Lenders who provide loans secured by real estate regularly obtain a loan title insurance policy securing their preferred position. Owners of real estate regularly obtain a homeowner’s title insurance policy that insures their title to the property. But what if a lender becomes the owner by foreclosure or deed in lieu of foreclosure of their insured trust deed? Can a lender rely on their loan title policy to secure their property title? If so, should a lender rely on their loan policy or should they get a homeowner’s policy?
Typically, coverage under a loan policy continues after a lender has acquired title to the property. However, there are actions that can jeopardize continued coverage, and there are advantages to purchasing a homeowner’s insurance policy. Lenders about to take the title should therefore consider the following pitfalls for the unwary and the benefits of a homeowner’s policy.
Continuation of coverage
Coverage under a loan policy continues after foreclosure or registration of a deed in lieu if title to the property is taken by the same entity that is the insured named under the title policy. If a secured lender prefers, instead, to take title on behalf of an affiliated OREO entity or special purpose entity, then the named insured lender must assign the secured debt to the entity taking title, and request this entity to bid for the sale or take the deed in lieu of foreclosure. Alternatively, the insured lender could take title and then transfer the property by notarial deed to: (i) the parent company of the insured lender, which must fully own the lender; or (ii) a wholly owned subsidiary of the insured lender. If the transaction is not structured in one of these ways, the discrepancy between the named insured under the title policy and the new owner could be grounds for the insurer to deny continued coverage under. a loan policy.
Inappropriate foreclosure issues
Unlike a loan title insurance policy, a homeowner’s policy will ensure that a foreclosure has been effected properly and that the title has been transferred successfully without any unfavorable interest outstanding (unless expressly stated as exception). A loan policy may not protect the lender if there was a default in the foreclosure process. A post-foreclosure homeowner’s policy also offers the benefit of insuring the title for the period between the date of issuance of the existing loan policy and the date of foreclosure. This can only improve the marketability of the property if the lender can present a potential buyer with a blank title policy dated post-foreclosure that ensures there are no surprises.
Acts in lieu
By opting for a deed in lieu of foreclosure rather than foreclosure, the lender waives the extinction of any subordinate interest in the property through foreclosure. In this situation, obtaining an update of the title and obtaining a title policy from the owner is invaluable as the risks presented by most of the junior interests involved will be identified before the deed is registered. . The lender can then condition his acceptance of an act in lieu of the elimination by the borrower of any intervening interest and the obtaining of own title insurance for the lender.
Lenders should be aware that some title insurers refuse to cover deed-in-lieu transactions without exception for contractor privileges. For this and other reasons, documents relating to a deed-in-lieu transaction should specify that the secured obligation is merely rendered non-recourse, rather than discharged, and that the deed of trust will remain registered, at the same time. case the lender later finds out some interim interest that needs to be extinguished by foreclosure.
Insured value
A homeowner’s insurance policy can provide greater coverage value. A homeowner’s policy insures the face amount of the policy. In comparison, a loan policy insures only the lesser of the face amount of the policy or the outstanding amount of secured debt. This is because the terms of a loan policy give the title insurer the right to meet its obligations at any time by simply buying back the debt.
Triggering of the insurer’s obligation to pay
An insurer’s obligation to pay a loss under a homeowner’s policy is triggered on “first loss”. However, under a loan policy, no loss is usually recognized until the collateral is fully liquidated and an actual loss is incurred. Therefore, a homeowner’s policy can result in a faster resolution of a title claim than a loan policy.
Conclusion
Arguably, it is foolish and foolish for a lender to rely on its loan policy to insure title taken by foreclosure or deed in lieu. There are some important advantages to having a homeowner’s insurance policy. In addition, obtaining a homeowner’s insurance policy should not represent a financial burden for the lender. Typically, the title work required to secure a homeowner’s policy is for a relatively short period of time (between the date of registration of the insured trust deed and the date the lender takes title), which decreases considerably the cost of obtaining a homeowner’s policy. In addition, since the title insurer will already have insured the asset, it should issue a new policy on the asset at a “reissue” rate lower than the original premium. Finally, since an owner’s policy increases the market value of the property, obtaining the owner’s policy benefits the lender more by increasing the likelihood of quickly selling the property to a third party. In short, lenders are encouraged to obtain a homeowner’s insurance policy in all foreclosures and acts in lieu of foreclosure transactions.
