too bad the seller did not have title insurance

We have a title insurance order in process and our examination revealed that the seller bought the property from a bank who had foreclosed.  As usual, the our title examination included a review of the foreclosure to make certain that the bank had done everything correctly.  They did not.  Crap.  The bank's attorney had failed to give good service to a lien holder.  Crap.

The prior owner had a 2nd mortgage with Beneficial Consumer Discount Company. For some crazy reason the bank's attorney gave service to Household Realty Corp.  Now these two entities were under the same corporate family at the time, however, they are still two different entities.

Our seller is an estate. The deceased purchased the property from the bank for cash and did not opt to purchase title insurance.  Too bad.  If he had, someone might have noticed the flaw and fixed it a long time ago.  The estate attorney says his client probably thought the bank knew what they were doing and opted to forego any title examination - with or without title insurance.  Not a smart move. A buyer must always be savvy and have title examined and covered by a competent title insurer - even when paying cash for real estate. The first and primary purpose of title insurance is RISK AVOIDANCE. Look for problems and fix them before you buy.

Let's say the seller had purchased title insurance and his title insurer had missed the error in the foreclosure.  That's certainly possible.  A secondary - and just as important - reason for title insurance is that HUMANS MAKE MISTAKES.  The bank's attorney made a mistake and it's possible that a title examiner could miss it.  You could have a situation in which you are trying to sell real property and a problem isn't discovered until your buyer has a title insurance examination performed.

If our seller had an owner policy, we could have asked for indemnification and closed.  This is a reasonable circumstance for indemnification.  The error involved an entity under the same corporate umbrella.  Several years have passed and there has been no collection effort on the Beneficial mortgage.  It is reasonable to presume that Beneficial thought they had been served and were divested.  This is a technical flaw in title but a flaw none the less.  Indemnification coverage from a prior owner policy would have done the trick, but we have no title insurance to fall back on in our transaction, so what do we do?

In this case we offered our buyer - who is also paying cash - an option to allow us to put an exception in their owner coverage.  We did this with a suggestion that they negotiate with the seller for an escrow to be held pending the attorney obtaining acknowledgement of good service from Beneficial.  I don't want to insure over this because I'm not certain that the attorney will be successful.  Our buyer, however, is free to assume the risk.  The buyer decided to go for the escrow. They asked the seller to put $6000 aside for a few months during which the seller's attorney would attempt to get the acknowledgement.  If at the end of the period, the attorney could not, the buyer would get to keep the money.

Our seller stands to lose $6000 if this matter is not resolved.  They are lucky that they have a cash buyer willing to assume the risk.  Too bad the seller did not have title insurance.

What happens when an old mortgage is insured over?

Hi Ms. Cipa,

We came across your web site about title insurance and it very helpful. We have an urgent situation that we'd appreciate your help with. We are purchasing a property and the title search found a $45,000 mortgage on the property. They are not able to get a letter of indemnity because the mortgage is very old. The title search is handled by a real estate attorney who is an agent for Stewart Title. Should we be concerned and hold off the settlement?

Below is from attorney's office -
There is nowhere to go for a Letter of Indemnity. I spoke with our Underwriter when the title came in. He said that considering this is a 52 year old mortgage which was due and payable 32 years ago, Stewart would insure over it.
I am attaching a copy of the first page of the mortgage where you can see that this mortgage had a 20 year term ending in September of 1982."

Hi, T: When there are old unsatisfied mortgages the title insurer assesses the risk and then decides whether or not to insure. Stewart is willing to insure over it so you don't need indemnification. I offer this advice as a title insurance agent and not an attorney. The way title insurance works is that Stewart insures that if someone comes to you and asks for the money or attempts to foreclose, you'll be covered.

You should know, however, that this question may come up again should you decide to refinance or sell the property. The mortgage will be discovered once again and another decision to insure or not will take place. I personally wouldn't worry about that because the owner coverage purchased from Stewart will provide a basis moving forward for indemnification if your buyer is getting title insurance. If for some reason you get a buyer who is unrealistic about risk and wants a perfect title, they may not buy the property. Those types of folks are rare but we do come across them.

So, I would say, bottom line, if you are getting an owner policy with no exception for this old mortgage, as a title agent, I'd say that's a low risk scenario. Make sure you get a copy of the title insurance commitment to review prior to closing to make certain this item is not shown as an exception. Hope this helps. ;)


Diane

query: what is an unsatisfied mortgage

When a mortgage lender receives payment in full that mortgage lender must file a document at the county courthouse to let the public know that the mortgage has been satisfied.  In PA mortgage lenders have 60 days to file this document.  It is not uncommon for mortgage lenders to fail to file the satisfaction document and so unsatisfied mortgages are a constant source of title insurance claims.

When a title search reveals an unsatisfied mortgage the first order of business is to determine whether or not the mortgage had in fact been paid in full.  If not, then someone must pay the balance before the mortgage lender will file the satisfaction document.

