Mortgage Insurance Presentation by spx14903

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									  EMERGING MORTGAGE & TITLE
INSURANCE COVERAGE DISPUTES

                    presented at
   MBA’s REGULATORY COMPLIANCE CONFERENCE 2010
                September 26-28, 2010
                  Washington, DC



  John N. Ellison
  Matthew D. Rosso
  Reed Smith,
  R d S ith LLP
  2500 One Liberty Place
  1650 Market Street
  Philadelphia, PA 19103
        851-8100
  (215) 851 8100
    PRESENTATION OVERVIEW
     What is mortgage insurance?
     Effect of mortgage crisis on mortgage insurance
     The claims process
     Dispute resolution provisions
     Loan modifications, transfers & assignments
           modifications
     Representation provisions and exclusions
     R    t       li h ld decisions
      Recent pro-policyholder d i i
     What is title insurance?
     Emerging title insurance issues
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    WHAT IS MORTGAGE INSURANCE?
     Type of insurance policy which helps reduce or
      eliminate a loss due to a borrower’s default on a
      mortgage loan
     Enables borrowers to purchase homes with less
      than the traditional 20% down payment by sharing
      the mortgage risk with the mortgage lender
     There are several mortgage insurers (“MIs”) in the
      market today, including United Guaranty, Radian,
      PMI, Genworth Financial, MGIC, RMIC, and Triad.


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    EFFECT OF MORTGAGE CRISIS ON
    MORTGAGE INSURANCE
     In mid-2007 the mortgage market experienced an
         mid-2007,
      unprecedented decline
     MIs, like most businesses, have been feeling the
      effects of deterioration of mortgage market
     According to a recent Moody’s report, MIs are
               g                  y     p
      increasingly implementing the same claim
      mitigation strategy to reduce losses in this
      economy: rescind and deny claims
     These rescissions and denials are primarily based
      on alleged misrepresentations in loan application

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    THE CLAIMS PROCESS
     Policyholders must comply with the claims
      process detailed in its MI Policy to obtain
      coverage
     Policyholders have an obligation to complete
      procedures within designated time periods
     Failure to fulfill these requirements may result
      in reduction of claim amount or forfeiture of
             g
      coverage
     The claims process includes providing notice,
      producing monthly reports and filing a claim


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    Notice of Default Provisions

     Policyholders must provide written notice to MIs
      within set period of time when borrower is in
      default or proceedings have commenced
      against borrower
     Some notice of default provisions require notice
      in as little as 10 days
     MIs typically raise issues with timeliness of
                    ’
      policyholders’ notice
     Policyholders should install systems to track
         i d f time i which it must provide notice
      period of ti  in hi h         t    id     ti
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    Monthly Reports Provisions
     Reports required by MIs advising on the status of
                           MIs,
      loan and servicing efforts undertaken to remedy the
      default.
     Must contain all information and documentation
      requested by MI.
     Must continue until borrower no longer in default.
     Some MIs require reports on specific forms.
     Failure to comply with this provision could reduce a
      claim amount or result in MI withholding coverage.


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    DISPUTE RESOLUTION PROVISIONS
     Most mortgage insurance policies contain certain
      resolution provisions in the event of a dispute
      between the policyholder and MI.
     Policyholders should understand the breadth and
      scope of its mortgage insurance policies’ dispute
                 provisions.
      resolution provisions
     Such provisions could drastically affect whether the
      p y                                p
      policyholder is able to resolve disputes in its favor.
     Here, we examine suit limitations, choice-of-law and
      arbitration provisions.


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    Suit Limitation Provisions
     Clause typically used by insurance companies to
      shorten the statue of limitations for breach of
      contract claims
     Such provisions should be treated very seriously,
      even though there are numerous defenses to such
      provisions
     MIs often rely on such provisions to deny coverage
     Policyholders should look to negotiate suit limitation
      periods, if possible, with special emphasis on when
      the clock begins to run


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     Choice-of-
     Choice-of-Law Provisions
      Some mortgage insurance policies specify which
       state’s laws apply to any dispute concerning the
       interpretation of the policy
      The law that applies to a mortgage insurance policy
       can significantly affect a dispute over policy
       construction and application
      Standards for rescission can be very different
       across states
      Policyholders should take the applicable law into
       consideration when purchasing coverage


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     Arbitration Provisions
      Certain Policies set forth the circumstances and procedures
       under which claims may be arbitrated
      S      fl ibl       i i     ll       li h ld “at its     i ”
       Some flexible provisions allow a policyholder “ i option” to
       elect arbitration
        In Republic Mortgage Ins. Co., et al. v. Countrywide
          Financial Corp., et al., No. 603915 (N.Y. Sup. Ct. filed Dec.
          31, 2009), the court granted policyholder’s motion to compel
          arbitration and dismissed complaint, finding arbitration
          clause did not require policyholder to demand arbitration
          before litigation was brought by MI
      Some provisions require arbitration but permit declaratory
       judgment actions on matters of policy interpretation
      Disputes may arise over which rules apply and how the
       arbitration should proceed:
      Disputes may also arise over choice of law and location of the
             g
       hearing of the arbitration


