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Claims Tails: Top 7 lender foreclosure issues, and how to avoid them

As borrowers struggle with increased prices for almost everything, it’s no surprise that making monthly mortgage payments has also been an issue. In the last few years, it has been reported that foreclosures have steadily increased.[1] Thus, lenders have sought to exercise their rights granted under either a mortgage, security deed, or deed of trust to force a sale of the collateral due to the non-payment of the debt.

In many cases, whether it is a purchase money loan or a refinance, the lender may purchase and obtain a loan policy of title insurance to protect the lender’s interest from a variety of covered risks.   

As a lender prepares to initiate a foreclosure either by a judicial foreclosure or a non-judicial foreclosure, it may run a title search on the property to determine ownership along with other liens, judgments, encumbrances, and easements involving the property and the borrower. Title matters that present themselves involving the validity, enforceability or priority of the insured mortgage lien that were not excepted or excluded from coverage, and occurred prior to the date of the title policy, may lead the lender to submit a notice of claim to the title insurer seeking a coverage determination under the title policy.

The top seven title issues submitted by lenders to the Alliant National claims team include:

  1. Unreleased prior lien or mortgage;
  2. Spousal marital status is missing or is incorrect on mortgage;
  3. Spouse does not execute the mortgage;
  4. A notary acknowledgment issue;
  5. Error in the legal description or the legal description is missing;
  6. The mortgage was not timely recorded; and
  7. A complete copy of the mortgage was not recorded (i.e., missing a page).

Happily, strong post-closing procedures and attention to detail can easily prevent each of these issues. Let’s look at a scenario and use it to analyze a few different situations.

Scenario

An unmarried couple – we’ll call them the “buyers” – enter into a purchase contract with John Doe (the “seller”). The sale is scheduled to occur in 30 days. The buyers let you know that they are so excited as they are getting married in two weeks and that this is going to be their first home. The seller has two mortgages or deeds of trust on the property, as well as a recorded monetary judgment. All are properly indexed in the county land records. The parties are ready to close on schedule. 

First situation: Thirty days later, the buyers are now married; however, the prepared deed to vest title to the buyers, and the new mortgage or deed of trust shows them as unmarried. What do you do? 

Of course, one should not proceed with having the documents executed until they are corrected to reflect the proper marital status as of the date of closing. It is also important to mention here that one should also verify the proper names of the parties (including business names, trust, etc.), and that the names are correctly spelled.

Second situation: The closing occurs. The documents are executed but the notary misses acknowledging one of the pages in the mortgage or deed of trust for one of the buyers. The instrument is then recorded.

In this case, it’s important to have the mortgage or deed of trust re-executed, re-acknowledged and then recorded in the county land records. However, in some states, there may be an option to have the notary execute a Notary Affidavit. Check with your state to see if the latter is available and the cases for which it is appropriate.

Third situation: The closing occurs. The instruments are not sent to the county land records for recording until 60 days later.

Because of the delay in recording, it’s possible for another interest holder or lienholder to record an instrument in the “gap period,” the time between the closing date and the recording date. Keeping the gap period small lowers the risk that someone else will record an instrument that could challenge the lender’s priority.

Fourth situation: The closing occurs. The lender prepared the mortgage, and it identifies that an Exhibit A will be attached to show the property’s legal description. The mortgage is recorded without Exhibit A being attached.

In this case, it’s important to promptly have the mortgage or deed of trust re-executed, re-acknowledged and attach Exhibit A with the legal description; and then record in the county land records. In a few states, there may be an option to remedy the matter with a correction affidavit. Check with your state to see if the latter is available.

Fifth situation: The closing occurs, and the funds are disbursed. No additional review or follow up with the prior lenders or judgment creditor is conducted for the recorded release or satisfaction of the lien. One year later, these have not been released in the county land records. The current lender is now foreclosing, and the new foreclosure title search shows the items as unreleased in the county land records.

