Flaws in servicers' foreclosure processes are unlikely to have a major impact on title insurance claims or on new owners of real estate owned properties (REOs), title insurers say.
With lenders such as Ally Financial, Chase and, most recently, Bank of America, having halted foreclosures in 23 states, the validity of title to properties that have already been foreclosed and resold has been called into question.
Last week, The New York Times reported that title insurer Old Republic National Title instructed its agents to steer clear of insuring title to properties foreclosed upon by Ally ‘until further notice.’
Although laws vary by state, buyers of REOs generally have numerous defenses available to assure their continued ownership, says the American Land Title Association (ALTA), a national trade association representing the title industry. For example, an alleged deficiency in the foreclosure process may not be accurate or may not have harmed the previous owner, ALTA says.
Also, because a foreclosure judgment is a final court order, ‘it is likely too late’ for previous owners to raise ‘a technical objection,’ the group says.
These same defenses should limit the title industry's claims exposure, ALTA adds.
"If a new homeowner's title is challenged because of a faulty foreclosure, the title insurer may have an obligation to defend the challenge," says Kurt Pfotenhauer, CEO of ALTA. "However, it is unlikely that a court will take property from an innocent current homeowner and return it to a previous homeowner who failed to make payments on the loan subject to the foreclosure."
Pfotenhauer says ALTA will ask lenders to acknowledge they have followed all appropriate procedures before foreclosed properties are resold on the market.
Separately, Jacksonville, Fla.-based Fidelity National Financial Inc. (FNF) says it believes the reported foreclosure errors will not have a material adverse impact on its title business.
FNF gives two reasons for its belief. First, the rights of new owners and their lenders, as good-faith purchasers, supersede potential defects in documentation (a point also raised by ALTA). Second, even if a court sets aside a foreclosure due to a defect in documentation, the foreclosing lender would be required to return to FNF's insureds all funds obtained from them, resulting in no loss under the title insurance policy, FNF says.