Title insurers and lenders have relied on one another for more than a century to ensure the smooth transfer of property from one owner to another. The foreclosure documentation crisis has cast some doubt on that relationship.
Initially, there was some concern that title insurers could decline to issue title insurance on mortgages of foreclosed properties made by banking companies that have flagged foreclosure-handling problems, including Ally Financial Inc.'s GMAC Mortgage, JPMorgan Chase & Co. and Bank of America Corp.
But now it appears that the title insurance industry is trying to work with mortgage companies to take responsibility for any mishandling.
"We think at the end of the day that the banks' errors in foreclosures are not going to result in title claims, because the bank's the one that made the mistake in the way it foreclosed," said Kurt Pfotenhauer, head of the American Land Title Association.
"However, to get to that conclusion, we will have to engage in some relatively expensive litigation," Pfotenhauer said. "If we can agree to it in advance, litigation costs go down for everybody and the markets start moving more quickly. All we're getting them to say is, 'Yes, this is our responsibility and we've taken responsibility for it.' It's pretty reasonable if you break it down that way. … And I think lenders aren't trying to duck from reason."
Many analysts expect more title insurers and mortgage companies to make deals like the one Bank of America and Fidelity National Financial Inc. reached this week. According to reports, Fidelity agreed to continue to provide title insurance on the sale of the bank's foreclosed properties going forward and to defend a new homeowner in court if a foreclosed owner challenged the title. For its part, B of A agreed to cover any legal costs and potential damages awarded to the previous owner.
The Charlotte company said it was working with the ALTA and title insurers individually on similar agreements.
"This is a critical step toward ensuring consumer confidence, and an important part of the process of restoring the housing market and ensuring neighborhood stability," B of A said in a statement.
"The lenders don't want the foreclosure pipeline to stop, and they want those transactions to continue in the market once they make sure everything is OK," said Nat Otis, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "Those types of agreements make a lot of sense, and it's basically an added indemnification."
Within the last month, several large mortgage servicers, including GMAC Mortgage, JPMorgan Chase, Bank of America and Goldman Sachs Group Inc.'s Litton Loan Servicing, have halted foreclosures while they review their processes amid evidence that foreclosure documents were improperly filed. Depositions of a handful of bank employees revealed that foreclosure documents were routinely signed without their verification or firsthand knowledge of the information in the document, opening the door for potential mistakes in the way foreclosures have been executed.
Some analysts warned that title insurers could decline to insure mortgages on some foreclosed properties, which would hurt lending.
"If the title company is not satisfied that there is a good release on the old mortgage, it will refuse to insure the new mortgage," Adam Levitin, an associate professor of law at Georgetown University, noted in a research report from Citigroup Global Markets Inc. last week."If a scenario emerges in which title companies are unwilling to issue title insurance ... lenders may cease lending."
A title is a legal document that establishes evidence of ownership, which is different from a mortgage note, a legal document that obligates the borrower to repay the loan. Typically in a residential real estate transaction, both the homebuyer and the lender take out a title policy to protect themselves and to ensure the proper transfer of land from one owner to another.
The lender's policy assures the validity and enforceability of its mortgage. According to the ALTA, "the policy obligates the title insurer to pay for defending against any claim filed against the title that might supersede the lender's lien. If unsuccessful, it must also satisfy that claim should it be upheld in court." Among the risks covered by title insurance are forged deeds and mortgage releases, falsified records and transfer of title through foreclosure sale where requirements of foreclosure statue have not been met.
Old Republic National Title Insurance Co., a unit of Old Republic International Corp., reportedly ordered its agents to stop writing policies on properties foreclosed by GMAC or JPMorgan Chase soon after the problems came to light.
In a statement earlier this month, Old Republic denied that it was refusing to insure REO sales and said it is continuing to insure foreclosed properties.
"The initial memo which they sent out was a quick reaction until they could better understand the circumstances," said Chuck Cain, president of Alliance Solutions LLC, a consulting firm in Cincinnati, who received the original memo. "I think they have basically modified their position."
Meanwhile, Stewart Title Guaranty Co. has issued guidelines to its agents to make it difficult for them to write policies on properties foreclosed upon by certain lenders, according to an Associated Press report citing an internal company memo.
Calls to both Old Republic and Stewart Title were not returned.
Most industry players expect the two sides to work together so that the lending process can continue to run smoothly.
"We're all on the same team here," said David Kittle, senior director of industry relations at IMARC, a mortgage fraud investigation company, and a former chairman of the Mortgage Bankers Association. "I can't make a loan without an underwriter and a clear title, and they can't give clear title and make their money until I make a loan. So the title business is our ally and our friend."