Update: "National Moratorium on Foreclosures"

Make That Four Theories
(#4. Overreaction)

In my post on Thursday, "National Moratorium on Foreclosures," I puzzled over the seeming disconnect between the stocks of publicly-traded title insurance companies (barely affected), and the supposed tidal wave of claims headed their way due to defective mortgage foreclosures.

I posited three possible explanations: 1) the aforementioned companies don't have exposure in the markets where the problems are most severe; 2) they've already laid off their risk, through reinsurance, derivatives, or the like; and/or 3) the banks, not the title insurance companies, are going to take the hit.

Based on this week's stock market action, the clear winner is theory #3 (all the too-big-to-fail banks -- including Bank of America, Wells Fargo, and JP Morgan Chase -- had rough weeks).

SARS vs. AIDS

But I'd now also add a fourth theory: the problem, while serious, has been exaggerated.

Think of it as the financial equivalent of a possible health epidemic.

In 2003, much of the developed world was bracing for a full-blown outbreak of SARS ("severe acute respiratory syndrome").

The quick spike in (well-documented) cases -- fanned by all manner of media -- was certainly alarming.

And SARS in fact was extremely lethal if contracted.

But ultimately, nothing like the pandemic officials initially feared occurred.

Other scares like West Nile virus have followed the same trajectory.

It's too soon to tell -- all 50 state attorneys general are now looking into the matter -- but it's possible that the stories about homeowners with no mortgages having their locks changed in the middle of the night are the (rare) exception, not the rule.

At least in Minnesota, the fact that I haven't heard first-person accounts from a pretty broad circle of clients and friends tells me that that's at least plausible.

Are Title Insurance Companies Bracing for a Tidal Wave of Claims? Nah.

National Moratorium
on Foreclosures

Surprise, Surprise . . . the same banking behemoths that recklessly originated trillions in dubious mortgages -- fuel for Wall Street's securitization juggernaut -- are apparently now running roughshod over the rights of delinquent borrowers as they seek to foreclose on their homes.

How big a problem is this?

And who's going to pay for it?

Background

To investigate (a little), I checked the stocks of three, large publicly-traded title insurance companies.

My theory is that if hundreds of thousands (millions?) of homes were wrongfully foreclosed on, there is going to be a tsunami of title insurance claims in the offing, brought by Buyers of those homes who in fact . . . may own nothing.

So, is the stock market clobbering the largest, publicly traded title insurance companies, in anticipation of all those pending claims?

Claims? What Claims?

Hardly.

Three of the biggest, publicly traded title insurance companies -- Fidelity National, First American Financial, and Old Republic -- are all trading in the middle of (or above) their 52 week price ranges.

Which is certainly curious, given their presumed exposure to this brewing mess.

I don't have a ready explanation, but my guesses are: 1) the companies somehow don't do much business in the markets (FL, CA, Las Vegas) where the problem is greatest; 2) they've already reinsured or otherwise laid off the risk of those claims (or think they have -- can you say, "insolvent counter-party?"); and/or 3) the title insurance companies -- and their investors -- figure that the banks, not they, will ultimately bear responsibility.

And by "the banks," I mean "us" -- the taxpayers now standing behind those too-big-to-fail entities.

P.S.: maybe "tidal wave" should be "title wave."

Choosing a Title Company

A Realtor's Perspective

While the Realtor serves as the deal "quarterback," there are many other professionals involved with a residential home sale.

They typically include a lender or mortgage broker; a home inspector; and a title company and closer.

Of the three, title is easily the most obscure, but hardly any less important: a defect in title can be just as expensive as a defective roof or foundation.

Recommendations

If a client has a title company preference, great.

If not, I recommend they use Edina Title (which is an affiliated company of Edina Realty).

I used to get bogged down in the minutiae of what title does, and explain terms such as "gap coverage," "ALTA," "encroachments," "easements," "lien searches," etc. (I'm still happy to explain if a client has interest).

However, now I simply say, if they use Edina Title and there's a problem or mistake, I'll make sure it gets taken care of.

If they don't and there are problems, I'll certainly do what I can, but I can't promise anything.

Title in a Nutshell

What Buyers Need to Know About Title*

With terms like "Torrens," "warranty deed," "ALTA," "registered property abstract," etc., title is no one's idea of scintillating.

However, problems with a home's title -- the document that shows you are the legal owner -- can be every bit as expensive as a defective roof or cracked foundation.

In a nutshell, here are the 4 things home Buyers need to know about title:

One. Exactly what does the Seller own? (Call this "the Brooklyn Bridge" test.)

Lawyers colloquially refer to the various property rights as a "bundle of sticks" (right to use, right to exclude, right to convey, etc.)

Two. How many of those "sticks" are they conveying to you? (You want all of them)

Three. Is anyone else contesting the Owner's claim?

Like, ex-spouses, rival heirs, encroaching neighbors, etc.

Four. Are there any unpaid creditors who are entitled to get paid from the Seller's proceeds?

This last question is especially critical for foreclosures, where unpaid liens, property taxes, city fines, etc. can be piling up, and the Bank that owns the property has zero motivation to discover -- let alone disclose -- their existence.

You'll pay $500 or so to a good title company to carefully address these questions. Then, depending on your home's value, another $1,000 - $2,000 to buy a home owner's policy protecting you from any defects in title.

Good investment.

*From a former attorney not giving legal advice.

Title Insurance Traps

Title Traps Can Bite
Foreclosure Buyers

The potential traps that lurk for Buyers procuring title work, especially for foreclosures, reminds me of a favorite attorney joke (I'm allowed to tell them because I am one, albeit non-practicing).

When a neighbor charges that the attorney's dog bit him, the attorney first denies it. When he's shown photos of the bite and the emergency room bill for the neighbor's stitches, the attorney then argues that the dog attacked in self-defense. When numerous witnesses come forward to testify that the attack was unprovoked, the attorney says . . . it's not his dog.

Similarly, Buyers paying good money for title exam and insurance need to be mindful of numerous pitfalls, especially when foreclosures are involved. Herewith is a partial list:

--Who is the title company working for? If they're hired by the bank that owns and is selling the property -- as some banks require -- their motivation to uncover all potential liens and claims against the property may be compromised.

--What's in the fine print of the owner's title insurance policy? Specifically, what's included -- and more importantly, what's excluded? Many municipalities are now imposing hefty abandoned building fees (Minneapolis' is $6,000). Is the title examiner checking to see if such a fee has been imposed? How recently did they look? Ditto for property taxes, unpaid utility bills, contractor liens, etc.

--Even if the owner's title policy covers a potential claim, it may be subject to a significant deductible. Or, to collect, the owner may have to incur significant legal fees that the title policy won't reimburse.

--Is the company issuing the owner's title policy financially sound? Even an airtight claim is worthless if the company standing behind the policy is bankrupt or otherwise out of business.

When it comes to title work, inattentiveness or unwise penny-pinching can cost Buyers A LOT down the road.