB recently issued proposed amendments to mortgage servicing rules in the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act. According to a Bureau, the proposal would:
- Require servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan;
- Expand consumer protections to surviving family members and other homeowners;
- Require servicers to notify borrowers when loss mitigation applications are complete
- Protect struggling borrowers during servicing transfers;
- Clarify servicers' obligations to avoid dual-tracking and prevent wrongful foreclosures;
- Clarify when a borrower becomes delinquent;
- Provide more information to borrowers in bankruptcy;
- Provide flexibility for servicers to comply with certain force-placed insurance and periodic statement disclosure requirements;
- Clarify several early intervention, loss mitigation, information request, and prompt crediting of payment requirements, as well as the small servicer exemption;
- Exempt servicers from providing periodic statements under certain circumstances when the servicer has charged off the mortgage;
Another 'lesser fraud,' with substantial monetary loss...
Over the many years we’ve seen people ask the title agent notarize a document that was not signed in front of them. Sometimes they are harmless inquiries due to timing and locations of the parties, but sometimes they are not. To notarize a document not executed in front of you places all parties to the transaction at risk, especially monetary loss. This not only can cause the notary to lose their commission, but can also result in a substantial loss to a lender should defense counsel for the borrower raise at the foreclosure proceeding the fact that the borrowers did not sign in front of a notary. Make sure you choose a title company with experience in such matters and, even in these 'lesser' acts that present themselves, will follow protocol and protect the buyer and lender's property should such situations arise.
Did You Know? In the title insurance policy, Fraud is one of the coverages in relation to documentation recorded in the courthouse. Specifically, Forged documents is an item specifically addressed in the insurance coverage terms of the policy.