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» VISIT US ONLINE @ DSNEWS.COM INDUSTRY INSIGHT MARKET PULSE MARKET PULSE TITLE WAVE By James E. Moon, Esq., and Michael J. Barker, Esq. Title Insurance, in Brief Resolution Hurdles Compounded Title issues can come in many forms: erroneous legal descriptions, interest claims by prior POINT— COUNTERPOINT The objective of title insurance is, in essence, rather simple: to assist the parties in real estate transactions to determine their rights, title, and interests and to ensure that land transfer is a secure transaction between the parties. As part of this process, before a land transfer is completed, a title search of the property is conducted to determine if the buyer faces any potential problems or pitfalls. Liens, easements, rights-of-way, or sale of future interests are typically recorded in public records. Underwriting is then able to look at these potential title issues and, in many cases, resolve them before a closing. It is estimated that approximately one in four property sales prior to the financial crisis had some type of title issue that was cleared—usually unbeknownst to the purchaser or lender.1 lien holders, or un-divested interest of heirs, to name a few. Claims can behave quite esoterically, but when they're confronted in foreclosure, they can be downright nasty. Unfortunately, due to the unprecedented pace of sales and refinances during the real estate boom, far too many title insurance agents—both corporate and attorney— failed to uphold accepted industry standards in providing settlement and title insurance services. As a direct result of such practices, errors and omissions are now coming to light. Resolving title insurance claims in a "normal" environment can be time consuming. There are always multiple parties involved such as the insured, the title insurance carrier, the closing agent, and the party claiming an adverse interest to the insured. Of course, when a title claim is made in the environment of a foreclosure, the difficulty and, most important, the time it takes to resolve the title issue increases substantially and results in further delaying the foreclosure timeline. We can directly attribute the delay to the very nature of how title issues are typically resolved. However, the interplay between foreclosure counsel, the loan servicer, the title company, and its appointed counsel can make already murky waters turn pitch black. Unfortunately, although all parties involved have the same common goal of resolving the title claim, the communication between parties with aligned interest is almost GROUND FORCES In addition to these usual suspects, one frequently overlooked contributing element, more often than not, can stall a judicial foreclosure for months—potentially by more than a year. Specifically, when a title issue is confronted that prevents the prosecution of a foreclosure, a file can get lost in title claim limbo, which significantly impacts the timeline to recover an asset in foreclosure. nonexistent. It is not uncommon for foreclosure counsel to be completely unaware of the actions of the counsel appointed by the title company and vice versa. Confusion, frustration, and delay are the ultimate result. Lack of communication between interested parties can cause delays, but economics plays a role as well. Title policies do not generate recurring premiums, unlike traditional insurance products such as motor vehicle or property insurance. Rather, there is a one-time premium charged at the time of issuance and the policy will remain in effect essentially as long as the insured retains an interest in the real property detailed in the policy. To generate sufficient revenue to remain viable, title insurers need high transactional volume and low claim payout.2 As the real estate bubble burst, revenue via real estate sales plummeted.3 During this same time period, title insurance claims rose well beyond expectations with the top five underwriters paying nearly $1 billion in claims in 2007 and major title underwriters reporting an increase in title claims of 62 percent in the first half of 2007 alone.4 As a result of decreased revenue, staffing levels of many title insurers were downsized.5 A difficulty subsequently arose related to forecasting future employment needs against anticipated claim levels. Unfortunately, after staffing cuts, some insurers scrambled to increase the number of employees in claims departments to keep up with the rise in claims workload, but many never caught back up and are still behind in processing claims. Most analysts argue the process of clearing property inventories and increasing property values via supply/demand needs to be accelerated, which at first blush appears backed by the BEST PRACTICES S ince the foreclosure crisis began, there has been significant discussion over the ever-lengthening time required to complete a judicial foreclosure. A number of factors are consistently at the forefront of these discussions, including borrower delay tactics, government holds, and servicer and outside counsel transfers. 1. Cal Zimmerman, "Title Issues Can Make Property Sales Fall Flat," NuWire Investor, February 1, 2008, www.nuwireinvestor.com/articles/title-issues-can-make-property-sales-fall-flat-51421.aspx. 2. See Title Insurance, A Comprehensive Overview (James L. Gosdin ed., 3rd ed. 2007) for further information regarding the title insurance industry. 3. For 2008 and 2009, refinance transactions increased; however, the overall title business was down significantly from 2007 and 2006 levels with ranges of 14 to 22 percent. See First American, First American Title Order Transactions by Month for Direct Title Operations, www.firstam.com/titleordercounts.cfm (as of March 9, 2009). 4. Annette Haddad, "Foreclosures Hit Title Insurer—First American Posts a Second-Quarter Loss as the Hosing Downturn Increases Claim Filings," L.A. Times, August 3, 2007, at C3. 5. Fidelity National Financial, Inc., eliminated 1,500 out of 5,500 positions and closed 125 offices, while LandAmerica cut 4,200 positions in 2007 and 2008. LandAmerica was eventually forced to seek Chapter 11 protection in 2008 after its stock price plummeted from $120 per share to just over $0.20 a share amidst surging claim filings.6.Yves Smith, "Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers," Naked Capitalism, September 18, 2010, www.nakedcapitalism.com/2010/09/ 45

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