massachusetts title insurance

GMAC-MortgageRejects “In For One, In for All” Theory in Title Insurance Coverage

One little mistake in drafting and recording legal documents during a refinance can result in a huge problem for a lender — such as the lender having no legal ability to enforce the mortgage! (A slight problem..) GMAC Mortgage learned this the hard way last week at the Supreme Judicial Court in GMAC Mortgage v. First American Title Insurance Company (SJC-11161), where the court found in favor of First American Title Insurance Co., in a dispute over coverage under a lender’s title insurance policy.

First-American-Title-Insurance-CompanyA Doozy of a Mistake

As title defects go, this is a doozy, because it was easily preventable, and yet wrecked so much legal havoc in its aftermath. Elizabeth Moore and her husband, Thomas Moore, lived in a home in Billerica, the title to which was in Mr. Moore’s name. In 2001, for the purpose of refinancing the property, Mr. Moore executed a note and a mortgage to GMAC’s predecessor corporation (which obtained a lender’s title insurance policy from an agent of First American). Mr. Moore also signed a deed conveying the property from himself to himself and his wife as tenants by the entirety, as his plan was for both of them to hold title jointly as husband and wife. Under the “first in time” rule, in order for the mortgage to properly attach to the property, it should have been recorded before the deed went on record. However, the closing attorney mistakenly recorded the instruments in the wrong order, so the mortgage only attached to Mr. Moore’s 1/2 interest in the Property. Mr. Moore died in 2007. After his death, record title to the property vested solely in Mrs. Moore, and GMAC was left with no ability to enforce its mortgage against her or the property.

GMAC sued Mrs. Moore to enforce its mortgage rights, and she countersued for a slew of wrongful foreclosure and consumer protection claims. GMAC and Mrs. Moore wound up settling out of court, but GMAC tried to recoup all its legal fees and losses against the lender’s title insurance policy issued by First American.

Court Rejects Complete Defense Doctrine for Title Insurance

Unlike commercial general liability policies, which courts have ruled must provide coverage to all claims in a lawsuit if merely one claim is covered — the “in for one, in for all” theory —  the SJC ruled that title insurance policies do not provide such wide-ranging coverage. Reaffirming the notion that a policy of title insurance is merely an indemnification policy and not a guaranty of perfect title, the justices ruled that First American’s duty was only to cover the aspects of Mrs. Moore’s claims affecting title, and not her wrongful foreclosure and consumer protection claims. This ruling will mostly affect the relationship between the large banks and lenders and title insurance companies, but provides a good reminder about what title insurance does and what it doesn’t cover.

Title Insurance Coverages Often Misunderstood

As a former outside claims counsel for a leading title insurance company, I have found that most insureds and claimants do not fully understand title insurance coverages. And why would they? It’s complicated stuff.

Most regular folks think that title insurance provides a full and complete guaranty and assurance that title to their home is pristine and clean. While title insurance gives an ordinary homebuyer “max coverage” available for title defects, it does not provide a 100% warranty that every conceivable problem affecting legal ownership of a home will be covered.

Subject to various exclusions and exceptions noted on the policy, a title insurance policy provides coverage for loss or damage sustained by reason of a covered risk as of the time of the closing. What are those covered risks? Some risks such as forgeries, improper legal descriptions, and recording errors are covered. Other risks such as certain encroachments, boundary line disputes, wetland issues, and zoning issues are not covered. Defects or liens arising after the issuance of a policy are likewise not covered, unless a new policy is issued. Also, the new enhanced policies provide for more expanded coverages than the older standard policies. It’s best to consult an experienced title insurance attorney for a complete explanation of what a title policy covers.

I’ve written several blog posts on title insurance which can be found by clicking here.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is an experienced Massachusetts title insurance claims and coverages attorney who was previously outside claims counsel to a leading title insurance company. You can reach him at info@vetsteinlawgroup.com or 508-620-5352.

