DETAILS… DETAILS… TELL ME ABOUT TITLE INSURANCE
THE REQUEST TO INSURE
Our work usually begins when we are asked to insure a refinance or sale transaction. If you are refinancing, you, your lender or your mortgage broker will make the request. If you are selling, the request will come from you or your real estate agent.
What about the Buyer..?
Although a title insurance owner’s policy insures the buyer, it also shields the seller from possible future liability. Without title insurance, a buyer’s recourse for problems related to ownership would be to the seller. To avoid or at least mitigate that possibility, the seller provides the buyer with a title insurance policy, thereby shifting the risk of liability to the insurer.
Because the seller is the one seeking to avoid the risk, he or she generally picks the company to assume it. If a seller is indifferent, or if a buyer is insistent, the buyer may choose.
A few days after receiving the request, we will issue a title insurance commitment, which sets forth conditions that must be met prior to insuring, including payment of the insurance premium. Upon satisfaction of the conditions and payment of the premium charge, our underwriter will issue a title insurance policy insuring the lender’s lien position (loan policy); or, for an owner’s policy, our underwriter will assume some of the risks associated with ownership.
♦ Sample Title Commitment "Requirements Page"
WHAT IS INSURED
Lenders are concerned about their mortgage lien position (a/k/a priority).
When you borrow money from a bank to purchase or finance real estate, you sign a promissory note. The promissory note is a statement of all the loan terms (e.g., the loan amount, the interest rate and the terms of repayment) together with your acknowledgement of the obligation to repay the loan.
You also sign a deed of trust (mortgage). The mortgage is recorded in the public records maintained by the clerk and recorder for the county where the property is located. Recording the mortgage creates a lien against your property. Lien position is established by recording order. That is, a mortgage describing your property and recorded today has a higher priority than a mortgage recorded tomorrow.
Why would your bank care about mortgage lien position? The mortgage empowers it to foreclose on your property if you fail to perform in accordance with the terms of your loan. Foreclosure involves the termination of your rights of ownership and the sale of your property in order to satisfy your debt obligation.
If your bank must foreclose, a third party may purchase your property at the foreclosure sale (Auction). In this case, your bank recoups its loan proceeds immediately. As a practical matter, many foreclosures end with the foreclosing party owning the property. In that case, your bank would have to list and resell your property before it would recoup its loan proceeds. There are various costs associated with resale - (a) ongoing property maintenance costs such as taxes, insurance and repairs; (b) marketing; and (c) the payoff of any liens of higher priority. If your bank had a “first position” lien, it could resell after foreclosing without any costs other than maintenance and marketing.
A loan policy insures a lender’s lien position. To insure a “first position lien” for example, we would examine the public records and make sure that there are no mortgages or other liensthat have already been recorded and that are not otherwise discharged. We do not necessarily insure first lien position. If you have two or more secured loans, only one can be insured in first position. A loan policy insuring second positionassures that lender that upon foreclosure, there would be only one lien of higher priority.
Priority is based on all of the liens affecting your property. That is, a judgment or tax lien recorded today would have a higher priority than a mortgage recorded tomorrow. Therefore, to insure first lien position, we must discharge all existing liens affecting your property and address potential liens that could attain a higher priority by operation of law (e.g., mechanics' liens).
Why would a lender agree to make a loan secured by a second (or lower) position lien...?
Consider a property purchased with an $80,000.00 loan from Bank A (first position) and a $10,000.00 loan from Bank B (second position). Suppose Bank B forecloses and acquires the property at the Auction. To recoup its loan proceeds, Bank B must sell the property, and the sale price must equal at least the Bank A loan, plus the costs of maintenance and marketing, plus its own loan. If maintenance and marketing amount to $10,000.00 and Bank B sells the property for $100,000.00, then it will recoup the full amount of its loan. If the property sells for less than $100,000.00, it will not. Therefore, Bank B’s willingness to make a second position loan will be based in part on its confidence that the value of the property is and will remain equal to or greater than the combined total of the existing first loan, its second loan and the costs associated with a possible future foreclosure.