1. AS SEEN IN DSNEWS
Title insurance claims
are on the rise, and
this upsurge is not only
contributing to drawn-out
foreclosure timelines,
but it’s putting title
companies in dire straits.
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INDUSTRY INSIGHT
MARKET PULSE
TITLE WAVE
MARKET PULSE
By James E. Moon, Esq., and Michael J. Barker, Esq.
S
ince the foreclosure crisis began, there has been significant discussion nonexistent. It is not uncommon for foreclosure
BEST PRACTICES
counsel to be completely unaware of the actions
over the ever-lengthening time required to complete a judicial
of the counsel appointed by the title company
foreclosure. A number of factors are consistently at the forefront and vice versa. Confusion, frustration, and delay
of these discussions, including borrower delay tactics, government are the ultimate result.
holds, and servicer and outside counsel transfers. Lack of communication between interested
parties can cause delays, but economics plays
In addition to these usual suspects, one lien holders, or un-divested interest of heirs, to a role as well. Title policies do not generate
frequently overlooked contributing element, more name a few. Claims can behave quite esoterically, recurring premiums, unlike traditional insur-
often than not, can stall a judicial foreclosure for but when they’re confronted in foreclosure, they ance products such as motor vehicle or property
months—potentially by more than a year. Specifi- can be downright nasty. Unfortunately, due to insurance. Rather, there is a one-time premium
GROUND FORCES
cally, when a title issue is confronted that prevents the unprecedented pace of sales and refinances charged at the time of issuance and the policy
the prosecution of a foreclosure, a file can get lost in during the real estate boom, far too many title in- will remain in effect essentially as long as the
title claim limbo, which significantly impacts the surance agents—both corporate and attorney— insured retains an interest in the real property
timeline to recover an asset in foreclosure. failed to uphold accepted industry standards in detailed in the policy. To generate sufficient
providing settlement and title insurance services. revenue to remain viable, title insurers need high
Title Insurance, in Brief As a direct result of such practices, errors and transactional volume and low claim payout.2 As
The objective of title insurance is, in essence, omissions are now coming to light. the real estate bubble burst, revenue via real estate
rather simple: to assist the parties in real estate Resolving title insurance claims in a “normal” sales plummeted.3
transactions to determine their rights, title, and environment can be time consuming. There During this same time period, title insurance
POINT— COUNTERPOINT
interests and to ensure that land transfer is a secure are always multiple parties involved such as the claims rose well beyond expectations with the
transaction between the parties. As part of this insured, the title insurance carrier, the closing top five underwriters paying nearly $1 billion
process, before a land transfer is completed, a title agent, and the party claiming an adverse interest in claims in 2007 and major title underwriters
search of the property is conducted to determine if to the insured. Of course, when a title claim is reporting an increase in title claims of 62 percent
the buyer faces any potential problems or pitfalls. made in the environment of a foreclosure, the in the first half of 2007 alone.4 As a result of
Liens, easements, rights-of-way, or sale of future difficulty and, most important, the time it takes decreased revenue, staffing levels of many title
interests are typically recorded in public records. to resolve the title issue increases substantially insurers were downsized.5 A difficulty subse-
Underwriting is then able to look at these and results in further delaying the foreclosure quently arose related to forecasting future em-
potential title issues and, in many cases, resolve timeline. ployment needs against anticipated claim levels.
them before a closing. It is estimated that ap- We can directly attribute the delay to the very Unfortunately, after staffing cuts, some insurers
proximately one in four property sales prior to nature of how title issues are typically resolved. scrambled to increase the number of employees
the financial crisis had some type of title issue However, the interplay between foreclosure in claims departments to keep up with the rise in
that was cleared—usually unbeknownst to the counsel, the loan servicer, the title company, and claims workload, but many never caught back up
purchaser or lender.1 its appointed counsel can make already murky and are still behind in processing claims.