We understand that there may be challenges in getting the respective party (lender or creditor) to record a release or satisfaction if it is on that party to do so; however, this is part of the post-closing process. Being persistent and diligent will help ensure that the county land records accurately reflect the status of the mortgage or lien. There are several states that have enacted statutes that impose on lenders and creditors a prescribed time limit to record a release after payment. Also, in a few other states, a title company or a title insurer may have the ability to execute a release if certain requirements are met and if the lender or creditor fails to do so. Check with your state to see what options are available.

As you can see, title companies can impact the lender’s foreclosure process in a big way. By taking the time to catch the “little” things, you can help reduce the likelihood of claims submitted by lenders under loan policies.

If you have any questions, we’re here to help! Please feel free to reach out to me at: mhawkins@alliantnational.com

Resources:

Bates, M. (2024, April 11). ATTOM: Foreclosure Filings Increased 3 Percent in Q1. https://mortgageorb.com/attom-foreclosure-filings-increased-3-percent-in-q1

Fabino, A. (2024, March 13). Map Shows States Where House Foreclosures Are Rising.  https://www.newsweek.com/housing-foreclosure-rise-states-affordability-crisis-1878775.

This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.


[1] Bates, M. (2024, April 11). ATTOM: Foreclosure Filings Increased 3 Percent in Q1

magnifying glass looking at an aerial view of a neighborhood

Legal Descriptions: Wait! I Can’t Locate My Real Property 

In the automotive world, each vehicle is uniquely identified by a vehicle identification number (VIN), a distinct code used by the car industry. This identifier is used in various ways, such as for insurance and department of motor vehicles records, ensuring each vehicle is clearly and accurately tracked.

There is a similar concept that applies in the area of real property, and it’s not the parcel identification number shown on a county appraisal district or a property appraiser or assessor’s website. The true identifier for real property is the property’s “legal description.” However, errors with a property’s legal description can lead to complex issues affecting transactions. Let’s discuss some common issues and strategies to prevent and address these problems.

Legal descriptions come in various types, such as metes and bounds, or plats, just to name two. The legal description is created by a professional surveyor and is used to locate and identify the real property it describes. This information is located on deeds, deeds of trust, mortgages, and other instruments pertaining to real property. Without a legal description, it is nearly impossible to determine where a property is located and the boundaries of the property on the ground. Absent a legal description, it is also extremely difficult to determine who holds title to the property, who can convey title, what property is being pledged as collateral to secure a loan, and much more.   

At Alliant National, the claims team regularly sees cases involving legal descriptions. Here are just a few of the more common issues:

  • the legal description is not included with the recorded deed, mortgage, or deed of trust;
  • the legal description is incomplete;
  • the legal description has typographical errors;
  • the legal description references an incorrect subdivision or references an erroneous plat book or page; or
  • ownership of property is being challenged due to a gap in the property or an overlap of the property’s legal description with that of a neighboring property owner.

When a legal description is missing or not correctly identified in an instrument, it may result in a title claim involving intervening conveyances or liens on the real property. In some cases, a person may not be able to convey title to property they believe they own, or they may face challenges from others who believe they have better title.

Legal description issues can be timely or difficult to cure. In some states, there are statutes that permit certain legal description errors to be corrected through the use of a correction affidavit. However, states that have such corrective statutes generally limit their use and have certain requirements that must be met before a correction affidavit may be utilized. If the situation is not covered or the requirements are not met under the statute, then a correction affidavit is not available. In those cases, it may require a corrective instrument be obtained from a party or costly litigation. Even though it is not an exhaustive list, the Resources section below includes links to a few states’ corrective statutes.

Familiarizing yourself with your state’s laws is crucial to understand if there are corrective statutes relevant to legal descriptions, along with their specific limitations and requirements.

