Title Insurance Title All Clear (Paid for Search) What ifs?

Question

Hi all,

I've read/searched previous posts here and on google in general the last few weeks, however, I'd prefer a point blank answer and not risk my entire future on a misinterpretation (first flip!).

We found a iffy REO property owned BOA; listing had notes on that there is no clear title, buyer is responsible for liens, only offering quit claim, no title insurance, etc., the listing agent wouldn't even talk to me. We get our realtor involved he gets some story about +7 liens and such totaling 250k, we pay the $175 for a title search with a trusted company out of morbid curiosity. Comes back clean, they have no idea why. They even re-checked it and put it through a "second pair of eyes" and we can get title insurance.

What would happen if we close on it with title insurance and there's a large lien or such that comes out of nowhere or a cascade of ones in various stages? Such as after reno starts, or when we try t

Ron S. · Answer

1) Title issues are common but not that frequent. I would say for my portfolio (Primarily California), maybe 10% have some sort of issue? I've yet to NOT resolve a title issue but it's that "80/20" rule (I forget how it goes but...) 80% are flawless and 20% cause 80% of the time and money and problems? Something to that effect. Most of the title issues that I've encountered were due to lax due diligence and underwriting years ago when we first made the loan. Back in like 99'-07, we were doing these crappy insured "FACTA" reports for pennies on the dollar. Title policies that weren't worth the paper they were written on. Fast forward years later in a default situation, the title come up with a cloud that should have been caught then. That's the majority of the title issues. The other small percentage is just something missed by the foreclosure trustee. In those situations, we file a title claim and wait for it to clear up then move forward.

2)Behind/in front - if there is only one loan on the property, there is only one loan and its a "Senior" or "First Trust Deed (Depending on state). If there are more than one loan, there is a senior and a junior. That can be multiple juniors. There can be the 2nd lien holder behind the 1st lien holder. There can be a 3rd lien holder behind the 2nd and the 1st, and so on. The junior lienholders are aware of the senior lien holders and agree to subordinate their lien position behind the senior lien position(s). Junior lien holders have increased risk of loss in the event of default because as each lien position gets in lien, the next one has less of an equity protection in the event of default. As an example:

$200,000 Property value

$100,000 Senior lien (Or 1st Trust Deed) - Effective LTV (Loan to Value) 50%. GREAT equity position

$50,000 Junior Lien (Or 2nd lien position) - Effective CLTV (COMBINED Loan to Value)75%. GOOD equity position

$50,000 Junior Lien (Or 3rd position) - Effective CLTV 100%. CRAPPY equity position

These "positions" assume the 1st recorded first, the 2nd recorded second and the 3rd recorded third. Everyone knows their position and everyone gets along just fine. Everyone gets paid until they don't. Let's say borrower defaults on the junior 2nd and the junior 3rd. Neither of the junior lien holders are going to do anything (Usually) because they would have to pay off the liens in front of them before they can take the property in foreclosure. They will just charge it off. The 3rd lien holder knows they are under water. The 2nd lien holder knows they are going to be under water soon so both just charge their loans off and keep their liens attached to the property hoping values improve and some day, they'll come back and foreclose if they do. The borrower keeps paying the senior lien holder and everyone goes on with their lives until one or both of the junior lien holders either gives up and reconveys title free and clear of any liens or, until value comes back to the point where it's worth spending the money to pay off the senior lien holders and foreclose. Happens every day, all day.

NOW...if borrower stops paying all three lien holders or stops paying the 1st (Senior) then the senior will foreclose and wipe out Junior 2nd and Junior 3rd. Senior lien holder has a 50% equity position. They will DEFINITELY foreclose and unless the junior 2nd or junior 3rd pay the senior off, they get wiped out.

I'm totally simplifying the myriad of possible outcomes but this is how it works in a nutshell and at the 20,000 foot level.

...That help?

Dustin Haviland · Answer

Bottom line, the boogey man is real and we all have horror stories to share. If you have a reputable title company that runs a search report and it comes back with clear title, listen to the experts. If you want to argue with them and swear there is a ghost in the shadows, then you have already made your decision. If you want to really scare yourself, ask the Title Company to run a 30 year search, match that report with the foreclosure and see if you hit every name. If you do, you're on your way to closing.

Ron S. · Answer

As you state in your first paragraph...you might be risking your entire future. Is it worth the risk? If it is, take a deep breath and dive in. If the margins are thin, do you want to risk your entire future? You said yourself that the property was "Iffy". Why? Why is it iffy?

Title issues come up. Its the nature of the beast. Comes with the territory. Even as a lender, I run into them from time to time. Lawsuits are necessary some times. Quiet title action usually solves the issue, eventually,  but that involves time and attorneys. Neither are cheap.

