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Title insurance claims are on the rise, and this upsurge is not only contributing to drawn-out foreclosure timelines, but it’s putting title companies in dire straits.

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TITLE WAVEBy James E. Moon, Esq., and Michael J. Barker, Esq.

Since the foreclosure crisis began, there has been significant discussion over the ever-lengthening time required to complete a judicial foreclosure. A number of factors are consistently at the forefront of these discussions, including borrower delay tactics, government

holds, and servicer and outside counsel transfers.

In addition to these usual suspects, one frequently overlooked contributing element, more often than not, can stall a judicial foreclosure for months—potentially by more than a year. Specifi-cally, when a title issue is confronted that prevents the prosecution of a foreclosure, a file can get lost in title claim limbo, which significantly impacts the timeline to recover an asset in foreclosure.

Title Insurance, in BriefThe objective of title insurance is, in essence,

rather simple: to assist the parties in real estate transactions to determine their rights, title, and interests and to ensure that land transfer is a secure transaction between the parties. As part of this process, before a land transfer is completed, a title search of the property is conducted to determine if the buyer faces any potential problems or pitfalls. Liens, easements, rights-of-way, or sale of future interests are typically recorded in public records.

Underwriting is then able to look at these potential title issues and, in many cases, resolve them before a closing. It is estimated that ap-proximately one in four property sales prior to the financial crisis had some type of title issue that was cleared—usually unbeknownst to the purchaser or lender.1

Resolution Hurdles CompoundedTitle issues can come in many forms: errone-

ous legal descriptions, interest claims by prior

lien holders, or un-divested interest of heirs, to name a few. Claims can behave quite esoterically, but when they’re confronted in foreclosure, they can be downright nasty. Unfortunately, due to the unprecedented pace of sales and refinances during the real estate boom, far too many title in-surance agents—both corporate and attorney—failed to uphold accepted industry standards in providing settlement and title insurance services. As a direct result of such practices, errors and omissions are now coming to light.

Resolving title insurance claims in a “normal” environment can be time consuming. There are always multiple parties involved such as the insured, the title insurance carrier, the closing agent, and the party claiming an adverse interest to the insured. Of course, when a title claim is made in the environment of a foreclosure, the difficulty and, most important, the time it takes to resolve the title issue increases substantially and results in further delaying the foreclosure timeline.

We can directly attribute the delay to the very nature of how title issues are typically resolved. However, the interplay between foreclosure counsel, the loan servicer, the title company, and its appointed counsel can make already murky waters turn pitch black. Unfortunately, although all parties involved have the same common goal of resolving the title claim, the communication between parties with aligned interest is almost

nonexistent. It is not uncommon for foreclosure counsel to be completely unaware of the actions of the counsel appointed by the title company and vice versa. Confusion, frustration, and delay are the ultimate result.

Lack of communication between interested parties can cause delays, but economics plays a role as well. Title policies do not generate recurring premiums, unlike traditional insur-ance products such as motor vehicle or property insurance. Rather, there is a one-time premium charged at the time of issuance and the policy will remain in effect essentially as long as the insured retains an interest in the real property detailed in the policy. To generate sufficient revenue to remain viable, title insurers need high transactional volume and low claim payout.2 As the real estate bubble burst, revenue via real estate sales plummeted.3

During this same time period, title insurance claims rose well beyond expectations with the top five underwriters paying nearly $1 billion in claims in 2007 and major title underwriters reporting an increase in title claims of 62 percent in the first half of 2007 alone.4 As a result of decreased revenue, staffing levels of many title insurers were downsized.5 A difficulty subse-quently arose related to forecasting future em-ployment needs against anticipated claim levels. Unfortunately, after staffing cuts, some insurers scrambled to increase the number of employees in claims departments to keep up with the rise in claims workload, but many never caught back up and are still behind in processing claims.

