This post was updated October 6, 2010.
Old Republic National Title, one of the country's largest title insurance companies announced that it won't insure homes that have been foreclosed on by J.P. Morgan Chase.
The New York Times obtained a company memo that said Old Republic would not write policies on foreclosed Chase properties until "objectionable issues have been resolved." Earlier last week, the company said it would not write title policies for homes that had been foreclosed by GMAC mortgage, which is now owned by Ally Bank.
Late last week Bank of America said it would also freeze foreclosures in certain states while it reconfirmed that the foreclosure documents had been prepared and executed correctly. It's likely that Old Republic will stop writing title policies on these foreclosures as well.
If other major title companies follow suit, and stop writing these policies, it could turn into the watershed event that actually sends the already crippled housing market into a tailspin.
Why? Let's back up for a moment.
Title is the ownership in a property. A chain of title is a list of all owners in the property going back to when the land was first developed or, in the case of some East Coast properties, when the King of England first granted large tracts of land to homeowners.
When you buy title insurance, what you're purchasing is an insurance policy that guarantees that the sellers actually have the right to sell you the property. If there are any other claims to the property that come forward after closing, and those individuals actually have a legitimate claim to ownership and you lose your property, title insurance will pay you the amount your home is worth or the monetary damages that you have.
All home buyer who get a mortgage are required by their lenders to purchase title insurance that protects the lenders investment in the property. (It's called a lender's title policy.) The lender's investment is the amount of cash you borrow to purchase the home, or the mortgage and home equity line of credit. But the lender's policy doesn't include the buyer as a named insured. For that, you have to buy your own title insurance policy (called an "Owner's Policy) because it protect your investment in the property, such as your down payment.
So why is it a big deal that Old Republic National Title isn't going to insure Chase's or GMAC's foreclosures?
Because if a house doesn't have clear title, you can't get a title insurance policy for it. If you can't get a title insurance policy for a property, lenders won't lend because there is a huge risk that someone else is going to come forward with a valid title claim and take away the property and they will lose the investment they've made in the mortgage.
In that scenario, wouldn't the bank go to the homeowner to get repaid? Sure. But who has a few hundred thousand bucks lying around in cash. If homeowners had that kind of cash to buy a home, they wouldn't need a mortgage.
Clear title is one of the main tenets of homeownership in this country. If lenders can't be assured that the seller (in this case, the banks who are reselling millions of foreclosures as REOs) have clear title to the property, they won't issue a mortgage.
Which means homeowners can't buy homes.
Which will be the perfect storm scenario that tanks the already crippled housing market.
If you think the current foreclosure freeze is bad news, think about what will happen if the millions of homes that are already in foreclosure and the millions more heading into foreclosure can't be resold.
You know where all this is heading, right? Hello class action lawsuits.
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.