Closings on Bank Owned Property -
Hello to everyone. I want to raise awareness of a deceptive practice being employed by the banks and title companies selling recently foreclosed property. The scheme is not new to anyone experienced buying property following a foreclosure. The prospective buyer is lured to close with the selling bank's title company on the promise that they will get good t itle and that the selling bank will pay the buyers closing costs and the premium for the owners title policy.
The deception comes when the buyer is not told that they are only receiving insurable title and not marketable title. Even though a title is insurable, it does not follow, necessarily, that the title is also good or marketable. To say that a title is insurable merely means that it is capable of being insured, and not that it is also good or marketable. "A marketable title is one that is free from reasonable doubt and such as reasonably well informed and intelligent purchasers, exercising ordinary business caution, would be willing to accept.‘A title, to be marketable, need not be perfect (* * * free from every possible technical criticism), but it must be reasonably safe (that is to say, such that a reasonably well-informed and intelligent purchaser, exercising ordinary business caution, would be willing to accept)."
How can the title be insured without the corrective work needed to render the title marketable? Simple. The selling bank agrees to indemnify the title insurer for the loss. In other words the title insurer looks the other way because they are being indemnified by the likes of a big bank. Without the indemnity agreement, the title would not be insurable because it fails to conform to basic title insurance underwriting requirements.
I will admit that in the vast majority of cases this scenario does not result in injury. The buyer resells without difficulty and is unaware of any problem that might exist. However, in some albeit rare instances the owner is unable to sell because the title proves unmarketable. At present I have 2 files where my client bit the poison apple and used the selling bank's title company to close when the property was purchased and now, after spending large sums rehabbing the property, is unable to sell. The title issues are so pervasive that they cannot be remedied without court intervention. Under this scenario, the title insurance is at best an insufficient remedy. First, making a claim against a title policy for lack of marketability of title is not an easy proposition. Unlike a claim against a home or automobile policy, the basis for the claim is not readily apparent and must be proven to the title insurer. Not an easy thing to do. Further, in most instances the title insurance itself is only going to insure the purchase price of the property and not the improvements that the buyer has made. Thus, even if you prove your claim to the title company a sizeable loss may still remain.
You should also be aware of the potential illegality imposed by 12 USC 2608:
CHAPTER 27--REAL ESTATE SETTLEMENT PROCEDURES
Sec. 2608. Title companies; liability of seller
(a) No seller of property that will be purchased with the assistance
of a federally related mortgage loan shall require directly or
indirectly, as a condition to selling the property, that title insurance
covering the property be purchased by the buyer from any particular
title company.
Again, the selling bank wants to "persuade" ( force ) the buyer to close with their closing company so that it can issue the buyer's title insurance policy and "insurer over" the problems. That practice may well violate the above quoted provision of RESPA. Note that a "federally related mortgage loan" is very broadly defined to include any loan "made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the Federal Government, or is made in whole or in part by any lender which is regulated by any agency of the Federal Government." I have difficulty thinking of a scenario under which a mortgage loan would not be "federally related."
The buyer needs someone looking out for the buyer's best interest. The bank's title company is beholden to the interest of the selling bank and thus hopelessly conflicted. My recommendation is that all purchase contracts for bank owned property be written with the following language...
"This offer is contingent upon seller conveying clear and marketable title to the property. The determination of whether title is marketable shall be in the sole discretion of buyers closing attorney, ________________. In the event that buyer's closing attorney determines that title to the property is unmarketable and Seller is unwilling or unable to correct the title problem(s), this agreement shall be terminated and buyer's earnest money deposit shall be refunded in full. THIS CONTINGENCY MAY NOT BE WAIVED, AMENDED SUPPLEMENTED or SUPERSEDED BY ANY CONTRACT AMENDMENT OR ADDENDUM." < SPAN style="COLOR: black">
Please feel free to call or write back with questions or comments.
The deception comes when the buyer is not told that they are only receiving insurable title and not marketable title. Even though a title is insurable, it does not follow, necessarily, that the title is also good or marketable. To say that a title is insurable merely means that it is capable of being insured, and not that it is also good or marketable. "A marketable title is one that is free from reasonable doubt and such as reasonably well informed and intelligent purchasers, exercising ordinary business caution, would be willing to accept.‘A title, to be marketable, need not be perfect (* * * free from every possible technical criticism), but it must be reasonably safe (that is to say, such that a reasonably well-informed and intelligent purchaser, exercising ordinary business caution, would be willing to accept)."
How can the title be insured without the corrective work needed to render the title marketable? Simple. The selling bank agrees to indemnify the title insurer for the loss. In other words the title insurer looks the other way because they are being indemnified by the likes of a big bank. Without the indemnity agreement, the title would not be insurable because it fails to conform to basic title insurance underwriting requirements.
I will admit that in the vast majority of cases this scenario does not result in injury. The buyer resells without difficulty and is unaware of any problem that might exist. However, in some albeit rare instances the owner is unable to sell because the title proves unmarketable. At present I have 2 files where my client bit the poison apple and used the selling bank's title company to close when the property was purchased and now, after spending large sums rehabbing the property, is unable to sell. The title issues are so pervasive that they cannot be remedied without court intervention. Under this scenario, the title insurance is at best an insufficient remedy. First, making a claim against a title policy for lack of marketability of title is not an easy proposition. Unlike a claim against a home or automobile policy, the basis for the claim is not readily apparent and must be proven to the title insurer. Not an easy thing to do. Further, in most instances the title insurance itself is only going to insure the purchase price of the property and not the improvements that the buyer has made. Thus, even if you prove your claim to the title company a sizeable loss may still remain.
You should also be aware of the potential illegality imposed by 12 USC 2608:
CHAPTER 27--REAL ESTATE SETTLEMENT PROCEDURES
Sec. 2608. Title companies; liability of seller
(a) No seller of property that will be purchased with the assistance
of a federally related mortgage loan shall require directly or
indirectly, as a condition to selling the property, that title insurance
covering the property be purchased by the buyer from any particular
title company.
Again, the selling bank wants to "persuade" ( force ) the buyer to close with their closing company so that it can issue the buyer's title insurance policy and "insurer over" the problems. That practice may well violate the above quoted provision of RESPA. Note that a "federally related mortgage loan" is very broadly defined to include any loan "made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the Federal Government, or is made in whole or in part by any lender which is regulated by any agency of the Federal Government." I have difficulty thinking of a scenario under which a mortgage loan would not be "federally related."
The buyer needs someone looking out for the buyer's best interest. The bank's title company is beholden to the interest of the selling bank and thus hopelessly conflicted. My recommendation is that all purchase contracts for bank owned property be written with the following language...
"This offer is contingent upon seller conveying clear and marketable title to the property. The determination of whether title is marketable shall be in the sole discretion of buyers closing attorney, ________________. In the event that buyer's closing attorney determines that title to the property is unmarketable and Seller is unwilling or unable to correct the title problem(s), this agreement shall be terminated and buyer's earnest money deposit shall be refunded in full. THIS CONTINGENCY MAY NOT BE WAIVED, AMENDED SUPPLEMENTED or SUPERSEDED BY ANY CONTRACT AMENDMENT OR ADDENDUM." < SPAN style="COLOR: black">
Please feel free to call or write back with questions or comments.
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