Home Equity Lines of Credit (HELOCs) may be difficult to obtain in today’s market, but not too long ago, everybody had one. Recently, a series of closings were delayed in our office due to issues with HELOCs, and I expect that dealing with HELOCs will only get worse.

There are several reasons why HELOCs often cause title nightmares, and keeping good records can help avoid settlement delays.

Click beyond the jump for 3 issues that can arise at settlement from a home equity line of credit.

A recent Demotech study may reveal yet another reason for homebuyers to obtain owner’s title insurance – especially if you are buying a home in the District of Columbia.

Title insurance companies take a loss of $215 on average in Maryland and $165 in Virginia, according to the study. In the District of Columbia the average loss is $639 for every title policy issued.

Put another way, if the homebuyer had not obtained owner’s title insurance, these figures possibly represent the average amount of loss suffered directly by the homebuyer.

Among the three jurisdictions, title insurers of District properties suffer the highest loss per policy issued. In fact the District of Columbia has the highest loss rate in the country, which may explain why District title insurance premiums remain among the highest in the country.

On average, a DC homebuyer pays $2,800 in title insurance premiums. Of the $2,800 in premium, $639 is paid out in claims and losses suffered by the title insurance underwriter.

Below is a more detailed breakdown, by jurisdiction and title insurance underwriter, of the loss ratios:

Maryland

• First American wrote 25 percent of the policies and paid $22 million in losses (48 percent of the state total; $409 loss per policy).

• Chicago (15 percent), Fidelity (13 percent), Old Republic (13 percent) and Stewart (13 percent) rounded out the top 5 in policies written.

• Chicago stood out from that pack in losses paid with $10.5 million — 23 percent of the losses in the state.

• Overall, Maryland had a $215 loss per policy.

• 85 percent of the policies were from non-affiliated agents; nearly 10 percent came from underwriter-affiliated and 5 percent came from direct shops.

Washington, DC

• 26,211 policies were written and split among 16 different underwriters.

• First American led the way with 51 percent, followed by Chicago with 11 percent and Stewart with 11 percent.

• Paid losses piled up to nearly $17 million — $639 loss per policy.

• First American led the way there too with 65 percent of the total ($11 million, $817 loss per policy). They were followed by Chicago at 14 percent ($2.4 million, $859 loss per policy) and Stewart at 13 percent ($2.2 million, $803 loss per policy)

• 87 percent of policies come from non-affiliated agents; 7 percent from underwriter-affiliated agents and 6 percent from direct agents.

Virginia

• 321,450 policies written statewide.

• First American wrote 24 percent, followed by Fidelity with 21 percent, Chicago with 15 percent and Stewart with 14 percent.

• Statewide, there were $53 million paid losses — a $165 loss per policy.

• First American paid 41 percent of the total — $22 million, a $276 loss per policy. Fidelity (20 percent) and Chicago (13 percent) combined for 33 percent, or more than $17 million.

• Entitle was 12th in policies written with 0.39 percent of the market but paid $2 million in losses, or 4 percent of the total — a $1,605 loss per policy.

• 90 percent of policies were written by non-affiliated agents; 6 percent came from underwriter-affiliated agents and 5 percent from direct shops.

Fraud is a common cause of title claims, and it's practically impossible to detect in many cases because there is no way for the title agent to know about the fraud until after the fact.

As we've discussed before, title insurance is about "risk elimination" of title problems arising from past events and not "risk assumption" of future events. If a title claim arises down the road, as was the case for the homebuyers in this story involving a forged power of attorney document, the owner's title insurance policy kicks in.

In 2001, Karen and Kirk purchased a home together and took title as joint tenants.

In 2005, Karen moved out after learning of Kirk’s infidelity.

In 2006, Kirk showed up at the closing table and presented the settlement attorney with a specific, full authority power of attorney signed by Karen and properly executed and sealed by a Notary Public.

Using the power of attorney, Kirk proceeded to sign the closing documents for his self and on behalf of Karen; including the deed and a disbursement authorization that directed all the sales proceeds be wired to his personal savings account.

At the closing, the homebuyers elected to waive owner’s title insurance coverage.