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     REPRESENTATION PROVISIONS &
     EXCLUSIONS
      Some representation provisions impute borrower
       misrepresentations to the policyholder
      Some provisions limit the MI’s ability to rescind or deny
       coverage if, for example:
           Borrower made 12 scheduled payments; or
           Purported fraud was not committed by a first
            party (i.e., insured, agent of insured, or loan
            originator)
               g       )
      Some Policies may exclude coverage for any claim
       “involving or arising out of any dishonest, fraudulent,
          i i l knowingly wrongful act” b th i
       criminal or k     i l                             d
                                     f l t” by the insured

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            PRO POLICYHOLDER
     RECENT PRO-POLICYHOLDER DECISIONS
      In United Guaranty Mortgage Indemnity Co. v. Countrywide
       Financial Corp., Case No. CV-09-1888-MRP(JWJx) (C.D. Cal.
       filed Oct. 5, 2009), th      t h ld th t MI    t “ l b ll ”
       fil d O t 5 2009) the court held that MIs cannot “globally”
       rescind policies based on alleged misrepresentations in some,
       but not all, loan applications.
      In Radian Insurance Inc v Deutsche Bank National Trust Co
                            Inc. v.                               Co.,
       C.A. No. 08-2993 (E.D. Pa. filed Oct. 1, 2009), the court held
       that the economic loss rule bars MIs from bringing negligence
             g g         p                     g
       or negligent misrepresentation claims against lenders based
       on alleged misrepresentations.
      In United Guaranty Residential Ins. Co. of North Carolina v.
       Countrywide Financial Corp., et al., No. 1:09CV203 (M.D.N.C.
       filed Mar. 2009), the magistrate judge recommended dismissal
       of United Guaranty’s fraud, negligence, negligent
       misrepresentation and unfair business practices claims under
             12(b)(6)
       Rule 12(b)(6).


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     LOAN MODIFICATIONS, TRANSFERS
     & ASSIGNMENTS
      Policyholders must understand and comply with
       their obligations when making any loan
       modifications or assignments, or changing servicers
              loans.
       of the loans
      This is especially important if a policyholder is
       considering a merger or required by the government
       to    t t        b i     l
       t restructure subprime loans.
      Failure to fulfill such obligations could result in a
       reduced claim amount or even forfeiture of
       coverage.
      Here, we examine loan modifications, change of
       i     d d h         f     i        i i
       insured and change of servicer provisions.

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     Loan Modifications Provisions
     L    M difi ti     P   i i

      Require policyholders to obtain advance written
       approval from MIs before making any change in
       terms of loan
      Hot issue with MIs given downturn in economy and
       push by government to restructure certain types of
       loans
      MIs may attempt to terminate coverage, especially if
       p y p          y provides such a remedy
       policy expressly p                    y
      Even under Policies that do not require “advance
       written approval,” policyholders should obtain MI’s
       approval in writing before making any modifications
15
     Change of Insured Provisions

      Provisions that permit substitution of one
       insured for another as long as certain
       conditions are satisfied
      I     t tt         id       li h ld is
       Important to consider if policyholder i
       considering a merger
      Advance written approval may be required if
       loan is sold, transferred, or assigned
      Therefore, as precaution, policyholders
                  ,    p          ,p    y
       should obtain MI’s approval in writing before
       selling, assigning or transferring a loan


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     Change of Servicer Provisions

      Require policyholders to provide notice and
       obtain MI’s approval before changing servicers


      Important to consider if policyholder is merging
       or changing its corporate structure


      Failure to obtain written approval from MIs for
       change of servicers could result in a termination
       of coverage
                 g

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     WHAT IS TITLE INSURANCE?
      Insurance or indemnity contracts against risk
       of defects in title to property
      Major lenders take out title policies to cover:
        Mechanic’s liens & unrecorded liens
        Unrecorded easements & access rights
        Defects & other unrecorded documents
      Title insurance policies typically contain a
       duty to defend the insured in lawsuits that
       challenge title
               g

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     WHAT IS TITLE INSURANCE?
      Title insurance is now commonly available
       internationally
      Policies are issues by title insurers (“TIs”)
                                             ( TIs )
       domiciled in U.S. and have choice-of-law
       and forum provisions that select U.S.
      Coverage provided in international policies
       varies greatly because of needs of
       customers and different real property laws


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     EMERGING TITLE INSURANCE
     ISSUES
      Deterioration in real estate market has also
       increased title insurance claims
      Scope and applicability of common exceptions from
          p         pp       y               p
       coverage under standard American Land Title
       Association (“ALTA”) form
      Violations of RESPA, unfair trade practices and
       unjust enrichment based on alleged overcharging
                           p
       for title insurance premiums
        Significant amount of premiums should have
         been allocated to title searches and evaluations
          l i title issues
         clearing titl i

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     CONCLUSION

      Given state of economy and its affect on MIs
          d TIs            th         MI    d TI
       and TI now more than ever, MIs and TIs are
       looking to policy provisions and exclusions to
       deny coverage
           y        g
      Policyholders should review their Policies in
       order to understand and possibly resolve
                                 p      y
       potential areas of dispute with their MIs or TIs
      If Policyholders submit claims and their MIs OR
               y
       TIs are taking unreasonable and/or aggressive
       positions, consult legal counsel


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               ANY QUESTIONS?

              N
         John N. Ellison                D.
                                Matthew D Rosso
     jellison@reedsmith.com   mrosso@reedsmith.com
          215-241-1210
          215 241 1210            215-241-1220
                                  215 241 1220




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