Owner’s title insurance: Seller fraud and HELOCs

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.