Title insurers demand protection

By ELIZABETH RAZZI • WASHINGTON POST • October 26, 2010

The title insurance industry is maneuvering to protect itself from losses if courts rule that banks have played fast and loose with the foreclosure process, and people who buy foreclosed properties from banks may face some degree of loss despite having a title policy.

Fidelity National Financial, the largest title insurance company, is demanding that lenders warrant that they have followed all legal procedures in the handling of foreclosures and indemnify the title insurers if a court decides otherwise.

"They are putting on record that it is absolutely the bank's responsibility," said Susan Wachter, professor of real estate at the Wharton School of the University of Pennsylvania.

But Wachter said buyers of these properties risk getting caught up in litigation among title companies, banks and possibly other entities if the foreclosure is overturned by a court.

"There is still uncertainty," she said. "It's a question of litigation; it's a question of transaction costs."

That uncertainty is chilling the foreclosure market, with real estate agents already seeing would-be foreclosure buyers retreating from the market, said Lucien Salvant, spokesman for the National Association of Realtors. That could drive property values down further.

Title insurers are at the hub of real estate transactions. They guarantee that the chain of title is clear, unblemished by missing documents, outstanding liens or other factors that would impede an owner's right to deliver a clean title to the new owner.

Lenders always require buyers to pay for title insurance coverage that protects the lender against those risks. Buyers have the option of paying extra to have such coverage for themselves.

Fidelity underwrites policies under the brands Fidelity National Title, Chicago Title, Commonwealth Land Title and Alamo Title.

As of Nov. 1, all lenders seeking a Fidelity policy for the sale of a foreclosed home must warrant that all documents and procedures involved in the foreclosure were handled properly. They also must agree to pay the title insurer's costs if a court finds errors or fraud.

Peter Sadowski, Fidelity's chief legal officer, said the indemnity agreement was drafted by Fannie Mae and Freddie Mac, and that he hopes their regulator, the Federal Housing Finance Agency, soon makes it mandatory for loans backed by Fannie and Freddie as well.

Fidelity executives said they do not anticipate having to pay claims anyway, even if a court sets aside a foreclosure due to a defect in documentation or process.

"If a foreclosure is set aside -- which is very unlikely to happen -- the purchaser who bought the property is going to get his or her money back from the lender who sold it to him," Sadowski said.