Very good question because it gets right to the reasoning of most mortgage loan underwriting guidelines.
The art or science of organized mortgage lending has evolved through trial and error over many decades starting, really, since the Great Depression. The combined experience of generations of mortgage lenders has been encapsulated in the uniform underwriting guidelines of FHA, VA, FNMA [Fannie Mae], and FHLMC [Freddie Mac]. It's all based on the worst case scenario of foreclosure.
Foreclosure is a mortgage lender's ultimate solution. They don't want to go there and have underwriting guidelines in place to avoid foreclosure, but if the borrower absolutely defaults, the remedy is foreclosure.
Now, let's get back to your question, why does your lender require a clear title policy? Your lender might say it's because the guidelines say they have to have it, but the REAL reason, the "Buddha truth" behind the underwriting guidelines is that clear title = ownership = freedom to engage in real property conveyance.
Lenders have learned that title problems may interfere with their ability to foreclosure. What if the mortgage lien was placed on a property that was partially owned by an individual who had not signed the mortgage document? In that case, the mortgage lender doesn't have a perfected lien and may not be able to foreclose.
Here's another problem. Your mortgage lender wants first lien position. What if there is some other entity who is in first position, unknown to your lender? Well, whoever is in first position gets paid first - they have priority. THEY can foreclose and place your mortgage lender's interest in jeopardy.
Now, let's say the mortgage lender has completed foreclosure and now owns your land. What if they go to sell the property and find that the house is built 12 feet unto the neighbor's land? Maybe YOU bought the property without a survey and didn't ever know that, but the person who buys the property after foreclosure is a more savvy buyer. He gets a survey and finds the flaw. Well, now that the flaw is discovered, the lender must rectify the problem before they can sell. The loan title insurance policy typically has survey coverage which will cover damages the lender may suffer in this case.
The bottom line is that morgage lenders are the ultimate knowledgable purchaser of real estate. As an industry, their underwriting guidelines have been developed through many tens of thousands of transactions. Pay attention to those guidelines, they are the voice of experience. You'd be wise to follow their advice and require clear title yourself. You'd be wise to follow their lead and get a survey so you know what you are buying.
There is wisdom in traditional mortgage lending that got lost in the ridiculous idiocy of subprime lending and we all know where that's got us. Good old fashioned mortgage lending - safe & secure homeownership.