Happily, experience teaches that attention to detail can significantly reduce the occurrence of legal description issues. Here are a few tips for avoiding legal description headaches:

  • Purchase Contract and Addendums. If parties make changes to the purchase contract’s legal description, make sure to have those changes incorporated into your real estate closing platform to ensure, when it is time to print documents, that the documents properly reflect the accurate legal description.
    • For example, the parties may have originally contracted for Lots 1, 2 and 3, Main Plat. Subsequently, through an addendum, the contract now only dealing with Lots 1 and 3, Main Plat. Make sure the documents reflect only Lots 1 and 3, Main Plat.  
  • Who else should know of changes? Let your team and any third-party vendor know of any changes made to the legal description since the last time products were obtained and request that the products be revised, and new products issued to reflect the change. Then, distribute the revised products to the proper parties.
    • Remember to let the lender know of any changes to the legal description as soon as you know. Lenders may use this information to obtain an appraisal of the property to determine its value and may have to adjust the lender’s underwriting review.
    • In some cases, if the lender prepares the deed of trust or mortgage, it may pre-print the legal description on the instrument.  Review the instrument prior to closing for accuracy of the legal description. If the legal description is inaccurately reflected, contact the lender immediately to discuss.
  • Review and ask questions. If a survey was purchased or a prior survey is being reviewed showing the property’s legal description, review the survey for any differences shown in the seller’s vesting deed (and those in the chain) against what is being prepared to be conveyed. If there are differences, ask questions and review with the surveyor and the parties to clear up any discrepancies and document your file indicating how the parties addressed and resolved the situation. 
  • The parties. Review all documents prior to the closing to ensure they accurately reflect the legal description the seller intends to convey and the buyer intends to purchase. Don’t forgot to review and compare any legal description changes that the parties agreed to in the contract or purchase contract addendum.
  • Recording. When sending the instrument to the county recorder’s office, remember to include the correct legal description with the instrument.
  • Policies. When a final title policy is issued, review to make sure the correct legal description is included in Schedule A before sending it to the recipient.

Taking a moment to thoroughly address a property’s legal description can greatly reduce potential errors that could lead to claims. If you have questions, please feel free to reach out to me or any member of the Alliant National claims team. We’re eager to help!

Resources:

Colorado Revised Statutes Title 38, Sec. 38-51-111 – https://leg.colorado.gov/colorado-revised-statutes

Florida Statutes, Title XL, Sec. 689.041 – http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0689/Sections/0689.041.html

Texas Property Code, Title 2 – Conveyances, Chapter 5 – Conveyances, Sec. 5.027-5.031 https://statutes.capitol.texas.gov/Docs/PR/htm/PR.5.htm

This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.

illustration of a woman holding HELOC paper in front of a house

A Claims Tale: All Mortgages Are Not Created Equal – HELOC Mortgage Payoff

Dealing with mortgages and deeds of trusts in a transaction seems fairly easy to address at a closing, you would think. On occasion, we see a security instrument known as the Home Equity Line of Credit (HELOC) Mortgage or Deed of Trust – a revolving credit line secured by the home’s equity – that is not treated the same way as a traditional mortgage. HELOC instruments may require additional steps to shut down and release the lien from the property.

Let’s consider a scenario:

Mr. and Mrs. Smith are the previous owners of property located at 123 Main Street, Anywhere, USA.  The owner has two loans secured by the property: a $150,000 traditional mortgage and a $300,000 HELOC mortgage. Mr. and Mrs. Smith sell the property to the buyer, Tim Jones, for $475,000. As part of the closing process, the title company sends the payments to the lenders by wire transfer.

Two years later, Tim Jones receives a notice of foreclosure from the home equity line of credit lender. The lender asserts that Mr. and Mrs. Smith’s HELOC loan has a balance and was never closed. The HELOC loan once again has a balance of $300,000, and the loan is now in default. Tim Jones submits a claim.

The Lesson:

A HELOC loan typically includes a clause that gives the borrower the ability to “borrow, repay, and reborrow” from time to time, up to a maximum credit available, through a maturity date.  

In our scenario, the lender may have applied the payment on the HELOC loan as a “pay down” on the loan and did not close down the account and cancel the loan two years earlier. 

For a HELOC loan, the lender may require additional steps be taken to close out the loan and have the lien released from the property. In certain cases, the lender requires that the borrower execute a “Close out / Close Down” letter. Not only does the borrower(s) have to sign the letter authorizing the account to be closed, but the signed letter has to be delivered to the lender instructing the lender to do so. In some cases, a lender may even have a specific form to be used to effectuate the closing of the account.

