The following is a scenario we occasionally see with an REO referral:
- There was an issue that the foreclosing servicer’s or REO attorney has resolved in accordance with relevant state law, which seemingly would allow the REO sale to be completed; but
- The REO purchaser’s attorney or title company’s title insurance company understands the issue has been resolved, but declines to insure.
How can these two positions be reconciled?
To put this in proper context, the standard REO sales contract contracts the seller to convey and the purchaser to accept title that is “insurable.” That does not mean perfect or marketable title, but rather a status of title that a national title insurance company would accept and insure.
A classic example is the existence of a prior, unreleased mortgage or security instrument in the chain of title. In many jurisdictions, as long as various standards are met, such a mortgage can be insured over at REO without the requirement obtaining a release or satisfaction. Thus, title is considered “insurable” since the title insurance company is willing to insure.
In contract, perfect or marketable title would not allow insuring over such a prior, unreleased mortgage, and instead require that the REO seller obtain a release or satisfaction to record with the county land records.
Certainly, if given the option everyone would choose to receive perfect title, but contracting to receive insurable title allows the closing to be completed without delay or additional costs, and still leaves the REO purchaser in a position of having the protection of an insurance policy that protects their interest in a property.
That brings us to the question of why an insurance company won’t insure when an attorney has completely resolved an issue in favor of the foreclosing lender or REO seller, at times even after the completion of a civil action where a judge has issued a favorable order.
The answer is that title insurance companies are insurance companies; and as such, they manage risk. Just like the Las Vegas Strip wasn’t built on the backs of successful gamblers, title insurance companies wouldn’t be in business if they insured everything that came their way. Even when a contested matter has been resolved in the legal sphere, a title insurance company underwriter has to weigh the risk of insuring into a problem. Even if they believe they would insure the “winning” viewpoint, they still would have to spend money on defensive litigation if a third party files a lawsuit, appeals a lower court order, or otherwise has to defend the title insurance policy.
That also is why different title insurance companies have different opinions on the same title objection, or why it can seem the opinion of a title insurance company can change over time. Our law firm’s REO closing department is an agent of multiple underwriters, which helps when we need to find an underwriter to insure a tricky file.
A great underwriter will agree to insure upon request; a good underwriter will say something to the effect of, “no I can’t insure now, but if you obtain x, y or z, then yes, I’ll feel better and be able to insure.” It helps to have options.
Ultimately, every REO file needs to be able to be marketed and sold. At times the key is knowing how to navigate and resolve the distinctions between what is “legal” and what is “insurable.”