Owner’s title insurance: Case of forgery after infidelity

Part 6 of a series

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.

Owner’s title insurance: Seller fraud and HELOCs

Part 5 of a series

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.

Owner’s title insurance: The costly 'bond off'

Part 4 of a series

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.

Owner's title insurance: Encroachment from neighboring property

Part 3 of a series

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.

Two 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.

Owner's title insurance: Case of clerical error

Part 2 of a series

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?

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