Importance of Lender's Title Insurance

[Andy Mirza]

(I wanted to start this thread separately to avoid hijacking another thread where this subject came up. The topic is important enough to warrant further discussion.)

As @Tracy Z. Rewey pointed out, there's a huge difference between getting back a clean title report and having an actual lender's title insurance policy. Before acquiring a note, you should know if there's an existing lender's title insurance policy on it. Not only does it affect the value of the note you intend to buy and hence the amount you should be paying for it, the lack of a lender's policy means that you're taking all the risk if there are title issues that can come back to haunt you.

In a way, it's similar to having car insurance. You can save the money on premiums but run the risk of having to pay for everything in case things go wrong. 

What kind of things can go wrong?

Once common issue I see are previous loans that never get properly reconveyed in a refinance or purchase transaction. 

Example: A seller sells his home to a buyer. Buyer gets a new loan to pay for the house. Seller's loan gets paid off during escrow. Normal transaction, right? Well, what if the seller's loan never recorded a reconveyance or release of lien? 

In our world, if you wanted to buy the buyer's loan and title still showed the seller's loan on title, there's a big issue. The buyer's loan is actually a 2nd and not a 1st, until proven otherwise. Whoever owns the buyer's loan can't sell their loan until this issue is taken care of. If they can't locate the recorded or unrecorded reconveyance, their next course of action would be to file a claim with their title insurance company.

Now, it would be up to the title company to clear up the title issue. In this situation, they would most likely do the research & track down the missing document. If they couldn't locate it, they would find proof of payment on the payoff & get another document executed by the appropriate party and record that to release the lien.

If there was something fraudulent involved and the seller's loan actually never got paid off, the title company might pay the buyer's lender the face amount of the loan. (We actually have a situation exactly like this with one of our NPNs.)

Personally, I'll pay the premium instead of risking the entire amount of my investment.....

[Bob Malecki]

We purchased an npl note for $450,000 on a home in Washington State with an approximate value of $600,000, great. Title history had quite a bit of hair on it - a bankruptcy, a divorce, and the lender suing the borrower for various reasons about 10 years ago. We knew this project was going to be complicated and we made sure that our purchase agreement with the seller of the loan had specific terms related to our due diligence findings.

We proceeded to foreclose and the borrower lawyered up and filed a lawsuit. Her defense was statute of limitations based on a filing not being done correctly by the original lender in 2006. We filed a claim with the title insurance company that originated the lenders insurance policy, they eventually approved the claim and beared the cost for representing us in the lawsuit. 

Long story short, we eventually got the company that sold us the loan to agree to purchase it back based on a specific clause we required in the purchase agreement that was related to the statute of limitations issue that we experienced in the lawsuit, and had anticipated in our initial due diligence as a possible issue at foreclosure.

This clearly illustrates the importance of making sure you have a lender's title insurance policy on the loan, and that you execute a well-crafted purchase agreement that covers your butt should something like this put you into a litigious situation. This also illustrates that borrowers on higher value properties with defaulted debt can be much more challenging than those who own lower valued properties.