If you have the stomach for the potential pitfalls, the money to hold on, the patience to wait it out, I'd say go for it but if you are adverse to risk and don't have a good stock of Tums on hand, might want to stick to something less exciting.

On a side note, if BofA foreclosed, they did wipe out any liens junior to them. Any liens in front of them would survive if there are any. Any liens such as IRS liens have a clock ticking that runs out after a set period of time and those liens are not scary if they exist. They have to pay the liens off in order to exercise their right to the property and only have a set period of time to do so before they have to abandon their rights. HOA liens usually survive and are usually superior to any other liens. Some are capped, some aren't. Utility liens usually survive. Other liens, like a lien for benefits of Medicaid and such would get wiped out if they are behind the foreclosing entity. While possible, it isn't probable that those kinds of liens are in front of the foreclosing entity. We lenders don't usually lend on liens in front of us unless we are intentionally going into a transaction as a junior lien holder. We would only typically do that to subordinate to a senior lienholder for a loan, not an unpaid lien.

Taxes survive foreclosure and are always superior. Some states require taxes to be paid current at or before or shortly thereafter foreclosure. Most lenders (Most...not all) pay taxes current at or before foreclosure. Who wants to risk losing lien position due to delinquent taxes.

Mechanics liens will get wiped out in foreclosure assuming they are behind the foreclosing entity.

You ran a title search and were told its insurable...Still have the stomach for it?

Kyle S. · Answer

Dustin,

Just so I know what you're saying, I think you've answered my original question because really what I'm trying to figure out is "who to believe, the bank/listing agent or title company." I was asking some preemptive questions if that answer was "the bank/listing agent" but sounds like that's a "worry about it in the off chance it happens" scenario.

You're saying a reputable title company is going to be right often enough that:

• It probably wouldn't be worth my personal follow up (figuring out the deep/full process, getting second searches, whatever) and I can reasonably "take their word for it"

• I shouldn't really worry about whatever it is the bank and the listing agent was talking about even though it directly conflicts with the title search and chalk it up god knows what, the title company would be more of the authoritative source

• There's not much more precautions, planning, or steps I should take since the title came back clean and just assume the risk of something random which is always a risk

• And the original answer is yes, the title insurance should cover something as it comes out but it will still be a pain in the ass

Kyle S. · Answer

Well, it's not whether or not I have the stomach for it, etc, I'm trying to quantify the impacts, (in sole regard to this title thing) get probabilities of the risks, the triggers, mechanisms and procedures, etc. so I can make a proper risk management assessments, backup plans, etc.

So let me unpack what you said to make sure I understand:

1. I was under the impression something like this was uncommon (bank/listing agent saying one thing but the title coming back clean, etc.) but sounds like it's normal/expected? If you were to ball park "title issues coming up" generally speaking are we talking 50% of the time? 1%? Are there any indicators/variables that push that probability higher (BOA/Listing Agent saying this/that) or lower (clean title and title insurance)?

2. I think what would help me understand better would be clarity on what you mean by "behind/In Front", "Junior/Senior"

"On a side note, if BofA foreclosed, they did wipe out any liens junior to them"; can you explain or give me an example of what "junior to them" means? Meaning all liens against it BEFORE the foreclosure were wiped out by them? Does that mean all that were brought up or chronologically? (example: a debt existed before foreclosure wasn't "processed" or "brought up" or whatever until after foreclosure.)

"Any liens in front of them would survive if there are any." same as point 2, what exactly does that mean? The bank foreclosed then a lien came out of the wood work?

What I'm really trying to figure out is, what is the absolute worst case scenario (a flood of liens coming out of nowhere for over $200,000), what would that mean to me after I close (I just turn it over to the title insurance and deal with it), and what's the probability of it happening? (based on the forclosure and clean title search).

Ron S. · Answer

No. Title insurance is only as good as the search. Things get missed all the time. Title insurance, insures past events. If they miss it, you may be able to file a title claim but suffice it to say, they are gonna put gasoline and barbed wire on the hoops they make you jump through to be successful in a title claim. Will you prevail? Usually but it takes time and patience. I still shake my head after 24 years of doing this at how inept some title companies and their title reports can be.

I foreclosed last year on a borrower that deeded half the property to their daughter. Title missed that little blurb when they issued the TSG (Title for foreclosures, called a "Trustee Sale Guarranty"). A year later, I'm STILL in the middle of the title claim and when its all done, I'm probably going to have to share any proceeds from sale with the daughter.

Michael Lucero · Answer

Maybe im mistaken but If you get title insurance, arent you in the clear?

Title Insurance Title All Clear (Paid for Search) What ifs?

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