In 2011, the homebuyers were served with a lawsuit brought by Karen and her attorney claiming her interest in the property.

As it turned out, Karen’s signature on the power of attorney document presented at the 2006 closing had been forged and the Notary Public was complicit in the fraud.

As of 2012, the homebuyers have spent approximately $15,000 in attorney fees defending title to their property.

Had they elected to purchase owner’s title insurance coverage at the time of closing, they would have paid $850 and the title insurance underwriter would be paying the attorney fees to defend title.

If a homebuyer refuses to purchase an owner's title insurance policy and a title cloud arises down the road as in the story about Karen and Kirk, the homebuyer (new owners) would then be on the hook for any legal expenses. Without an owner's title insurance policy, money invested to buy the property or make improvements could also be lost.

The Consumer Financial Protection Bureau (CFPB), by mandate under Dodd-Frank, will soon change our world once again.

Just barely two years since the title and mortgage industry was turned upside-down with regulatory changes to the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedure Act (RESPA), the CFPB will be releasing its proposed forms and regulations next month to replace the HUD-1 Settlement Statement, Good Faith Estimate, and Truth-in-Lending Disclosure.

These new forms will be known as the Loan Estimate and Settlement Disclosure Form.

On its snazzy website, CFPB states that the current 3-page HUD-1 settlement statement is replete with "... Technical and legal jargon ... that may be more confusing than helpful. Complicated and lengthy disclosures can make it hard to answer or even ask the right questions."

So CFPB’s solution is to do away with the current 3-page HUD-1 and replace it with a lengthier and more complicated 5-page document called the Settlement Disclosure Form.

This is hardly an improvement. In our experience at the closing table, homebuyers are less likely to review lengthier disclosure forms compared to short form disclosures.

Among other things, these new CFPB forms will require lenders and settlement service providers to overhaul their existing software production systems, re-tool the lender-to-title company interfacing, and re-train staff members — which means homebuyers will end up paying more at settlement.

Currently, homebuyers pay, on average, $750 for total settlement fees in the Washington DC metro area. With little, if any, benefit to the consumer, I expect that figure to increase to approximately $1,000 with the implementation of these new CFPB forms and regulations.

The current disclosures are more than adequate. At the risk of sounding astringent, if a homebuyer can’t understand the HUD-1 Settlement Statement in its current form, then perhaps that homebuyer shouldn’t be a homebuyer.

Pending home sales in the Washington, DC metro area are nearly as high as they were two years ago when the $8,000 federal first-time homebuyer tax credit was still in effect, another sign that the market is poised for a turn-around.

That's good news for sellers. More buyers hopefully means homes are spending less time on the market and fetching offers closing to the initial asking price.

A ground rent refers to a scenario where an individual owns his house, but someone else owns the actual property (the “ground”). The homeowner pays the ground rent owner an annual fee, or a ground rent, as a rent on the land.

In Baltimore, this form of ownership dates back to the 18th century. The intent was to make homeownership affordable, by allowing purchasers to only have to buy the house, while paying an annual rent on the land.

Since many ground rent leases were established for 99 years, time and poor record-keeping made it difficult to know who owned the ground rent.

In response to this, since 2007 the Maryland State Department of Assessments and Taxation has maintained a ground rent registry to help homeowners determine who owns their ground rent.

Consequently, homeowners can now check for ground rent information and locate and determine their current ground rent owner by checking the Maryland State Department of Assessment and Taxation website.

When a property is listed, it is the listing agent’s responsibility to determine whether or not a listed property is subject to a ground rent (and, if so, how much). The property description on the MLS listing should note if the property is being conveyed in fee simple or as part of a ground rent.

Homeowners of properties subject to a ground rent that was created after April 8, 1884 have the right to purchase the ground rent, which would convert the property to a fee simple ownership. The purchase price is determined by a formula set by Maryland law that varies depending on the year of creation of the ground rent.

Further, if a property that is subject to a ground rent has not heard from the ground rent owner for at least three years, the homeowner can redeem the lease. For more information on this, please visit the Maryland SDAT website.

