Mortgage Impairment Liability Insurance by pid17270

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									                     MORTGAGE IMPAIRMENT VS. TITLE PROTECTION

Like politics, real estate is local. So too are the laws, rules and regulations governing real estate-
related insurance. As much as we would want to have the law and procedures surrounding the
transfer and financing of real estate uniform across the country, that is not the case and may not
be anytime soon. The GSEs have tried mightily without success to create truly “nationwide,”
uniform documents. The federal government became so frustrated with the varying foreclosure
procedures that Congress created a national foreclosure law for HUD loans. However, Congress
has not preempted local real estate law and practice. Similarly, insurance has always been
regulated on a state level, and Congress, in the recent Gramm-Leach-Bliley Act again reaffirmed
the public policy that insurance should be regulated by the states. It is intellectually dishonest to
describe the costs and procedures involved in real estate transactions in national terms without
any regard to state and local issues. The Washington Post article, “Title Industry Sues to Block
Reduced-Cost Lien Coverage,” written on December 1, 2001 by Kenneth R. Harney, makes the
same mistake.

STATE REGULATION INCREASES PROTECTION, COMPLEXITY, AND COSTS

Insurers like Radian Guaranty appear to believe that, because they provide insurance against
liens as a part of a larger policy insuring against other perils, they are not subject to state laws.
Those state laws specifically regulate insurers who issue policies insuring against loss or damage
arising from defects in or liens or encumbrances on title. The insurance is title insurance under
the laws of most states and under the model acts published by the National Association of
Insurance Commissioners. Most states regulate title insurance with a special set of rules, most
have significant and differing reserve requirements, many establish minimum due diligence rules
as a precondition for policy issuance, many have special standards for agents, and some require
the maintenance of sophisticated databases covering real estate title information. Many states
also have statutes or judicial decisions that make a policy issued by an unauthorized insurer
unenforceable.

RADIAN ONLY PROTECTS LENDER ON ONE ISSUE

Depending upon the jurisdiction, there are a number of pieces to the transaction puzzle, even in a
“simple” refinance transaction. That transaction involves the preparation of the documents,
including the HUD-1A settlement statement; a review of the documents by the borrower to
confirm their accuracy; a due diligence investigation to determine who owns the property, how
the property is described, and what other liens and encumbrances affect the property; the actual
execution of the documents; the recording of the necessary documents to create a valid lien
under state law; delivery of a completed package of documents to the lender; and the provision
of some legal assurance against the risks that everything has been done correctly and that the
lender has received what was bargained for. The Radian insurance plan, as described in Mr.
Harney’s article, only deals with one small portion of the risks inherent in this process.
Apparently, the product does—for the lender—assume the risk that there are no undisclosed filed
liens on the property. It –DOES NOT address unfilled liens such as various state and local tax,
sewer, water, etc. liens, OR unfilled mechanics liens that, in some jurisdictions because of state



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mechanics lien laws, are a significant problem. The product clearly does not deal with the issues
of ultimate enforceability of the lien that can be affected by such matters as forgeries or mere
mistakes in the precise form of ownership. For example, people transfer property between
spouses or to family limited partnerships and trusts based on estate planning advice and often do
not know precisely how legal title is held. All of these issues, and many more, are covered by
traditional title insurance that has developed with significant input from the lending community
that has identified many risks inherent in the real estate transaction.

MISTAKES HAPPEN

Based on limited experience with a program for equity credit line mortgages (in which the title
was checked at the time of recording), there can be a number of “vesting issues”: husbands have
mortgaged property owned jointly with wives or only by wives; parents have partial interests;
and, if the property is so-called “registered” land in Massachusetts, the presence or absence of a
middle initial will mean the mortgage may not be recorded at all. While most of these problems
may be fixed with the borrowers’ cooperation, the curative work has a cost that must be borne by
someone, and the lender is unsecured or only partially secured in the interim. Further, a
mortgage is not recorded until some time after the disbursement of funds might be a voidable
preference under Bankruptcy law. Protections for these issues are non-existent under Radian.

COSTS OF DEFENSE

Defense coverage is provided under a traditional title policy and is apparently absent from
products like Radian’s. A traditional title insurance policy not only provides for an indemnity
for losses actually incurred, it also specifically covers the attorneys’ fees and costs that may be
incurred in the defense of the title. The obligation to defend is independent of the obligation to
indemnify. If you get sued in an auto accident, your automobile insurer will defend you whether
or not you are ultimately liable. Similarly, the title insurance company will defend the title
whether or not the lawsuit has merit. While acknowledging that the risks are small in the equity
credit line mortgage area, the vast majority of claims the title insurance industry has had involve
defending the lender against foreclosure actions brought by mechanics lien creditors or other
lienors. Even though the claim may be invalid or the borrower is able to resolve the problem
independently, in the absence of traditional title insurance, the lender will have to bear the cost of
retaining counsel to defend and appeal.

