Fidelity National Financial is now requiring lenders to sign a warranty (affidavit?) that their paperwork is sound before it will issue title insurance on a foreclosure. It also requires indemnification from lenders for “incompetent or erroneous affidavit testimony or documentation” as a condition to issuing a title insurance policy in the lender’s favor. There’s a sort of irony to requiring an affidavit from a bank that effectively says any other affidavits issued in conjunction with the foreclosure were properly executed. If they’d lie on the affidavit getting the property to foreclosure, is it too hard to imagine they’d also lie in a subsequent affidavit about its validity?
So, now that the banks are effectively insuring themselves for their own screw-ups, what risk is left to insure? There is a bit, but not much.
There are two basic types of title insurance: Owner’s and lender’s policies. In many respects, they insure the same thing. An owner’s policy protects the owner for problems in the chain of title that might impair his ownership interests, along with ensuring that there are no liens affecting the title (outside the ones, like his mortgage, he knows about). A lender’s policy warrants to the lender that their mortgage lien is a good and defensible property interest in the priority desired (e.g., that it is the first mortgage for a first mortgage transaction). If the owner doesn’t purchase an owner’s policy at purchase, and a title problem later arises, he could lose his interest in the property, even if there is a lender’s policy insuring the mortgage.
Typically, a purchaser of property after a foreclosure (i.e., a purchaser of property acquired by a bank or other lender due to foreclosure) should demand an owner’s policy. But. If he purchases the property with cash, it is not a requirement. In Alabama, and most other states that have adopted uniform title laws, it has to be documented that a purchaser has been informed at closing of his option to purchase an owner’s policy of title insurance if he declines to do so.
But even when a purchaser fails to purchase an owner’s policy, he can always go back to the seller, if he received from them a “warranty” deed. Most corporations issue “statutory warranty deeds”, which have limited protections, yet are better than just a quit-claim deed like some entities try to get by with, which have no protections for the purchaser. Except for a quit-claim deed, it’d be hard to see how a bank could evade liability if its foreclosure paperwork was proven fraudulent in such a way that it impaired a subsequent purchaser’s ownership interests in the property.
So purchasers of foreclosure properties take note: Don’t accept a quit-claim deed from the bank unless you get an owner’s policy of title insurance.
Now, if the bank is indemnifying itself, why bother with title insurance? Title insurance will protect against back-chain issues, such as improperly notarized deeds or missing heirs. These types of issues arise very rarely, however. And if the foreclosed mortgage is less than ten years old (as almost all are), any issues with the back-chain should have been resolved when the mortgage was originally taken out. So there are some risks an owner’s policy would protect against, but for the prices of these policies (typically $2.5-$6.00/thousand insured), it might be worth it to just forego an owner’s policy for a bank warranty deed. Far and away the most likely source of title problems after a foreclosure is the foreclosure itself, and that was true even before “fraudclosure” hit.