Real Estate Loans: Title Insurance - What is its Value?
I am sitting at my desk with a four-inch-thick binder filled with title insurance forms—form policies, form endorsements, premium rate tables, survey requirements, etc.—and it occurs to me that many people who deal with real estate loans and title insurance on a daily basis may have never read a title insurance policy.
It’s probably not necessary for a loan officer involved in a real estate transaction to read the whole title insurance policy, but it may be helpful to have a basic understanding of the benefits and limitations of a lender’s title policy as well as some of the optional endorsements. To provide a basic understanding of title insurance, this post is the first in what will be a series of articles on title insurance from a lender’s perspective.
Almost all commercial loan title insurance policies issued in the United States are on a standard form known as the 2006 ALTA (American Land Title Association) Loan Policy, with some minimal variations depending on the jurisdiction. At its most basic level, a lender’s title insurance policy is intended to insure that the lender has a valid and enforceable mortgage on the real estate. The “Covered Risks” in the ALTA policy include (subject to certain exceptions and exclusions) insuring the lender against loss or damage resulting from things like: forgery of the mortgage (or the deed to the borrower), improper notarization, liens not disclosed in the policy, the borrower not owning the property, no right of access to the property, avoidance of the lien of the insured mortgage in a bankruptcy proceeding, improper recording, etc.
Some may wonder: What is the value of title insurance? The answer is: Hopefully you’ll never find out. If your borrower pays its loan in full without incident, you never have to look at, or think about, the title insurance policy; you never know or care if there is a problem with title. However, the same can be said of the mortgage itself. If your borrower pays the loan in full, then you never needed the mortgage in the first place.
…if you need to begin foreclosure proceedings or your borrower files a bankruptcy petition, the title insurance policy can be invaluable.
On the other hand, if you need to begin foreclosure proceedings or your borrower files a bankruptcy petition, the title insurance policy can be invaluable. I can describe several times over the last few years that I’ve been involved when a title insurance claim was filed or threatened (for the record, my involvement was limited to addressing preexisting title problems). These have included a situation in which an executor transferring real estate never had the probate court’s authority to sign the deed, instances where a mortgage was avoided (invalidated) because it was not properly notarized, an incorrect legal description, a mortgage being recorded in the wrong office, an improperly conducted foreclosure in the chain of title, and a situation in which a prior mortgage was paid off but the release was never recorded and the lender (or a successor) no longer exists. In each of these cases, the title problem was resolved by the title insurance company (or an attorney paid by the title insurance company).
All of these situations are rare (some more than others), but if they come up on one of your loans, you’ll be glad you have title insurance. The title insurance company generally will pay to correct any title defects and, in most cases, will hire and pay an attorney to handle the entire situation. In addition, title insurance itself may be partially responsible for the rarity of title problems. Simply obtaining the title search and going through the underwriting process forces borrowers (and sellers of land) to address potential concerns before they become a problem. For example, it is not uncommon for the title insurance company to tell a borrower that it needs to get an additional document from a seller, or that the parking lot needs two more spaces in order to comply with zoning requirements.
All in all, title insurance forces you (or more realistically, your lawyer and the borrower’s lawyer) to think about potential title problems before the closing, and it protects the lender if the loan ever goes bad or if title to the real estate is ever challenged.