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No Easy Fix For Defective Foreclosure Titles After U.S. Bank v. Ibanez Ruling

The Massachusetts Supreme Judicial Court issued its opinion today in the much anticipated Bevilacqua v. Rodriguez case considering property owners’ rights when they are saddled with defective titles stemming from improper foreclosures in the aftermath of the landmark U.S. Bank v. Ibanez ruling last January. (Text of case is embedded below). Where Ibanez consider the validity of foreclosures plagued by late-recorded or missing mortgage assignments, Bevilacqua is the next step, considering what happens when lenders sell defective foreclosure titles to third party purchasers. Previously, I discussed the oral argument in the case here and detailed background of the case here.

The final ruling is mix of bad and good news, with the bad outweighing the good as fixing defective Massachusetts foreclosure titles just got a lot harder and more expensive. But, contrary to some sensationalist headlines, the sky is not falling down as the majority of foreclosures performed in the last several years were legal and conveyed good title. Bevilacqua affects those minority percentage of foreclosures where mortgage assignments were not recorded in a timely fashion under the Ibanez case and were otherwise conducted unlawfully. Importantly, Bevilacqua does not address the robo-signing controversy, which may or may  not be considered by the high court in another case.

The Bad News

First the bad news. The Court held that owners cannot bring a court action to clear their titles under the “try title” procedure in the Massachusetts Land Court. This is the headline that the major news outlets have been running with, but it was not a surprise to anyone who has been following the case. Contrary to the Daily Kos, the court did not take the property away from Bevilacqua. He never held good title it in the first place–and you can blame the banksters for that. If you don’t own a piece of property (say the Brooklyn Bridge), you cannot come into court and ask a judge to proclaim you the owner of that property, even if the true owner doesn’t show up to defend himself. It’s Property Law 101.

The Good News

Next the good news. The court left open whether owners could attempt to put their chains of title back together (like Humpty-Dumpty) and conduct new foreclosure sales to clear their titles. Unfortunately, the SJC did not provide the real estate community with any further guidance as to how best to resolve these complicated title defects.

Background: Developer Buys Defective Foreclosure Title

Frank Bevilacqua purchased property in Haverhill out of foreclosure from U.S. Bank. Apparently, Bevilacqua invested several hundred thousand dollars into the property, converting it into condominiums. The prior foreclosure, however, was bungled by U.S. Bank and rendered void under the Ibanez case. Mr. Bevilacqua (or presumably his title insurance attorney) brought an action to “try title” in the Land Court to clear up his title, arguing that he is the rightful owner of the property, despite the faulty foreclosure, inasmuch as the prior owner, Rodriguez, was nowhere to be found.

Land Court Judge Keith Long (ironically the same judge who originally decided the Ibanez case) closed the door on Mr. Bevilacqua, dismissing his case, but with compassion for his plight.

“I have great sympathy for Mr. Bevilacqua’s situation — he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied,” Long wrote.

Given the case’s importance, the SJC took the unusual step of hearing it on direct review.

No Standing To “Try Title” Action In Land Court

The SJC agreed with Judge Long that Bevilacqua did not own the property, and therefore, lacked any standing to pursue a “try title” action in the Land Court. The faulty foreclosure was void, thereby voiding the foreclosure deed to Bevilacqua. The Court endorsed Judge Long’s “Brooklyn Bridge” analogy, which posits that if someone records a deed to the Brooklyn Bridge, then brings a lawsuit to uphold such ownership and the “owner” of the bridge doesn’t appear, title to the bridge is not conveyed magically. The claimant in a try title or quiet title case, the court ruled, must have some plausible ownership interest in the property, and Bevilacqua lacked any at this point in time.

The court also held, for many of the same reasons, that Bevilacqua lacked standing as a “bona fide good faith purchaser for value.” The record title left no question that U.S. Bank had conducted an invalid foreclosure sale, the court reasoned.