waters turn pitch black. Unfortunately, although Most analysts argue the process of clearing
Resolution Hurdles Compounded all parties involved have the same common goal property inventories and increasing property
Title issues can come in many forms: errone- of resolving the title claim, the communication values via supply/demand needs to be acceler-
ous legal descriptions, interest claims by prior between parties with aligned interest is almost ated, which at first blush appears backed by the
1. Cal Zimmerman, “Title Issues Can Make Property Sales Fall Flat,” NuWire Investor, February 1, 2008, www.nuwireinvestor.com/articles/title-issues-can-make-property-sales-fall-flat-51421.aspx. 2. See Title Insurance, A Comprehensive Overview (James L. Gosdin ed., 3rd
ed. 2007) for further information regarding the title insurance industry. 3. For 2008 and 2009, refinance transactions increased; however, the overall title business was down significantly from 2007 and 2006 levels with ranges of 14 to 22 percent. See First American, First American Title
Order Transactions by Month for Direct Title Operations, www.firstam.com/titleordercounts.cfm (as of March 9, 2009). 4. Annette Haddad, “Foreclosures Hit Title Insurer—First American Posts a Second-Quarter Loss as the Hosing Downturn Increases Claim Filings,” L.A. Times,
August 3, 2007, at C3. 5. Fidelity National Financial, Inc., eliminated 1,500 out of 5,500 positions and closed 125 offices, while LandAmerica cut 4,200 positions in 2007 and 2008. LandAmerica was eventually forced to seek Chapter 11 protection in 2008 after its stock price plummeted
from $120 per share to just over $0.20 a share amidst surging claim filings.6.Yves Smith, “Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers,” Naked Capitalism, September 18, 2010, www.nakedcapitalism.com/2010/09/
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3. AS SEEN IN DSNEWS
renewed interest in foreclosures and foreclosure affected properties will require re-foreclosure or Title insurance protects the buyer against defects,
filings.6 However, this push has created the very quiet title actions. errors, or omissions in the chain of title. As title
upswing title companies fear: As foreclosures Under title policies, an insurer has to act insurance firms begin to shy away from insur-
increase, the likelihood for serious title defects with diligence to clear title problems brought ing foreclosed properties, the entire real estate
also increases. Analysis of a random sample of under a claim or face damages for failing to market could suffer. The prices of foreclosures
foreclosed properties conducted by AFX Title timely act.10 The difficulty faced with foreclosure would plummet since lenders will not issue a new
detected mortgage recording issues that created claims brought under a title policy is the strong mortgage without title insurance. And small
and are continuing to create title flaws, the result possibility that problems with title many times
businesses that invested in commercial proper-
of which is an anticipated mass upsurge in title cannot be cleared. And, given the slow track
ties, taking advantage of historically low rates,
claims over the next few years.7 record of many financial institutions in correct-
could face ruin if they are hit with expensive
ing the issues raised, it is highly likely a violation
litigation to correct title issues on property they
Adding to Foreclosure Delays of the diligence standard for title insurers would
Early last year, financial institutions and state occur prior to them curing title. This places the thought they rightfully owned.
attorneys general reached a comprimise to com- title insurer in a difficult position of breaching While case law at the current time is un-
pensate property buyers for alleged damages due policy provisions with the limited ability to clear friendly toward title defense, courts typically are
to questioned foreclosure practices. While this title, if at all, given the court’s stance on “true” equally as unfriendly due to their misunderstand-
settlement and its intent seems to be a fair and ownership of notes and mortgages by banks. ing of title policies and the provisions therein.
effective resolution for all parties, the downside Most certainly, once it is realized that such an Many judges never see title policy claims or at
is the enormous clouded title problem is not ad- opportunity exists to collect on the title policy, an best may have one or two come through during
dressed under the terms of that settlement. Many influx of claims will occur. their entire careers. The legal system faced these
property owners now allege they cannot prove Other courts reached similar decisions as same difficulties as foreclosure actions increased
they own real estate they thought they rightfully the Premier Tierra court, such as that in Mattson in numbers. Courts and attorneys were in large
purchased while others argue that banks cannot Ridge, LLC, v. Clear Rock Title, LLP, 2011 WL part forced to learn under a deluge of case filings.
prove they have the right to foreclose and sell the 2175832 (Minn. App. 2011)11, which found that The same could happen with an anticipated swell
property. the insured could recover consequential damages in title claim filings. The end result is the creation
While no one is sure of the number of prop- including lost profits, the cost to cure the defect,
of more “bad law,” the misapplication of statutes
erties that face clouded titles, it is believed to be attorney’s fees, and the diminution in value to the
and policy provisions, and a windfall of claims
in excess of 1 million personal residences given property, beyond policy limits where the insurer
to the detriment of the title insurer and the real
the number of foreclosures that have occurred breaches the policy by failing to cure title. Again,
since 2006 and a great deal more commercial the title insurer is essentially exposed to quasi- estate market.