Practice Points:

If you are planning to mail or wire payoff funds to a HELOC lender, as a best practice, if you see that the loan is a HELOC –

  • carefully review the lender’s instructions to close out the account; 
  • ask questions to ensure all requirements are met;
  • deliver the borrower’s signed close down the account letter concurrently with the payment; and
  • keep a copy of the letter along with evidence on how and when you sent the “close out / close down” letter to the lender. 

Even if there is a zero-dollar ($0) balance on the borrower’s account on the day of closing, you still want to ensure that the account is properly closed, and the lien released. 

When you come across a HELOC mortgage, be aware that only requesting a loan payoff statement from a lender may not be enough to obtain a cancellation and release of the HELOC mortgage. By recognizing that there is a difference between a traditional mortgage versus a HELOC mortgage when it is time to pay off the loan, you will be well on your way to having the lien properly cancelled from the property.

stick man figure chased by 5 threatening stick figures

Claims Prevention: Five Types Of Claims That Cost The Most … And How To Avoid Them

The relationship between an independent title agency and its title insurer is a unique one; we rely on each other for our mutual success. So when a claim occurs, it’s no fun for anyone. Claims are a fact of life for any insurer, but thankfully, some of the costliest claims are entirely preventable if time is taken to appropriately review and analyze information that is part of the transaction.

What are these costly and preventable claims? Based on our experience at Alliant National, the top five categories for claim files over the last three years have been in the following areas:  

  1. Missing or erroneous legal descriptions,
  2. Lack of capacity or authority to convey title or release a lien,
  3. Unreleased mortgages or deed of trust,
  4. All other unreleased liens and judgments, and
  5. Unpaid taxes and assessments. 

To take this a step further, when we compared all of our closed claim files against closed claim files classified as “agent error,” we found that claims involving “agent error” tend to be more costly, particularly when it comes to the top five claims categories.

You ask, what can I do to reduce these preventable claims and thereby reduce the costs and other impacts of claims? Based on our experience, here are a few items to consider in every transaction:

  • Carefully read documents. Real estate transactions involve a lot of detail, and all those details are important. Take time to carefully read what the prepared instruments and documents say. This includes those that may have been delivered to you by a party to the transaction, a third-party or within a lender’s package. Do not assume anything. Here’s one example. Let’s say the lender does not include a spouse or a co-titleholder’s name on the mortgage or deed of trust. In several states, if the borrower is married, the spouse must join on the mortgage or deed of trust. Just because their name was not originally included, the lender may fall back on what the closing instructions required. In this case, it would be important to take a minute to contact the lender and make the necessary adjustments.
  • Do not be afraid to communicate. We’re all in a hurry, but it’s important to take the time to ask questions and be willing to ask for clarification when something is not clear. Then, of course, we need to listen to what is being said. In some cases, there may be disclosures of matters – not known until that moment – which can alter the transaction. Also, it’s helpful to consider whether everyone is using the same terminology to describe the same thing. We use a lot of jargon in this industry, so be careful not to think that “everyone uses this term” or that they understand things the same way you do. 
  • Avoid being solely persuaded by the seller or borrower not to collect funds required at the closing. We oftentimes hear that the seller or borrower told the closer that the delinquent taxes, mortgage, or homeowner assessment was already paid outside of closing and to just disregard any payoff or estoppel letter that was previously collected. Experience tells us that you should not just take the person’s word but instead contact the creditor, lienor, or lender that is owed the funds, at a properly verified number, and confirm whether a payment has resolved or made current an amount owed. If appropriate, it may be good practice to hold back those collected funds until a certain time has passed, and it is confirmed that the account is current and/or the lien has been satisfied or released.
  • Spend time in understanding the subject of the closing. This includes the parties in the transaction and the property. Understanding the intricacies can help you spot types of fraud involving the conveyance of title or unpaid liens and taxes. With a critical eye, review the person’s ID and other documents that are presented since a number of fraudsters and imposters are impersonating others in transactions.
  • Promptly discuss concerns and matters with the underwriting and claim teams. We at Alliant National are always ready to review and discuss issues and matters of concern with our agents. Please don’t hesitate to call us. Waiting until the last minute or after closing to discuss a known issue may cause problems. In some cases, it may be too late to deal with an issue brought to the title underwriting team after the closing, as a claim may now exist.