Door Left Open? Re-Foreclosure In Owner’s Name?

A remedy left open, however, was whether owners could attempt to put their chains of title back together and conduct new foreclosure sales in their name to clear their titles. The legal reasoning behind this remedy is rather complex, but essentially it says that Bevilacqua would be granted the right to foreclosure by virtue of holding an “equitable assignment” of the mortgage foreclosed upon by U.S. Bank. There are some logistical issues with the current owner conducting a new foreclosure sale and it’s expensive, but it could work.

That is if the SJC rules in the upcoming Eaton v. FNMA case that foreclosing parties do not need to hold both the promissory note and the mortgage when they foreclose. An adverse ruling in the Eaton case could throw a monkey wrench into the re-foreclosure remedy–it would also be an even bigger bombshell ruling than Ibanez, as it would throw into question the foreclosure of every securitized mortgage in Massachusetts.

In Bevilacqua’s case, he did not conduct the new foreclosure sale, so it was premature for the court to rule on that issue. Look for Bevilacqua to conduct the new foreclosure and come back to court again. The SJC left that option open.

Other Remedies & What’s Next?

The other remedy to fix an Ibanez defect, which is always available, is to track down the old owner and obtain a quitclaim deed from him. This eliminates the need for a second foreclosure sale and is often the “cleanest” way to resolve Ibanez titles.

Another option is waiting out the 3 year entry period. Foreclosure can be completed by sale or by entry which is the act of the foreclosure attorney or lender representative physically entering onto the property. Foreclosures by entry are deemed valid after 3 years have expired from the certificate of entry which should be filed with the foreclosure. It’s best to check with a real estate attorney to see if this option is available.

The last resort is to demand that the foreclosing lender re-do its foreclosure sale. The problem is that a new foreclosure could open the door for a competing bid to the property and other logistical issues, not to mention recalcitrant foreclosing lenders and their foreclosure mill attorneys.

Title insurance companies who have insured Ibanez afflicted titles have been steadily resolving these titles since the original Ibanez decision in 2009. I’m not sure how many defective foreclosure titles remain out there right now. There certainly could be a fair amount lurking in titles unknown to those purchasers who bought REO properties from lenders such as U.S. Bank, Deutsche Bank, etc. If you bought such a property, I recommend you have an attorney check the back title and find your owner’s title insurance policy. Those without title insurance, of course, have and will continue to bear the brunt of this mess.

More Coverage:

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure title defect matters & cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure title dispute.

Bevilacqua v. Rodriguez; Massachusetts Supreme Judicial Court October 18, 2011

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When you find out you have a major title problem that prevents you from selling or refinancing your home, have fun explaining to your spouse that for a fraction of the cost of your home you could’ve prevented it by buying title insurance.

Enhanced Owner’s Title Insurance Coverage

Available for a few years now, enhanced coverage policies offer vastly improved protection for common title problems at about a 10% cost over a standard coverage policy. (These policies run about $4 per thousand of purchase price). Enhanced coverage policies now cover some of the most common title problems facing Massachusetts residents. Realtors and mortgage professionals should be aware of the benefits of an enhanced coverage policy, and should recommend that their clients opt for the increased coverage. It’s well worth the small cost in premium.

Additional Coverages:

  • Appreciation in property value. Standard policies do not increase their coverage amount in a rising market as a home increases in value. The enhanced policy will increase coverage by 10% per year for 5 years up to 150% of the original policy limit.
  • Encroachments/adverse possession. Standard policies, to most homeowner’s chagrin, do not cover encroachments like a neighbor’s fence, wall or structure over a property line. Enhanced policies provide coverage for such encroachments, and also cover adverse possession–which occurs when an encroachment exists for 20 or more uninterrupted years. For more info on Massachusetts adverse possession, please read our post “Good Fences May Make For Upset Neighbors”.
  • Zoning/Subdivision/Building permit violations. Enhanced coverage policies now provide coverage if the property is not zoned for residential 1-4 family use, in violation of subdivision regulations, or if there is a defect or lack of a building permit. This is a tremendous benefit for commonly arising situations.
  • Easements. Enhanced policies offer coverage for easement encroachment situations such as deeded driveways, drainage easements, utility easements, beach paths, walking paths, etc.
  • Expanded Insured. Enhanced policies will now transfer to a spouse who gets property in a divorce, inheriting heirs, related family trusts and their beneficiaries.
  • Expanded Access Coverage. Enhanced policies now guarantee that your home as adequate vehicular and foot access over adequate streets or roads if there’s a title defect rendering your lot “land-locked.”

Do I Really Need Title Insurance?

The decision to get an owner’s title insurance policy is one of the most important choices you make in connection with your real estate transaction.

As part of every real estate transaction, the borrower/buyer is offered the opportunity to get an owner’s title insurance policy. (For refinances and purchases, your lender will require you to purchase a “lender’s” title insurance policy.) An owner’s title insurance provides the most comprehensive protection available for most every known type of title problem which could affect your property rights. I’m proud to say that every single one of my buyer clients have benefited from an owner’s title insurance policy at their closings, at my strong recommendation.

One needs only to look at the recent controversies over “robo-signing” and the U.S. Bank v. Ibanez defective foreclosure sales, which has stripped thousands of Massachusetts property owners of their property ownership rights, to see why an owner’s title insurance policy could be the best decision a home buyer ever makes. The unfortunate souls who declined owner’s title insurance are now left without legal title to their homes and looking at the prospect of spending thousands of dollars in legal fees to resolve their title issues with no guarantee of success. With a title insurance policy, the title insurance company will hire expert title attorneys to solve title issues at no cost to you, defend against any adverse claims, reimburse you for covered damages, and most valuable, issue affirmative coverage to enable a pending closing to move forward.

When you find out you have a major title problem that prevents you from selling or refinancing your home, have fun explaining to your spouse that for a fraction of the cost of your home you could’ve prevented it by buying title insurance.

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One of the most important jobs of the closing attorney during a Massachusetts refinance or purchase transaction is to fully explain the numerous closing costs that a borrower (and seller) must pay at closing. The best way to explain Massachusetts real estate closing costs in a blog post is the same way we would explain it at the closing–by reviewing the HUD-1 Settlement Statement line by line.

Prior to the closing, you should have received a Good Faith Estimate of closing costs from your lender. A good mortgage professional will always explain closing costs before you arrive at the closing table. The Good Faith Estimate or GFE will be a precursor of what you’ll be charged at closing, and certain closing costs cannot vary by more than 10% from the GFE. Bring your GFE to the closing to compare it with the HUD Settlement Statement.

HUD First Page, Borrower’s Column

We’ll use an actual HUD from a recent transaction, deleting the parties and property of course. This is a purchase for $250,000, reflected in line 101. The buyer is taking out a loan of $243,662.00 (line 202) to finance the sale. This is a FHA low down payment loan where the borrower must pay FHA mortgage insurance.

The total settlement charges, which are fully broken down on page 2 of the HUD (get to that down below), paid for by the borrower are $7,758.09, line 103. Because the closing took place on Jan. 31, in the middle of the tax fiscal quarter, real estate taxes on line 106 must be adjusted and paid for by the borrower through the end of the quarter, 3/31. As is customary in Mass., the borrower is also paying for home heating oil paid for by the seller and left in the tank (line 109–$241.20).

Line 120 tallies up the total amount due from the borrower at closing. Deducted from that number is the buyer’s deposit of $2,500 (line 201), and the buyer’s new loan of $243,662.00 (line 202). This borrower also fortunately received a seller closing cost credit of $5,708.93 (line 204) and a lender closing cost credit of $609.16 (line 205). Those credits really helped this borrower defray the closing costs.

