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MORTGAGE NEWS

Roles of Title Insurance and Mortgage-Backed Securities

Written By:
November 21, 2010 at 1:52 PM

According to Bloomberg News, the nation’s largest insurer of title insurance issued a memorandum to its employees stating that beginning November 1, 2010 all lenders would have to sign an indemnity agreement for all foreclosure sales complete on or after November 1, 2010. This contract protects Fidelity against defects in titles that may arise from faulty documentation in connection with the property. If a foreclosed owner decides to pursue litigation that challenges the owner of the mortgage or title to the property, Bank of America’s (BOA) guarantees to back Fidelity by footing the bill for legal expenses and any damages awarded by the court.

The agreement enables Bank of America to continue moving forward with foreclosures and provide a degree of certainty and protection to prospective buyers of its foreclosed properties. The Real Estate Settlement & Procedures Act (RESPA) prohibit lenders from requiring buyers to purchase title insurance from a specific insurer. Expect additional title companies to enter similar agreements with BOA and other lenders to protect title insurers that provide title insurance for such purchases.

What Is Title Insurance?

Lenders require homebuyers must purchase title insurance. Title insurance protects the buyer or the mortgage lender property against “unknown” defects in the title. There are two types of title insurance:

  • Loan Policy
    This policy protects the lender for the dollar amount of the loan and decrease each year until the loan balance drops to zero.
  • Owner’s Title of Policy Insurance
    Buyers purchase a standard policy at the closing for a one-time cost. The policy provides protection for you and your heirs for claims against title missed during the title search. An owner’s policy provides the only financial safeguard if an issue with the title occurs. The loan insurance does not protect the owner.

The title insurer issues title insurance after conducting a title search, which usually consists of a review its records and an examination of public records. The title insurance company issues a preliminary report of title called a title binder. The typical title binder contains the named of the insured, a legal description of the property, the type of title insurance policy and the interest it covers. In addition, the policy outlines terms, and condition as well as all title exclusions. Title exclusions refer to discovered “title defects.”

Foreclosures: Challenges to Chain of Title

John Mauldin of the InvestInsight.com printed on his website most of an email sent to him from David R. Kotok, Chairman and Chief Investment Officer of Cumberland Advisors, an international investment advisement firm with headquarters in Sarasota, Florida, offers a expert view of the possible chain of title issues as they relate to the Mortgage Electronic Registration Systems (MERS). MERS -- owned by Fannie Mae, Freddie Mac and a few major banks-- states it service and act as lender nominee of more than 64 million mortgage loans.

Mr. Kostok writes that the primary intent behind MERS was to make the process of mortgage-back securities (MSB) simpler by having MERS carve up the “digitized mortgage notes” according to risk, interest rate and other attributes. MSB issuers sold these mortgage-backed securities as high risk (junk bond-grade) or low-risk (Treasury Bond- grade) MSBs. The bottom line is that carving up of the loans into mortgage-backed-securities caused some “chain of title issues.” These issues may lead to possible challenges in court regarding whom (investor) actually own the mortgage note. A chain of title lays out the history of conveyances and any liens placed against the property – as far back as records permit. Generally, title reports do not contain chain of title information

Human errors, “securitizations” of mortgages and mistakes uncovered in many of the foreclosure practices underline the importance of owner’s title insurance, especially for those investing in foreclosures or REO (Real Estate Owned by Banks).

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