Everyone is excited when a closing occurs and funds are disbursed, but this enthusiasm can quickly change to concern when a title matter is submitted involving that transaction. Thankfully, taking time to review, understand and analyze transaction information can reduce the possibility of errors and help avoid those top-five pesky and preventable title claims.

If you have questions, please contact the Alliant National claims team.

Male Fraudster with phone on dark background

Claims Blog: BEC/EAC – They’re (Still) Here!

The Federal Bureau of Investigation (FBI) has labeled business email compromise (BEC)/email account compromise (EAC) as “one of the most financially damaging online crimes” as it is “the top cyber threat.” BEC/EAC is a scam in which fraudsters trick an unsuspecting party, typically by using a variety of social engineering and phishing tactics, into making payments to fraudulent accounts.  

Since 2016, over $43 billion has been lost through BEC/EAC attacks. In 2021, U.S. losses attributed to BEC/EAC cybercrimes were reported to be almost $2.4 Billion. This is more than one-third of the total cost of all cybercrimes reported to the IC3 in 2021. In a recent article from Security Magazine, the author noted that email cyberattacks have increased by 48% in just the first half of 2022. It is no surprise that the title insurance industry has been the target of fraud schemes for many years, especially with wire transfers being utilized more often.

Some common schemes we continue to see include:

  • Seller Spoof – fraudsters impersonate the seller (using an email address that may only be slightly different from the original, or using the actual seller’s email), and provide alternate bank account information for the seller proceeds.
  • Lender Spoof – in a transaction involving the payoff of a prior lender, fraudsters impersonate the prior lender. They often modify the original payoff provided by the prior lender (or create one) with wiring instructions for a fraudulent account.
  • Buyer Beware – fraudsters pose as the settlement or real estate agent using a similar email address, and instruct the buyer to wire their down payment funds to a fraudulent bank account.

There are many ways to protect a person or a business from becoming a victim of these costly schemes. A few tips include:

  • Meticulously examine the email address, URL, and spelling used in any correspondence. Fraudsters use only slight differences hoping you do not critically analyze the spelling.
  • Be suspicious about opening any email attachments from someone you don’t know and be wary of email attachments forwarded to you as they may include malware or other malicious software.
  • View all changes to wire instruction with extreme caution.
  • Always independently verify with the company any payments or wires being sent to a third-party by contacting them at a legitimate number, and be leery of any last-minute changes to account numbers or payment procedures.
  • Confirm with the intended recipient that the wire was received.
  • Be extremely suspicious if the requestor is pressuring you to act quickly.

If you do become a victim, do not wait to take the next steps since time is critical in this process. Have a plan in place and be prepared to:

  • Notify your office management.
  • Notify your financial institution and the recipient’s financial institution.  
  • Contact local law enforcement.
  • Contact your local FBI field office.
  • Contact your cyber-insurance, escrow security bond, and error and omissions provider.
  • File a complaint with Internet Crime Complaint Center (IC3).
  • Contact your title underwriter.

With our increased dependency on technology and the pace of our industry, we cannot let down our guard – we must stay vigilant! Heed the warning that fraudsters are not slowing down or giving up on these fraudulent schemes. If you are presented with any of these situations, the key is to be able to recognize the scam and then shut it down before it can infiltrate your transaction and create a web of issues.

You can learn more about identifying and preventing fraud by downloading Alliant National’s white paper – Escrow Fraud/Social Engineering: Recent Schemes and Prevention Tips.

Resources:

Escrow Fraud/Social Engineering: Recent Schemes and Prevention Tips, Alliant National Title Insurance Company

Email cyberattacks increased 48% in first half of 2022, Security Magazine: https://www.securitymagazine.com/articles/98145-email-cyberattacks-increased-48-in-first-half-of-2022

FBI – Business Email Compromise: https://www.fbi.gov/how-we-can-help-you/safety-resources/scams-and-safety/common-scams-and-crimes/business-email-compromise

FBI – Internet Crime Complaint Center (IC3): https://www.ic3.gov/

This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.

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