RADIAN PRODUCTS ARE “MOVING TARGETS”

The mortgage impairment products like the Radian program appear to be moving targets with
changing provisions. They are often not filed with insurance departments, and the insurers seem
willing to change the form of coverage in response to negotiations with individual insureds. The
individual policy covering each loan must be reviewed, since there is no uniformity among the
various forms and coverages. In contrast, title insurance from existing title insurers is based on
forms published by the American Land Title Association, and these forms are well known
throughout the industry. In addition, there is a significant body of law interpreting these policy
forms.
HOMEOWNERS LEFT UNPROTECTED

There is a significant risk to borrowers from the Radian type program. The insurance is based on
the borrower’s representations under oath as to the liens on his or her property. Unfortunately,
there are many borrowers who may not connect the dispute they are having with a contractor or a
hospital with the existence of liens on their property. They may not even realize that the
documents they signed two years ago to obtain a line of credit with the bank created a lien on
their property. If they provide an inaccurate affidavit, they expose themselves to liability for
false swearing and even bank fraud, both criminal offenses, and, depending on the jurisdiction,
have liability for attorneys’ fees and consequential damages that would not be available in a
simple foreclosure action or a suit on the promissory note.

SIMPLER, CHEAPER?

More important, Mr. Harney’s article presumes the conclusion that a plan like Radian’s is
necessarily quicker. In some jurisdictions, he is undoubtedly correct – not because the title
industry desires it but because of state statutory and regulatory prescriptions. Likewise the costs
of title services vary significantly from state to state. Depending upon the jurisdiction,
generating basic title information may be as quick as entering a name and address in a computer,
or as time consuming as driving to a remote courthouse and spending a good part of a day
reviewing original documents. Eliminating this piece will obviously eliminate a cost, but it is
likely to be a small cost in many jurisdictions. In Connecticut, for example, the cost of a
rundown to verify ownership and identify new liens will cost $50.00 to $75.00. The premium
for a $100,000.00 Loan Policy on a refinance in Connecticut is $228.00. If Radian is charging
$275.00, then it is not the claimed 50% of the cost traditional title insurance with traditional title
insurance protections. For more limited forms of coverage, such as the ALTA Junior Loan
Policy which addresses taxes and liens, but provides only limited vesting coverage, the premium
will be $200.00 or less.

COMPARING APPLES TO ORANGES

Since Radian is not involved in the other aspects of the closing process, there are likely to be
other charges for the other services. Therefore, when evaluating costs of competing programs, it
is critical to determine exactly what services are included in the comparable fees. For example,
in Pennsylvania, the title insurance premium includes not only the risk premium, but also all of
the title search costs and the cost of the actual settlement. The rates may be higher, but they
cover many more services.

BUNDLED SERVICES, APPRAISALS, AND CLOSINGS

Mr. Harney finds “especially significant” the fact that the Radian product is “just one element in
a multi-service mortgage settlement package” that includes appraisal and settlement. The major
national title insurance companies have offered similar packaging of a variety of settlement
services for years, and independent vendor management companies have also been packaging
services. In fact, the vendor management companies have their own trade group, the
Title/Appraisal Vendor Management Association. Discussions surrounding the bundling of
services, however, have been one of the most contentious issues in the RESPA/TILA reform
discussions over the past several years. The title industry is developing products that, in fact,
provide cost reductions for bundled services.

The “appraisals” that ExpressClose.com provides for $50.00 are alternative valuation models
(AVMs) that are estimates of value based on a computerized evaluation of data bases such as
assessors records and previous full appraisals. There are numerous vendors, including the major
national title insurance underwriters, who have the same product at the same or lower price, and
they are being used extensively in the equity credit line field. However, it is banking regulation
and state appraisal regulation, not the appraisal vendor, who requires a $300.00 full appraisal.
We would be happy to provide whatever appraisal product the lender wants.

Additionally, the article implies that arranging for documents to be signed outside of an office is
somehow revolutionary. In fact, settlement agents, if they want to stay in the business, have
understood for some time that they have to satisfy the consumer, and closings that are insured by
traditional means are being closed in donut shops all over the country today. If a settlement agent
is not willing to travel, the originating lender will find someone who is.

Probably the greatest efficiency that Mr. Harney attributes to ExpressClose.com is the
availability of the documents and calculations the day before closing. Everyone in the process
agrees that there is a huge problem of documents turning up at the time of settlement with errors
or misunderstandings. Ironically, the originating lender, not the settlement service provider,
controls the availability of documents.

CREAM SKIMMING

There is no question that the process of real estate financing needs to be constantly reviewed,
streamlined, and made more cost-effective. There is also no question that consumers are
empowered by the rapid technological changes that are taking place, and industry will have to
find better, quicker and cheaper ways of meeting consumer demands. In fact, the title insurance
industry is doing just that within the confines of state regulatory and legal practice. The Radian
plan, like others before it, is less a “direct assault on the traditional ways of doing business” than
an attempt by another entity to skim some of what they perceive as the cream from the settlement
process. Bear in mind that they will only insure loans to high credit borrowers where the
chances of a credit default are very low. The cost savings, to the extent that any exists, will inure
to the benefit of a small class of borrowers who are in good financial shape. Any “no due
diligence” product will not work with sub prime borrowers and those borrowers most in need of
assistance. Thus, recognizing that insurance products are based on loss spreading over a large
group, the cost of this “savings” to high-income borrowers will fall on the others. A new
“redlining” may emerge.

Mr. Harney asks at the end of this article: “Will American homeowners get the chance to pay
less at the settlement table? And will needlessly complex and expensive practices be streamlined
to the consumer’s advantage with the help of imaginative new technologies?” The answer to
both of these questions is “YES.” Not because of Radian, but because of the demands of
consumers. The title insurance industry is working hard, within the rules that protect consumers,
to achieve these goals.

								
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