Foreclosures and the value of title insurance

Issue December 2010 By Elizabeth J. Barton

Title insurance is valuable protection for owners and lenders in today's real estate market. Upon the issuance of an Owner Title Insurance Policy (owner policy), the property owner is protected from a vast array of title defects and ownership challenges. The owner can refinance or sell the property knowing that the Owner Policy insures the property's marketability.

When the lender secures an underlying loan or obligation with a mortgage on real property, the Mortgagee Title Insurance Policy (loan policy) protects the validity, enforceability and priority of the mortgage. The loan policy also provides much of the same coverage contained in the owner policy, but the loan policy insures and protects only the lender, not the owner.

Whether or not the owner is protected by title insurance depends upon whether or not the owner chooses to purchase an owner policy. Institutional lenders, particularly those placing a first mortgage on real property, always require the protection of a loan policy. The value of the loan policy becomes apparent when the lender takes title to the property. The lender becomes the owner when the lender forecloses on the insured mortgage, so the protection of the loan policy has become important to many lenders with the current increase in foreclosures.

Real estate that has gone through one or more foreclosures may be affected by a variety of title issues. When such property is sold, the buyer takes the property subject to any title issues that were not eliminated by the foreclosure, and the title to the property is also subject to defects in the foreclosure process.

The title search at the Registry of Deeds, completed prior to the purchase of real estate at a foreclosure sale, may reveal undischarged mortgages granted by a prior owner. The title search may also show tax liens, tax takings or other liens that have not been released or discharged prior to the foreclosure.

In Massachusetts, conveyancers must now also confirm that the foreclosure complies with the recent U.S. Bank National Association v. Ibanez et al decision. ("Ibanez"). Massachusetts Land Court Miscellaneous Decisions No. 384283, 386018 and 386755 (KCL)  The Ibanez foreclosure was one of many foreclosures which took place after the transfer of a group of  mortgages from one lender to another lender.  The Land Court judge in Ibanez noted that the transfer of the mortgages in the Ibanez case and its companion cases was not recorded at the Registry of Deeds where the property was located by the recording of an assignment of the mortgage. The assignment is the public record at the Registry of Deeds of which entity is the current holder of the mortgage.

The Ibanez decision requires that a mortgage foreclosure must be commenced by a lender that holds the mortgage at the time of the publication of the required foreclosure notice. With the frenetic pace of the mortgage market over the past several years, many assignments of mortgage were not recorded in a timely manner, so there are a significant number of foreclosures that were not conducted properly under the standard imposed by the Ibanez decision. The Ibanez case is being appealed, but since the decision owners and buyers are subject to a new title issue regarding Massachusetts foreclosures, an issue for which an owner's title insurance policy would provide protection. A foreclosure completed by a party that did not hold the mortgage at the time of publication of the foreclosure notice might need to be redone in order to clear the issue raised by Ibanez. An owner who purchased the property and holds a title insurance policy which was issued after a faulty foreclosure under Ibanez is protected by the policy if he or she is selling or refinancing their property.

Other recent events have raised additional questions about the effectiveness of foreclosure proceedings in Massachusetts and throughout the United States. Some banks have temporarily stopped all foreclosure proceedings because the affidavits which are recorded with foreclosure deeds were being signed by individuals who were not familiar with the facts stated in the affidavit. The effectiveness and accuracy of the Mortgage Electronic Registration System (MERS) is being challenged, which may raise more questions about which lender holds the mortgage and has the power to foreclose. As of May 1, 2010, the Federal National Mortgage Association does not allow MERS to be named as a plaintiff in any foreclosure action, neither judicial nor non-judicial. Quitclaim deeds offer little or nothing in the way of protection for the buyer at a foreclosure sale, and an attorney's title certification cannot provide the security of a title insurance policy.

The title insurer has a duty under the policy to indemnify the insured against loss caused by a covered matter which arose prior to the date of the title insurance policy. The title insurance company also has a duty to defend the insured in litigation arising from a risk insured against in the policy. Title Insurance is the best protection available against ownership challenges and adverse claims resulting from defective foreclosure sales.

Elizabeth J. Barton is title counsel for Connecticut Attorneys Title Insurance Company (CATIC, a regional title insurance company) in its Wellesley office. She is vice chair of the MBA Property Law Section Council, as well as the chair of the Joint Foreclosure Legislation Task Force and the Education for Attorneys Representing Individuals Facing Foreclosure for the MBA. She is also a member of the Real Estate Bar Association (REBA), the REBA Title Standards Committee and the Merrimac Valley Bar Association.