Google "owner’s title insurance," and you will find scores of blogs and other publications scorning this misunderstood insurance product. Frequently, at the settlement table, we hear homebuyers opine that title insurance is a "rip-off" and not worth the cost.

Most of these comments stem from a deep misunderstanding of the product and, too often, are merely a regurgitation of the opinions that predominant the conventional wisdom.

While owner’s title insurance is optional to a homebuyer, we rarely hear homebuyers bemoan the fact that they are required to obtain homeowner’s insurance. The average owner’s title insurance premium paid by homebuyers to cover a Bethesda, MD property costs $962 as a one-time premium without a deductible, while homeowner’s insurance would cost that same homebuyer $879 annually with a $500 deductible.

In other words, over a period of ten years of homeownership, that same homebuyer/homeowner would pay $962 for owner’s title insurance but pay $8,790 for homeowner’s insurance.

Yet, rarely do we hear complaints about the required homeowner’s insurance coverage. But why?

Click beyond the jump to continue reading.

While we talk all the time about the importance of shopping for title services, it's about time we address what it is exactly that a title company does. Let's take a closer look at what goes on between the time when you agree to purchase your property and when you legally take ownership.

An order is placed. Once you have a ratified sales contract, you are ready to order settlement and schedule your closing appointment. To complete your order, either you or your agent will provide contact information of all parties involved in the transaction along with the purchase price, loan amount, property jurisdiction and type of loan. A pre-closing manager oversees this phase in the process.

Title work begins. A title abstractor goes to work to ensure clear title. A title abstractor is someone who searches records and files pertaining to a specific property to find its history. This can include transactions between current and previous owners in buying and selling the property, as well as any liens or judgments against the land or house.

Meanwhile, your lender's loan processor works to fund your loan and communicates with members of the settlement team to produce a final HUD-1 and other legal documents you will sign at closing. A settlement coordinator acts as a liaison between the title company and buyers, sellers, agents and lenders. 

Time to sign. Once clear title is established and your closing documents are assembled, it's time to go to settlement. Signing all the paperwork will take about an hour. Buyers sign more documents than sellers. Once all the documents are signed, it's time to celebrate: You are now a homeowner.

End of the line. Work on your closing doesn't end with your signature, though. Your case moves on to post-closing, where the post-closing manager disburses escrowed funds, such as a final water & sewer bill. Post-closing is also your point of contact should an unexpected property tax bill, utility bill or lien come to light after settlement.

Too often, after closing a homebuyer is faced with faulty workmanship performed by a contractor and/or the seller. In some cases, the homebuyer finds out too late that the faulty workmanship was not even permitted.

This scenario can lead to blood-bath of expenses, including the possibility that a government inspector orders a demolition of the work for health and safety reasons.

Under the terms of the GCAAR sales contract, a seller of new construction or a newly renovated house is not contractually obligated to produce permits for the benefit of the homebuyer. Therefore, it is advisable that an agent and/or the homebuyer verify proper permitting by the seller.

The good news is that it’s easy to research. Most jurisdictions maintain on online database for permits and accompanying inspections. Below, I have listed just a few of the links for researching permits in the surrounding jurisdictions.

• Montgomery County, MD Permit Search
• District of Columbia Permit Search
• Arlington County, VA Permit Search
• Fairfax County, VA Permit Search

Let's face it: When it comes to buying a house, title insurance is likely the farthest thing from your mind. After all, there are so many steps along the path to homeownership that you'll take before you find your way to the settlement table.Securing a loan, finding the right real estate agent and finding a dream home to buy – these aspects of the homebuying process are far more glamorous, and self-explanatory, than the wonky legal aspect involved in issuing your title insurance policy.

To assemble a winning homebuying team, look at the stats. Weigh services offered by agents, lenders and title companies against cost, and stretch your dollar further.

If you're serious about buying a house or condo, you've hopefully heard of a thing called "closing costs." These expenses are tacked onto the sales price of the home. Time was when you could lump your closing costs into your home loan, but nowadays a stricter mortgage industry holds borrowers on the hook for those costs. 