Most analysts argue the process of clearing property inventories and increasing property values via supply/demand needs to be acceler-ated, which at first blush appears backed by the

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1. Cal Zimmerman, “Title Issues Can Make Property Sales Fall Flat,” NuWire Investor, February 1, 2008, www.nuwireinvestor.com/articles/title-issues-can-make-property-sales-fall-flat-51421.aspx. 2. See Title Insurance, A Comprehensive Overview (James L. Gosdin ed., 3rd ed. 2007) for further information regarding the title insurance industry. 3. For 2008 and 2009, refinance transactions increased; however, the overall title business was down significantly from 2007 and 2006 levels with ranges of 14 to 22 percent. See First American, First American Title Order Transactions by Month for Direct Title Operations, www.firstam.com/titleordercounts.cfm (as of March 9, 2009). 4. Annette Haddad, “Foreclosures Hit Title Insurer—First American Posts a Second-Quarter Loss as the Hosing Downturn Increases Claim Filings,” L.A. Times, August 3, 2007, at C3. 5. Fidelity National Financial, Inc., eliminated 1,500 out of 5,500 positions and closed 125 offices, while LandAmerica cut 4,200 positions in 2007 and 2008. LandAmerica was eventually forced to seek Chapter 11 protection in 2008 after its stock price plummeted from $120 per share to just over $0.20 a share amidst surging claim filings.6.Yves Smith, “Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers,” Naked Capitalism, September 18, 2010, www.nakedcapitalism.com/2010/09/

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renewed interest in foreclosures and foreclosure filings.6 However, this push has created the very upswing title companies fear: As foreclosures increase, the likelihood for serious title defects also increases. Analysis of a random sample of foreclosed properties conducted by AFX Title detected mortgage recording issues that created and are continuing to create title flaws, the result of which is an anticipated mass upsurge in title claims over the next few years.7

Adding to Foreclosure DelaysEarly last year, financial institutions and state

attorneys general reached a comprimise to com-pensate property buyers for alleged damages due to questioned foreclosure practices. While this settlement and its intent seems to be a fair and effective resolution for all parties, the downside is the enormous clouded title problem is not ad-dressed under the terms of that settlement. Many property owners now allege they cannot prove they own real estate they thought they rightfully purchased while others argue that banks cannot prove they have the right to foreclose and sell the property.

While no one is sure of the number of prop-erties that face clouded titles, it is believed to be in excess of 1 million personal residences given the number of foreclosures that have occurred since 2006 and a great deal more commercial properties.8 The end result is that a property owner, whether commercial or residential, can-not sell the property if he or she cannot prove ownership, as mortgage companies will not issue mortgages on property that cannot be insured.

To compound troubles, title insurance companies also face seemingly harmful case law due to a frequent misunderstanding by lawyers and judges as to what is and isn’t available under title insurance. A decision reached in Massachusetts in U.S. Bank v. Ibanez, 458 Mass. 637 (2011)9 upheld the long-standing principle that a bank must own the note and mortgage on which it forecloses. When Wells Fargo and U.S. Bancorp could not prove they owned the mortgages they attempted to foreclose, the Ibanez court did not give clear title to the properties.

The court went a step further to indicate it was not limiting its ruling to future foreclosures only, meaning all completed foreclosures with similar problems theoretically failed to give good title. This means insurance companies that insured the titles of these properties will most certainly face a deluge of title claims and the

affected properties will require re-foreclosure or quiet title actions.

Under title policies, an insurer has to act with diligence to clear title problems brought under a claim or face damages for failing to timely act.10 The difficulty faced with foreclosure claims brought under a title policy is the strong possibility that problems with title many times cannot be cleared. And, given the slow track record of many financial institutions in correct-ing the issues raised, it is highly likely a violation of the diligence standard for title insurers would occur prior to them curing title. This places the title insurer in a difficult position of breaching policy provisions with the limited ability to clear title, if at all, given the court’s stance on “true” ownership of notes and mortgages by banks. Most certainly, once it is realized that such an opportunity exists to collect on the title policy, an influx of claims will occur.

Other courts reached similar decisions as the Premier Tierra court, such as that in Mattson Ridge, LLC, v. Clear Rock Title, LLP, 2011 WL 2175832 (Minn. App. 2011)11, which found that the insured could recover consequential damages including lost profits, the cost to cure the defect, attorney’s fees, and the diminution in value to the property, beyond policy limits where the insurer breaches the policy by failing to cure title. Again, the title insurer is essentially exposed to quasi-bad faith damages by allowing for an excess judgment against them for failing to cure the title to a property. The difficulty again is the question of what occurs if a title cannot be cleared due to mortgage foreclosure issues that created clouds on title.

