Real Estate Foreclosure Update: Buyer's Tips on Title Insurance

Title insurance protects the owner of a real estate property from claims or losses related to title defects created before they acquired the property. In the title insurance underwriting process, the insurer checks public records to confirm the title is free and clear of issues that might call into question the ownership of the property or result in monetary liabilities for the new owner. The insurer is looking for things like tax liens, easements, zoning issues, missing heirs, unpaid mortgages, mechanics liens, delinquent HOA dues (if applicable), etc. Title defects are not all that common and are generally an annoyance requiring time and energy to be resolved. The current foreclosure crisis, however, has made some issues regarding title not so clear.

One example is if a home was a foreclosed property bought from a bank that failed to follow proper foreclosure protocols. This would imply the previous owner might still have the right to say they owned the property.  In that event, the title insurer could be responsible for settling the claim and covering any monetary losses to the current homeowner. The current homeowner may have spent thousands of dollars remodeling, fixing, or updating the foreclosed property. If buyers think they may lose any investment made in a purchased foreclosure, that will drag foreclosure (REO) prices down even further and subsequently short sales and standard sales as well.

Thus, the stakes are high for the real estate market. Without title insurance, home sales simply cannot happen, and the glut of foreclosed homes in the United States cannot be sold. Some title insurers have slowed underwriting policies because they are unsure how much they may have to pay for the foreclosure mess. That may be another factor that is weighing on the currently soft housing market.

If you are borrowing any money to purchase the house, the lender will want to know that there will not be any issues and the underwriting department approving your mortgage will review the title prelim. If you are an all cash buyer, be very cautious.

Here's what you can do as a buyer to protect yourself:

• Carefully review the title prelim you will receive from the seller through escrow.
• Highlight any questions you may have - no matter how minor they may seem.
• Question your real estate agent or the title rep as to the coverage.
• If you are not comfortable, inquire as to whether there is any additional title coverage available.
• Only a real estate lawyer can properly advise you as to any potential future exposure.

We have not heard of any similar title insurance issues regarding short sales. In theory, both the owner and investor are signing off on the short sale transaction. We would like to think that would make it very difficult for them to challenge the sale at a later date but that remains to be seen.