If the mortgage has been paid in full, there are options for moving the transaction forward.  The best option is to contact the mortgage lender and get them to file the satisfaction.  This may take time and if time is of the essence other options may be more appealing.  The title insurance agent who is in charge of the current transaction will decide whether or not they will accept a letter of indemnification from a previous title policy or perhaps they may accept a letter from the mortgage lender affirming that the loan is paid in full and that they are in the process of satisfying the mortgage.

There are some cases in which the mortgage lender cannot be located and there is no acceptable way to cover the unsatisfied mortgage with indemnification.  In these cases the owner of the property may need to hire an attorney and file an action to quiet title and remove the mortgage lien.

prior owner continued to use an open line of credit

This is the title claim we title agents are trained to avoid.  We take the extra step to freeze the line, if possible.  We have the seller sign a statement requesting that the line be closed and satisfied of record.  This is what we are supposed to do.  Yet, when we recently processed a refinance title insurance application, we were shocked to uncover a situation in which a prior owner [TWO owners back] was using a line of credit attached to our consumer's house.  How could this happen?

We started our investigation by contacting the bank and asking them to satisfy the mortgage.  That's when we found out that the line had a balance and was still in use.  WHAT?  The bank refused to satisfy or assist us beyond a courtesy call to the borrowers asking that they call us.

We then made contact with the title agent who handled the sale that included the supposed payoff of the mortgage.  This title agent is the one who SHREDDED her files and so we had no evidence to show the bank that they should have closed the line and satisfied the mortgage.  [Two ex-employees of the SHREDDER did offer some help by somehow getting into the computer system and reprinting documents so we had a clue about the contents of the HUD-1 and the policy.]

Next we made contact with the title agency who handled the next sale, the one where our consumer was the purchaser.  We asked if they had discovered the unsatisfied mortgage and they said yes, however, they did not pursue satisfaction.  They requested and obtained an indemnification letter from the prior title company.

So, we had the first agency who may not have followed good standards and asked for satisfaction.  Our clue that they may not have followed good standards is that they SHREDDED their files.

We have the next agency in line who also, in my opinion, didn't do such a good job.  If they had contacted the bank they would have discovered that the line of credit was still in use.  They also seemed to have insured over this unsatisfied mortgage without even disclosing its existence to their consumer.

We obtained a copy of our consumer's owner policy and then contacted BOTH title companies and had our consumer open a claim.

We got a great response from the claims department at First American.  The attorney from the other title company was no help except that he wanted us to take an indemnification letter.  We wanted more than that and First American sent demand letters to the prior owner and the bank.  They offered and we accepted indemnification with PERFORMANCE language.  Our consumer and lender were both on board and okay with this performance based indemnity as was my underwriter.  We closed this transaction this week and the good news is that First American was able to get a release from the bank prior to our closing - much sooner than expected. ;)

this may not seem like alot of money but what this tells me

is how this attorney thinks............and I think his title underwriter should pay attention. Pay attention to the facts. The attorney received evidence that the letter on which he was relying was incorrect and he chose to ignore it.

Read this e-mail I've just shot over to my underwriter:

Closing a purchase transaction today at 4pm - issuing both loan and owner policies premium based on $160,000.

At issue is inheritance tax owing for the estate of redacted who died testate in 1992. Mr. redacted had a 1/3 interest in our property which is situate in Somerset County. His estate was filed in Allegheny County at No. redacted of 1992.

On October 21, 1994 the attorney for the estate, redacted of Reed, Smith, Shaw & McClay delivered a letter to redacted, then counsel at Chicago Title, which said:

This firm has acted as counsel to the Estate of redacted. This letter will confirm to you that all taxes, including Pennsylvania inheritance tax, owed by the estate have been paid in respect of the interests owned by the decedent and his estate in the properties known as redacted.

The letter was copied to redacted, attorney and agent for Chicago. On the basis of this letter, Mr. redacted was granted authority by redacted to issue insurance without exception for the inheritance tax.

On October 24, 1994 Atty. redacted filed estate information in Somerset at No. redacted-1994 including an inheritance tax return and evidence of payment of tax. My abstractor and I have examined the return and the 1/3 interest was not reported. There is no real estate or joint property reported at all, so we have raised the inheritance tax as an exception.

Mr. redacted insists that the letter from Reed Smith is sufficient evidence of payment and absolute authority to insure. I disagree, especially since the facts show that the letter is incorrect. Mr. redacted has no further evidence that the tax was paid.

At our request we received a copy of an owner policy which was issued to a prior owner. Our current seller does not have title insurance. May we accept indemnification or do you think Chicago will issue indemnification based upon a prior owner policy?

I also agreed to take indemnification directly from Mr. redacted but he refuses to issue it.

I have a call into Reed Smith to see if they have any further information which would help or perhaps they will issue a letter of guarantee.

Mr. redacted is taking the position that his client will not close with an escrow of $1500 - which I think is reasonable while they pursue an amended return. Instead he wants to take the transaction and insure it himself through Chicago.

I hate this crap. ;) Anyway, do you want me to insure over it?

Diane Cipa
General Manager

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