Title insurers face further claim exposure through the truism that bad facts make bad law. In JPMorgan Chase Bank, N.A., v. First American Title Ins. Co., 795 F.Supp.2d 624 (E.D. Mich. June 10, 2011),12 the federal court decided that title insurers will also be held responsible for claims that arise due to the fraudulent activities of title agents, attorneys, and real estate agents even if the title insurer receives late notice of the claim. As a response, many title policy lend-ers refused to issue title policies for JPMorgan foreclosures and are considering the same for other lenders who admitted the use of question-ably signed documents, mortgages that lacked assignments, or other issues that affected the foreclosure.13

When foreclosures are completed with faulty documentation, it can leave the new owners of the property vulnerable to expensive legal claims.

Title insurance protects the buyer against defects, errors, or omissions in the chain of title. As title insurance firms begin to shy away from insur-ing foreclosed properties, the entire real estate market could suffer. The prices of foreclosures would plummet since lenders will not issue a new mortgage without title insurance. And small businesses that invested in commercial proper-ties, taking advantage of historically low rates, could face ruin if they are hit with expensive litigation to correct title issues on property they thought they rightfully owned.

While case law at the current time is un-friendly toward title defense, courts typically are equally as unfriendly due to their misunderstand-ing of title policies and the provisions therein. Many judges never see title policy claims or at best may have one or two come through during their entire careers. The legal system faced these same difficulties as foreclosure actions increased in numbers. Courts and attorneys were in large part forced to learn under a deluge of case filings. The same could happen with an anticipated swell in title claim filings. The end result is the creation of more “bad law,” the misapplication of statutes and policy provisions, and a windfall of claims to the detriment of the title insurer and the real estate market.

New VulnerabilitiesIt is abundantly clear based upon the continu-

ation of foreclosures that we are at the begin-ning stages of what could well end up being our next wave of instability in the real estate market caused by a mass increase in title claims that simultaneously places our title insurers in an exceptionally difficult financial position.

No one can indicate how many clouded properties now exist that may subject title insurers to potential claims, which, in turn, will cause further delays of foreclosures in progress and foreclosures yet to be filed. Additionally, as insured property owners and insured mortgagees continue to seek answers and reparations, they most certainly will look to their title policy for payment and resolution.

James E. Moon, Esq., is an associate in the Fort Myers, Florida, office of Quintairos, Prieto, Wood & Boyer, P.A., practicing in the areas of civil and commercial litigation. Michael J. Barker, Esq., is a partner in the Jacksonville, Florida, office and heads up the firm’s financial services practice group.

latest-real-estate-time-bomb-title-of-foreclosed-properties-clouded-wells-fargo-dumping-risk-on-hapless-buyers.html. 7. Id.8 Abigail Field, “Why the Foreclosure Mess Settlement Proposal Can’t Fix the Damage,” DailyFinance, March 18, 2011, www.dailyfinance.com/2011/03/18/why-the-foreclosure-mess-settlement-proposal-cant-fix-the-damag/. 9. U.S. Bank v. Ibanez, 458 Mass. 637 (2011). 10. Premier Tierra Holdings v. Ticor Title Insurance Co. of Florida, Inc., No. 4:09-02872, 2011 WL 2313206 (S.D. Tex. June 9, 2011)10, where the Southern District for Texas, while interpreting Florida law, found that standard title policy provisions 4(b), 8(a), and 8(b) were ambiguous, but more importantly, that if an insurer breaches the policy under one of these provisions, the policy limitation on damages would no longer apply under the policy, exposing the carrier to greater damages. 11. Mattson Ridge, LLC, v. Clear Rock Title, LLP, 2011 WL 2175832 (Minn. App. 2011). 12. JPMorgan Chase Bank, N.A., v. First American Title Ins. Co., 795 F.Supp.2d 624 (E.D. Mich. June 10, 2011). 13. See Streitfield, David, “Companies Stop Issuing Title Policies,” found at www.nytimes.com/2010/10/03/business/economy/03foreclose.html?_r=1.

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