Break your closing costs down into three categories: policy premium, government transfer taxes and service provider fees (paid to the real estate agent, lender and title company, who packages the deal). Expect charges in the first two categories to be the same across the board.You can (and should) shop real estate service providers as you assemble your homebuying team.

Most homebuyers do some bit of research when selecting their agent and lender. They talk to friends and family, they jump online to read reviews and compare rates. But that's only two-thirds of the puzzle.A huge savings many homebuyers overlook is in selecting a title company. Take the time to get a quote from a handful of local settlement agents, and compare the bottom line closing costs. Ask if their company is affiliated with any other company, such as a real estate agency or bank.

It is widely known that independent settlement companies tend to charge lower settlement fees than title companies that participate in what our industry calls an affiliated business arrangement.

The right homebuying team includes the right title company, something to keep in mind while your hunting agents, lenders and houses.

During our 16 years of business Federal Title has, on three separate transactions, paid out claims on owner’s title insurance policies due to a seller committing fraud by securing a home equity line of credit (HELOC) immediately prior to closing. These claims amounted to a total of $280,000.

Here’s how it works. A fraudulent seller recognizes that the public records are usually 2-3 months behind in indexing liens or other matters of public record. Thus, he or she applies for a home equity line of credit with a mortgage lender a few weeks prior to closing, and that loan is secured by a deed of trust (mortgage lien) against the subject property.

A title examiner for the title company completes the search prior to closing but the search does not reveal this HELOC mortgage/lien because the clerk’s office for the respective county/city has not yet indexed the HELOC for public view.

In other words, there is no way for the title examiner or the settlement company to know about the HELOC but for the seller disclosing the lien.

In the "real life" instances I cite above, each of the fraudulent sellers drew on the HELOC, took the cash, and walked away from the settlement table. Months later, after the sellers defaulted on the HELOC by failing to make the required monthly payments, the new owners received a notice of foreclosure from the HELOC mortgage lender threatening to sell the property at a foreclosure sale.

Fortunately for all of these new owners, they each obtained owner’s title insurance coverage and the HELOC was paid off and released by the title insurance company.

What if these new owners had waived owner’s title insurance coverage?

Unfortunately, without owner’s title insurance coverage, the new owners would have had no recourse except to pursue an action against the fraudulent seller. In order to save their property, the new owners would have been required to pay off the HELOC lien.

Why wouldn’t the new owners have a cause of action against the title company?

Without owner’s title insurance coverage, a title company provides no assurances of title other than the matters appearing of record up to and at the time of closing. Since this HELOC did not appear as a matter of public record up to or at the time of closing, the title company would not be liable for the seller’s fraudulent action.

So let’s say you just sold your home. You then receive an email notice from the settlement company as follows:

Our office has completed the title search for your upcoming closing and sale of 2525 Badtitle Lane, and we regret to inform you that the search has revealed two unexpected mortgage liens secured against the subject property. Both of these open mortgages (deeds of trust) were acquired by your seller (the prior owner).

The settlement company that handled your closing in 1995 when you purchased the property would have been responsible for paying off and filing lien releases for these two mortgages. Our office has attempted to contact that settlement company but, unfortunately, that settlement company is no longer in business.

Please produce a copy of your owner’s title insurance policy so that we may contact the title insurance underwriter to verify payoff and satisfaction of these mortgages and request that the underwriter pay the costs for curing this problem.

You begin searching your paperwork from the 1995 closing only to find that you elected to waive owner’s title insurance coverage. In other words, you don’t have an owner’s title insurance policy.

Now what?

You contact the settlement company in response to the notice and explain that you don’t have owner’s title insurance coverage. The settlement company then explains that both open mortgages must be "bonded off." That is, you have to apply for a bond with a bonding company in order to convey title to your buyer.

The bonding company charges $20.00 per thousand of the face amount of each mortgage. In this case, the first mortgage is for $115,000.00 ($2,300.00 bond cost) and the second mortgage is for $75,000.00 ($1,500.00 bond cost) for a total bond cost of $3,800.

