DEAR BENNY: I am in the process of buying a house and see that the Consumer Financial Protection Bureau (CFPB) has indicated that owner’s title insurance is optional. What do you think? Should we purchase owner’s as well as lender’s? – Juan
DEAR JUAN: Full disclosure first; my law firm is an agent of First American Title Insurance Co., since we conduct real estate closings in our office.
You will have no choice regarding lender’s insurance. From my experience, every lender I have ever dealt with requires the buyer or the refinancer pay for the insurance. The policy is typically based on the dollar amount of your mortgage loan. This will protect the lender in the event there is a problem with the title to your house. It will not protect you, the owner.
What kind of problems can arise? There are too many to list in this column, but here are a few:
*The seller lacked the capacity or the legal authority to sign a deed;
*Erroneous legal descriptions;
*Deed is not signed by all owners;
*Claims of adverse possession.
Many years ago, I represented a couple who sold their house to X, who several years later then sold to Y. The next-door neighbor sued my clients, as well as X and Y, claiming adverse possession. In the District of Columbia, adverse possession requires the claimant to go back at least 15 years; that’s why my clients were sued, even though they sold their house at least 12 years before the lawsuit was filed.
My clients had purchased owner’s title insurance when they first bought their house. I filed a claim against the title company, and – after a bit of a fight – that company picked up the legal expenses of defending the case. From what I recall, my client was the only one who had owner’s policy coverage.
Do you need owner’s title? That’s a tough question. If, for example, your sellers have lived in the house for a long period of time, then perhaps you can avoid purchasing such coverage.
There is no easy answer. When you are buying real estate, including condominiums, make sure you personally review the title report that the settlement, or escrow, company or attorney has prepared. If you don’t understand, ask questions.
I have always made the analogy to travel insurance; in most cases you won’t need it, but as our politicians are wont to say “stuff happens.”
DEAR BENNY: We had a serious fire recently and our home was partially destroyed. The insurance company was great, and quickly evaluated the loss and issued a check in an amount that is acceptable to us – and to our contractor. However, the check was made payable not only to my husband and me but also named our mortgage company. We are having trouble getting the check back to us so that we can hopefully get the house fixed before the snows come. Is it legal for the mortgage company to be on such a check? And in any event, what can we do? – Skylar
DEAR SKYLAR: Yes, every deed of trust document I have ever seen always contains language that requires the insurance carrier to issue the proceeds check in the names of the insured as well as the mortgage lender. Here’s an excerpt from a Fannie Mae form deed of trust: “Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender’s security is not lessened. During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity to inspect such Property to ensure the work has been completed to Lender’s satisfaction, provided that such inspection shall be undertaken promptly.”
So you have to review your deed of trust; in some states it’s called a mortgage. If your lender is refusing to cooperate, you should immediately file a complaint with the Federal Trade Commission, the Consumer Financial Protection Bureau and the consumer protection division of your state attorney general’s office. But first talk directly to a senior officer at your lender’s office to determine why they are not cooperating.
The worst case scenario: They will use the proceeds to reduce your mortgage loan. That might give you an opportunity to borrow additional funds (such as a HELOC) to make the necessary repairs.
Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: firstname.lastname@example.org.