Title insurers are looking to protecting themselves from losses if courts rule that banks have played fast and loose with the foreclosure process. But people who buy foreclosed properties from banks may face some degree of loss despite having a title policy.
Fidelity National Financial, the largest title insurance company, is leading the industry in demanding that lenders warrant that they have followed all legal procedures in the handling of foreclosures and indemnify the title insurers if a court decides otherwise.
"They are putting on record that it is absolutely the bank's responsibility," said Susan Wachter, professor of real estate at the Wharton School of the University of Pennsylvania.
But Wachter said buyers of these properties risk getting caught up in litigation among title companies, banks and possibly other entities if the foreclosure is overturned by a court. "There is still uncertainty," she said. "It's a question of litigation; it's a question of transaction costs."
That uncertainty will continue to place a chill on the foreclosure market, she said. Real estate agents are already seeing would-be foreclosure buyers retreating from the market, said Lucien Salvant, spokesman for the National Association of Realtors. And observers fear that a market chill, if it persists for more than a few weeks, could drive property values down further.
Title insurers are at the hub of real estate transactions. They guarantee that the chain of title is clear, unblemished by missing documents, outstanding liens or other factors that would impede an owner's right to sell a piece of real estate and deliver a clean title to the new owner. Lenders always require buyers to pay for title insurance coverage that protects the lender against those risks. Buyers have the option of paying extra to have such coverage for themselves.
Fidelity National Financial, which has 38 percent of the market nationwide, underwrites policies under the brands Fidelity National Title, Chicago Title,
Commonwealth Land Title and Alamo Title. As of Nov. 1, all lenders seeking a Fidelity National policy for the sale of a foreclosed home must warrant that all documents and procedures involved in the foreclosure process were handled properly. They also must agree to pay the title insurer's costs in the event that a court finds errors or fraud in the foreclosure process.
Those agreements will be required even sooner for Bank of America, which plans to resume foreclosure sales next week. Peter T. Sadowski, Fidelity's chief legal officer, said the indemnity agreement was drafted by Fannie Mae and Freddie Mac, and that he hopes their regulator, the Federal Housing Finance Agency, soon makes it mandatory for loans backed by Fannie and Freddie as well.
Fidelity executives said they do not anticipate having to pay claims anyway, even if a court sets aside a foreclosure due to a defect in documentation or process. In a conference call to Wall Street analysts Thursday, Sadowski said, "If a foreclosure is set aside - which is very unlikely to happen - the purchaser who bought the property is going to get his or her money back from the lender who sold it to him."
In such an instance, the title insurance company would deal with the lender on behalf of an insured buyer, Sadowski said later in an interview.
Although Sadowski said he does not expect the foreclosure crisis to result in significant losses to the company, Fidelity National nevertheless is building up its cash on hand. The company has halved its dividend and announced plans to cut $50 million in expenses within the next six months. Company officials cited continued uncertainty in the real estate market and the desire to repurchase shares of company stock as reasons for the cash buildup.
The plans and concerns of the other major providers of title insurance - First American Financial Corp., Stewart Title and Old Republic International - will be disclosed this week. Each is scheduled to report third-quarter earnings to investors Oct. 28. Along with Fidelity, they account for 90 percent of the title insurance market.