Tuesday, August 02, 2011

Crappy Titles From Foreclosure Fallout, Uncleared Issues Purportedly Covered By Letters Of Indemnity Pose Big Challenges For Title Insurance Industry

In New York City, The Real Deal reports:
  • Late one Thursday afternoon last month, title insurance agent Rafael Castellanos got an urgent call from an attorney whose client needed a title search on a Brooklyn home that was selling three days later in a foreclosure auction. [...] Castellanos, a managing partner at Expert Title Insurance Agency in Manhattan, got cracking on the search first thing the next morning.


  • For Castellanos's part, the Monday after he received that urgent call, his research had already uncovered a property file in complete disarray. Among other flaws, the property's tax lot and block were misindexed, and the prior owner had not been personally served with a notice of foreclosure.

  • Given these facts, Castellanos rated the property uninsurable -- a conclusion he's reaching all too often these days. "Right now, 60 to 70 percent of the foreclosures have problems," said Castellanos, who does just over 30 percent of his business in Manhattan and nearly 25 percent of his business in the city's other boroughs. "We find all these problems, and we have to tell the client, 'I'm sorry, we can't insure this.'"

  • Heading into the second half of 2011, Castellanos and other title insurance executives can add intensifying foreclosure-related woes to a lengthy and growing list of challenges in their industry. Those challenges range from increasing financial losses to widespread consolidation through the industry -- there were just 54 operating underwriters nationally last year, a 43 percent drop from 2008. That has a direct impact on both how many title insurance agents the industry can support, and how the remaining agents have to split up the pie of available business.


  • Title insurers must also deal with another troubled legacy of the housing boom: letters of indemnity. Such letters were often issued in New York during the boom and remain common.

  • For example, if the seller's title insurance company couldn't produce a necessary document in time for a closing date, it would issue a letter taking responsibility for legal claims that might arise from omitting that document, so the new title insurance policy for the buyer could be issued without delay. The practice helped deals get done.

  • Now, however, it's unclear how many of these letters were issued, and how many of those cases actually had legal issues that are still not cleared up. "There's a web of indemnity out there, and some of it will shake out, and create a financial impact on some title agents and, more specifically, the underwriters," said [one title agency executive].


  • [C]astellanos is worried that other proposed legislation intended to help homeowners avoid wrongful foreclosure will backfire, leading to widespread ownership challenges on purchases of foreclosed homes in New York. That, in turn, would lead to huge costs for underwriters and even greater difficulties writing new title insurance policies than Castellanos is seeing now.

For the story, see Title's battles (Insurance industry, hurt by slump in home sales, struggles with foreclosure woes).