Had you elected to purchase owner’s title insurance coverage in 1995 when you purchased the property, you would have paid $980.00 for the owner’s title insurance coverage and the title insurance underwriter would have been responsible for the bonding expense.

Instead, you now have to write a check for $3,800.00 in order to deliver insurable and marketable title to your buyer.

Just recently, during our underwriting review of an upcoming closing, our office discovered that the subject property — we will call it LOT 1 — was severely encroached upon by the improvements of the neighboring lot, which we will call LOT 2.I have included an actual copy of the location drawing below for your reference.Immediately after our discovery, my office forwarded a copy of the location drawing to the buyer and the seller advising them that we could not insure title without taking special exception to the encroachment.Because the sales contract required the seller to convey insurable title without additional risk premium or uncommon exceptions, the buyer declared the contract void and obtained a return of her earnest money deposit.Land SurveyTwo years ago, the seller had purchased the property for $450,000 with a down payment of $90,000 (his equity) and the title company had failed to advise him of this severe encroachment from the neighboring property.Fortunately, the seller elected to purchase an enhanced owner’s title insurance policy which specifically covers this type of situation – the insuring provision reads:"Someone else has a legal right to, and does, refuse to perform a contract to purchase the Land, lease it or make a Mortgage loan on it because Your neighbor’s existing structures encroach onto the Land."In laymen's terms that means if you cannot sell your house, or that you have to sell it for far less, because your neighbor's additions have seeped onto your side of the property line, then all is not lost. The enhanced owner's policy has you covered.No doubt this insured seller will be filing a claim against his owner’s title insurance policy. And the insurer will have to pay all attorney fees for correcting the problem, as well as the actual loss suffered by the insured seller, according to the terms of the policy.In this case, the seller may have to sell the property for far less than the original sales contract, and that difference would constitute his actual loss.

Our most recent real-life case involved a $65,000 claim and a tax sale purchase, which occurs when a government agency auctions off properties with delinquent property tax bills.

The homebuyer almost lost $65,000 in equity because of a clerical error. A DC Superior Court judge entered the wrong date on the court order – March 15, 2009 instead of March 15, 2010 – making it appear as if the one-year statutory appeal period on the tax sale case had expired.

In this case, there would be no one for the homebuyer to sue since a clerical error by a judge falls within the "governmental immunity" category. You are not allowed to sue a judge for a clerical error.

The homebuyer in this case elected to purchase an owner's title insurance policy for $521.

Because it appeared by the court order that the one-year statutory period for appeal had expired, the title company insured title to the homebuyer. The tax sale purchaser, after the title company had completed the closing and insured the new homebuyer, filed an appeal within the new one-year statutory period and prevailed.

The insured homebuyer was notified of the order awarding the tax sale deed to the tax sale purchaser, and in turn, filed a title insurance claim. The insured was immediately made whole by reimbursement of his purchase price and actual damages.

When presented with all the information, most of our clients elect to purchase the coverage. After all, in most cases the cost of an owner's policy is a drop in the bucket compared to the down payment the homebuyer had to save to buy the property.

In this case, the homebuyer paid $521 for an owner's title insurance policy that wound up saving him from the loss of his $65,000 down payment.

Rather than asking if an owner's title insurance policy is worth the expense and advising ways to cut corners at the closing table, why not encourage homebuyers to think of the owner's policy in a different way: What's an extra $521 at the closing table to protect the tens of thousands of dollars you saved for your down payment?

While a homebuyer is required to pay for the lender’s title insurance premium, the owner’s title insurance is optional to the homebuyer, and sometimes homebuyers who are looking to shave dollars off their closing costs consider opting out of the owner's title insurance policy.

They may feel having an owner's title insurance policy is not worth the expense.

A lot of misinformation about owner’s title insurance permeates the blogosphere and, in fact, one Washington DC metropolitan area real estate broker regularly advises homebuyers NOT to spend the extra dollars to purchase owner’s title insurance coverage.

Most of the blog entries by this broker are replete with misunderstandings of the coverage afforded to a homebuyer by the owner’s title insurance.

In an effort to combat these misunderstandings, I am offering an on-going series of “real life” examples of why owner’s title insurance is worth the price.