Wednesday, August 5, 2009|
The Title Company's Role in Mortgage Workouts
By Cynthia Kern, Esq.
During both commercial and residential foreclosures, the title company plays a vital role that is relied upon by lenders and purchasers alike.
It is therefore important for the foreclosing lender to select a title company that has specialized knowledge of and experience in the intricacies of transactions involving defaulted mortgages.
The scope of this article is limited to New York statutes and regulations, but for information regarding foreclosure and its relation to title insurance in other states, please contact a title company like TitleVest with national expertise.
Foreclosure is not a lender’s only option when dealing with a mortgage in default. Short sales, modifications, and workouts are popular alternatives as well. However, regardless of the outcome, investigation of the state of title is an indispensible component of the lender’s first steps towards making that decision.
In the cases where there are multiple tiers of secured financing and/or multiple investors in the same loans, review of title must occur prior to and during the entire workout negotiation, modification, or foreclosure process.
Commercial lenders should order and review a title search to ensure there are no errors in the mortgage and/or UCC chain. With a construction loan, a “rundown” on the current loan policy is obtained from the date of the last disbursement to ensure no intervening liens have been recorded which would prime the remaining balance of the loan and effectively reduce the lender’s policy coverage.
Before instituting a foreclosure action, the lender must determine the identity of necessary parties to the foreclosure in order to extinguish their interests.
Similarly, even though the lender may have a lender’s title insurance policy insuring that its lien has the correct priority against the encumbered property, it is vital to discover if any superior liens actually exist (and therefore must be dealt with by the title company that insured over them.) A foreclosure search sets forth both such necessary parties and superior interests, if any.
Foreclosure searches generally look back to the date the borrower took title to the property.
A diligent title company will also search prior owners’ names for judgments if the current deed was given for no consideration.
In addition to these searches, TitleVest can also create a foreclosure/title report hybrid, which is relied on by the foreclosing lender, then seamlessly transitioned for use by a third-party purchaser obtaining fee insurance at the foreclosure sale.
Completion of a foreclosure action converts the lender’s loan policy into a fee policy and can be relied on as such, but only if the action was litigated correctly. Therefore, a title company asked to insure a third-party purchaser must examine the court documents to determine whether statutory provisions were followed.
In the case of residential foreclosures, the initial date of filing the foreclosure action determines whether recently-enacted special and additional notice requirements are triggered, requiring far more from a title company than mere awareness of the statutes or cursory glance at the clerk’s minutes.
In both residential and commercial foreclosures, the title company must determine that all necessary parties were named based on review of the judgments, mortgages, or other liens appearing in the new title report.
Superior interests will likely not appear in the action, requiring the title company to request explanation (and indemnification) from the prior title company that issued the lender’s policy over such interests.
Foreclosure actions are of course costly, time-consuming endeavors that in the current real estate market may very well result in the lender’s ownership of undervalued property.
For that reason, more and more lenders are resolving these defaults by allowing residential borrowers to sell their properties directly via short sales, and commercial borrowers to transfer title via deed in lieu of foreclosure. Both types of transactions involve unique title considerations.
During examination of a residential property, discovery of a foreclosure requires the title company to raise exceptions for the Home Equity Theft Prevention Act. Violation of this statute provides sellers a two-year window after closing to rescind the sale, making it vital to determine whether a transaction falls under one of the Act’s exemptions.
In a commercial transaction, lenders who agree to a deed in lieu of foreclosure may take title directly to the property via a separate holding company, or allow transfer to a third-party purchaser.
Title companies issuing new fee policies in either situation must be involved in the drafting of the deed in lieu affidavit and the deed itself to ensure the correct non-merger language is included.
Regardless of the resolution chosen by the lender for a defaulted loan, an experienced title company can not only provide the necessary searches and reports, but can advise lenders and purchasers of the obstacles to clean title and how to overcome them.
Cynthia Kern, Esq. serves as In-House Counsel at TitleVest, a Manhattan-based provider of title insurance and related real estate services. An affiliate of 1031Vest and InsureVest, TitleVest’s clients include many of the leading law firms and institutional lenders who enjoy outstanding service and free access to TitleVest’s arsenal of proprietary web-based tools such as ACRISasap™, Legal Form Generator™, Interactive Online Reports™, ACRIStracker™,and UCCtracker™. For more information, visit www.TitleVest.com .