Title Insurance and Foreclosure

Following my last post, Liens, Grantors, Grantees, Mortgagor, Mortgagee........., I think it is worth also explaining Title Insurance and Foreclosure in an attempt to get to the subject of short sales. If you did not read the last post, it may be helpful to read it before reading what is outlined herein.

As a buyer or if you are refinancing, you will hear about or deal with title insurance. It has been my experience that most people have little understanding of what title insurance actually is. In the simplest terms, there are two basic types of title insurance. The first type is the Owner's Policy, and the second type is the Loan Policy. There are other types of title insurance, but these are the two types you, the home owner, will need to be concerned with in 99% (not a scientific number) of the cases. The exception may be if you are involved with some type of leasehold property.

The Owner's Policy insures your title to the property. It insures that your title to the property is free and clear of all judgments, liens and encumbrances. When you buy a property, either you or perhaps your agent will order title insurance. The title company will run a public record search. They will check for any public utility, taxes, judgments, liens, mortgages, bankruptcies, restrictions, exceptions, etc.. They will produce a title report, which is a proposal for insurance. I am not sure if every state looks the same, but in Pennsylvania, the title report is broken down into four schedules: A, B, B2, and C.

Schedule A gives basic information. It shows the date through which the title search is valid. This date is referred to as the cover date. It is the date through which the title company was able to search the public record. It also shows the file number, property address, who currently owns the property, and which policies the title company is proposing to insure, the proposed insured names and the amounts insured. In a basic home purchase, there should be two proposed insured parties. The first is the home buyer/grantee for an Owner's Policy of Title Insurance, and the second is the lender/mortgagee for a Loan Policy of Title Insurance.

Schedule B lists all of the items, which need to be addressed to clear title and insure. Thus, it shows the documents, which need to be executed such as a Deed, Mortgage, Affidavits, perhaps a Power of Attorny, etc.. It also shows taxes, mortgages, judgments, liens, etc, which need to be paid to clear the title.

Schedule B2 shows exceptions, conditions, restrictions, etc.. This section discloses the rights of others to the property. There may be previously granted oil rights, gas rights, mineral rights, etc., easements for roads, utilities and pipelines, which can limit the ability of where and how the buyer can use the property, or possibly rights that have been granted to others such as neighbors for access over the land, companies for irrigation, etc. The review of this schedule is important, because these rights supercede the buyer’s rights on their future property. The title insurance will not offer any protection to the buyer for any of these issues.

Schedule C covers the legal description. This schedule can vary from state to state. In Pennsylvania, the legal description is a metes and bounds description followed by a recital, which shows the dates of deed and recording to get from the last owner to the current owner. The recital may include a description of dates and estates to provide the chain of title from the last seller to the present seller. Thus, if the Smiths bought a property in 1960, the recital will show the date of the deed, the date it was recorded in the public record and the book and page where it was recorded, and name the parties who conveyed the property to them. If both of the Smiths passed away, then it will show their dates of deaths and their estates and the parties assigned to be administrators or executors.

So, you have ordered title insurance. The title company has run a search and produced a title report. They will send you a copy of the title report and the seller will receive a copy either from you or from the title insurance company. The seller will go through the report and produce payoffs and bills to clear the title at settlement. They will also be required to produce identification and perhaps legal documents: there may be divorce decrees, wills, etc. These items may need to be reviewed by the title insurance company and additional requirements added to the title report.

The buyer will also be searched in the process of the title search. There may be items that the buyer is required to payoff also. For example, in Pennsylvania, if you have outstanding child or spousal support payments, you will be required to payoff the support before buying the property.

At settlement, the title insurance company will require everything to be paid that the report reflects. They will take the title report and "mark it up". They will mark all items paid and proven "REMOVED". There are other items, especially those found on Schedule B2, that will be marked "EXCEPTED". The excepted items will be still in effect and not covered by the title insurance. Therefore, items like roads and easements and rights will still be in effect and your title insurance will have no bearing on these issues. Typically in Philadelphia, there is a party wall or an alleyway, which others have rights to. After you buy the property and receive your insurance, the others will still have rights to the party walls and alleyways or any other excepted items.

When the settlement is scheduled, the title insurance will run an additional search called a bring down. The bring down will simply be an update to the complete search. They try to close the "GAP DATE", which is the original cover date to get as close to settlement date as possible. Additional items may be found on the bring down. When they insure your title, the title insurance company insures you through the date your deed and mortgage are recorded. They have additional risk in this gap period, where the records can not be searched prior to settlement and until they record your deed. It is pretty straight forward that if they are insuring a clear title for you, they are insuring that nothing is standing in the way between you and your title. There are not taxes due, no judgments, no mortgages on the property, etc.. If something should come up at a later date, the title company is on the hook.

The Loan Policy is a little more complicated. The Loan Policies guarantees a lien position. When you are buying a house and have one mortgage with which you are buying the property. The mortgage is referred to as a purchase money mortgage. It is a first mortgage and should have a first lien position. The title insurance insures that everything is paid off and there are no liens, which will come before this lien.

There is another concept, which is referred to as priority of liens, which is the order in which creditors are paid when borrower's assets are liquidated. When dealing with real estate in Philadelphia, taxes, water and sewer, and gas (PGW) take priority. Even after the loan policy of title insurance is issued, these three items retain a senior lien position to the mortgage. The mortgage will always be subordinate to taxes, water and sewer, and gas (PGW) in Philadelphia. Thus, if you should default and get taken through the foreclosure process, the eventual winner of the sheriff's sale will not only have to pay off the lender/first lien holder, but also the senior liens: taxes, water and sewer, and gas. If there is a second mortgage and judgments, etc., the taxes, water and sewer, gas and first mortgagee would need to get paid off, but the remaining items would get removed.

Now, of course the process and subject of priority of liens, foreclosure and sheriff sale is much more complicated than above described, and further complicated by state liens and IRS liens, which have certain priority positions. There are notification rules and certain processes which apply, etc. that I will not get into in this post.

Thus, when a lender forecloses on a property, they must go through the legal expense of foreclosing, must pay the municipal items and any liens, which are senior to their own. If another party bids against them at a sheriff sale, then the party winning the bid must pay those same costs and expenses.

Now, we keep hearing about a thing called a short sale. A short sale generally happens when a borrower is being foreclosed upon. With the lenders co-operation, the borrower lists the property for sale. The hope is to sell the property and avoid two things. First, to avoid going through with the actual foreclosure, and second, to sell the property and avoid, on the lender's part, the possibility of taking the property back at the sheriff sale. If the lender takes it back, then they have the added burden to market and sell said property. I will go further into this process in the next post.