In this transaction, there is a difference of $6,250.00 between the gross amount due from the borrower less the amounts paid by or for the borrower, which must be paid at at the closing (line 303). The borrower must bring a certified or bank check payable to himself (for fraud protection) for that amount to the closing.

Page 2 of the HUD

Page 2 of the HUD Settlement Statement itemizes all of the various closing costs, both from the borrower’s and seller sides.

Line 700 Series–Broker Commissions

In Massachusetts, the seller pays the real estate broker commission. Here, the seller is paying a total of 5% of the purchase price, or $12,500.

Line 800 Series–Lender Closing Costs

In this transaction, the lender is charging an “origination fee” of $1,735.00. This is the fee for procuring the loan. The lender has also charged the borrower for an appraisal for $425.00 but the initials “POCB” means it was paid for outside closing by the borrower. There are also small charges for a credit report and flood certification.

Line 900–Daily Interest and Mortgage insurance

The borrower is responsible for paying interest on the new mortgage loan from the closing date to the first day of the following month. That’s why most closings take place at the end of the month. The borrower is charged one day of interest of $32.54 (line 901). As this borrower is not putting 20% down, this particular loan requires mortgage insurance of $2,412.50 paid at closing by the borrower (line 902).

Line 1000–Escrow Reserves

The vast majority of mortgage lenders require borrowers to fund a real estate tax and homeowner’s insurance escrow account. Occasionally, a lender will waive the escrow for a fee or small interest rate increase. This is an aspect of closing costs that many borrowers have difficulty understanding.

The escrow account helps you and the lender anticipate and manage payment of property expenses by including these expenses as a portion of your monthly mortgage payment. Think of the escrow account as a small savings account for these expenses. An incremental amount of these expenses is added to your monthly mortgage payment, in order to cover these expenses when they are due. The lender will pay, on your behalf, the real estate taxes due on a quarterly basis, as well as the homeowner’s insurance for the following year.

Each year, your escrow account is reviewed to determine if the amount being escrowed each month is sufficient to pay for any change in your real estate taxes or homeowner’s insurance premiums. At closing, the closing attorney will collect sufficient funds to start your escrow account, typically 2-3 months worth of real estate taxes and up to a 12 months of homeowner’s insurance. In this case, the borrower must fund the escrow account with $817.12 (line 1001), which consists of 3 months of homeowner’s insurance and 2 months of real estate taxes. Remember, when you sell your home (or refinance) you will recoup your escrow account monies.

Line 1100–Title Charges

The line 1100 series shows the fees associated with the title examination, closing attorney fees and title insurance. In all transactions the lender requires the borrower to pay for lender’s title insurance and the settlement or closing fee to the closing attorney. In this transaction, the borrower has opted to purchase his own owner’s title insurance policy which protects the owner’s property and is highly recommended for many reasons. Read our post on title insurance here. So the borrower is charged $1,799.00 plus $477.50 for all the title work, closing attorney and both lender’s and owner’s title insurance premiums. The fee for reviewing and drafting the purchase and sale agreement is also included in the settlement fee on line 1102.

Line 1200–Gov’t Fees

The county registry of deeds imposes fees for the recording of the deed ($125) and mortgage ($175) which the borrower pays. The borrower also paid recording fees for an “MLC” which is a municipal lien certificate and a declaration of homestead. The seller pays the fee for the release ($75). The seller also pays a state transfer tax of $2.28 per $500.00 of value.

In Closing…

That’s basically it. Remember that closing costs differ widely between lenders, loan products, loan amounts, and closing attorneys. Make sure you ask to review the HUD Settlement Statement prior to the closing. It should be ready the day before or that day. Again, you should always speak to your mortgage professional about closing costs before you arrive at the closing table.

If you would like to speak with our office about handling your purchase or refinance transaction, please contact us at info@titlehub.com and check out our website at www.titlehub.com. Thanks!