properties.8 The end result is that a property bad faith damages by allowing for an excess
owner, whether commercial or residential, can- judgment against them for failing to cure the title New Vulnerabilities
not sell the property if he or she cannot prove to a property. The difficulty again is the question It is abundantly clear based upon the continu-
ownership, as mortgage companies will not issue of what occurs if a title cannot be cleared due to ation of foreclosures that we are at the begin-
mortgages on property that cannot be insured. mortgage foreclosure issues that created clouds ning stages of what could well end up being our
To compound troubles, title insurance on title. next wave of instability in the real estate market
companies also face seemingly harmful case law Title insurers face further claim exposure caused by a mass increase in title claims that
due to a frequent misunderstanding by lawyers through the truism that bad facts make bad law. simultaneously places our title insurers in an
and judges as to what is and isn’t available In JPMorgan Chase Bank, N.A., v. First American exceptionally difficult financial position.
under title insurance. A decision reached in Title Ins. Co., 795 F.Supp.2d 624 (E.D. Mich. No one can indicate how many clouded
Massachusetts in U.S. Bank v. Ibanez, 458 Mass. June 10, 2011),12 the federal court decided that properties now exist that may subject title
637 (2011)9 upheld the long-standing principle title insurers will also be held responsible for insurers to potential claims, which, in turn, will
that a bank must own the note and mortgage claims that arise due to the fraudulent activities cause further delays of foreclosures in progress
on which it forecloses. When Wells Fargo of title agents, attorneys, and real estate agents
and foreclosures yet to be filed. Additionally, as
and U.S. Bancorp could not prove they owned even if the title insurer receives late notice of the
insured property owners and insured mortgagees
the mortgages they attempted to foreclose, claim. As a response, many title policy lend-
continue to seek answers and reparations, they
the Ibanez court did not give clear title to the ers refused to issue title policies for JPMorgan
properties. foreclosures and are considering the same for most certainly will look to their title policy for
The court went a step further to indicate it other lenders who admitted the use of question- payment and resolution.
was not limiting its ruling to future foreclosures ably signed documents, mortgages that lacked James E. Moon, Esq., is an associate in the Fort
only, meaning all completed foreclosures with assignments, or other issues that affected the Myers, Florida, office of Quintairos, Prieto, Wood
similar problems theoretically failed to give foreclosure.13 & Boyer, P.A., practicing in the areas of civil and
good title. This means insurance companies that When foreclosures are completed with faulty commercial litigation. Michael J. Barker, Esq., is a
insured the titles of these properties will most documentation, it can leave the new owners of partner in the Jacksonville, Florida, office and heads
certainly face a deluge of title claims and the the property vulnerable to expensive legal claims. up the firm’s financial services practice group.
latest-real-estate-time-bomb-title-of-foreclosed-properties-clouded-wells-fargo-dumping-risk-on-hapless-buyers.html. 7. Id.8 Abigail Field, “Why the Foreclosure Mess Settlement Proposal Can’t Fix the Damage,” DailyFinance, March 18, 2011, www.dailyfinance.com/2011/03/18/why-
the-foreclosure-mess-settlement-proposal-cant-fix-the-damag/. 9. U.S. Bank v. Ibanez, 458 Mass. 637 (2011). 10. Premier Tierra Holdings v. Ticor Title Insurance Co. of Florida, Inc., No. 4:09-02872, 2011 WL 2313206 (S.D. Tex. June 9, 2011)10, where the Southern District for
Texas, while interpreting Florida law, found that standard title policy provisions 4(b), 8(a), and 8(b) were ambiguous, but more importantly, that if an insurer breaches the policy under one of these provisions, the policy limitation on damages would no longer apply under the policy, exposing
the carrier to greater damages. 11. Mattson Ridge, LLC, v. Clear Rock Title, LLP, 2011 WL 2175832 (Minn. App. 2011). 12. JPMorgan Chase Bank, N.A., v. First American Title Ins. Co., 795 F.Supp.2d 624 (E.D. Mich. June 10, 2011). 13. See Streitfield, David, “Companies
Stop Issuing Title Policies,” found at www.nytimes.com/2010/10/03/business/economy/03foreclose.html?_r=1.
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