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title-insuranceIn my opinion, title insurance is an absolute necessity in every real estate conveyance transaction. When I purchased my own house, I even purchased owner’s title insurance although I’m an experienced real estate attorney! I feel so strongly about this that I have declined to handle closings in the very rare instance where a buyer has insisted on declining owner’s title insurance.

The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement. Closing attorneys and title insurance companies need to do a better job explaining the excellent benefits and value of title insurance, so consumers don’t have the perception that it is just another closing cost.

What Is Title Insurance?

Title insurance is policy of insurance (technically an indemnification policy) protecting homeowners and lenders from actual financial loss in the event that certain covered problems develop regarding the rights to ownership of property. While Massachusetts closing attorneys search and certify each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by most every public mortgage lender in the U.S., and are typically paid as part of closing costs.  Owner’s policies are optional and paid for by home buyers. I will discuss owner’s policies in this post.

Title Defects:  What Does An Owner’s Policy Of Title Insurance Cover?

The recent foreclosure paperwork mess and the Massachusetts high court ruling in U.S. Bank v. Ibanez are perfect examples of the importance of title insurance. Thousands titles in Massachusetts coming out of faulty foreclosures were rendered defective because of the Ibanez ruling. Those without owner’s title insurance were left to fix the title problems on their own at great expense. Those with title insurance, by contrast, were able to sell their property with the title insurer issuing “clean” policies over the defects.

Here are some other real world examples of how title insurance protects you. I recently represented a condominium seller who was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Fortunately, she had an owner’s title insurance policy which allowed her closing to go forward as scheduled. I represented a young family who was dismayed to learn that the property they were about to buy was subject to the claim of a long-lost heir of a prior owner. The title insurance company agreed to file litigation against the “missing” heir, and clear the title. If title insurance was not available in these transactions, the deals would have been canceled altogether, or the closings would have been delayed by months if not years until the issues were resolved, if at all.

In addition to undischarged mortgages and the sudden appearance of unknown or missing heirs claiming an interest in the property, an owner’s policy of title insurance also covers a myriad of other types of title defects, including:

  • Faulty foreclosures
  • Forged deeds or impersonations
  • Incorrect legal or boundary descriptions
  • Recording errors

There is also a new extended or enhanced coverage policy available from all major title insurance companies which covers:

  • Building permit violations
  • Adverse possession or prescriptive easements
  • Building encroachments
  • Incorrect surveys
  • Pre-existing violations of subdivision, zoning laws, restrictive covenants.

For a full list of just about every conceivable situation covered by title insurance, please read my article: 50 Ways To Lose Your Home.

How Much Does Title Insurance Cost?

Title insurance is a one-time premium paid at closing and is calculated based on the purchase price of your home. The cost today is for s standard coverage policy $3.65 per $1,000 in home value. Enhanced coverage policies run about $4.00/thousand, and provide better coverages (i.e., for boundary disputes) and inflationary protection. Thus, a $500,000 home would cost a one time premium (standard) of $1,825.

Title insurance is a good deal because you pay once and it continues to provide complete coverage for as long as you or your heirs own the property. Those who decline title insurance rationalize that the risk of a title defect is minimal and not worth the premium. That is false. As a former claims counsel for a national title company, I could write a treatise on the different types of title problems I have seen derail closings and drag on for years.

The Role Of The Closing Attorney

The closing attorney ensures that the title examination is done on the property, certifies that the title is “marketable,” and issues the title insurance policy. While all U.S. public lenders require lender’s policies of title insurance, closings attorneys should always recommend owner’s policies for buyers. Attorneys do share in the title premiums generated. However, as I said before, even the most careful title search cannot reveal a hidden title defect that can wreck havoc on any subsequent sale or refinancing of the property.

To borrow from Nike’s old slogan, Title Insurance:  Just Get It.

Please contact me at rvetstein@vetsteinlawgroup.com if you have any further questions about title insurance.

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