By Zana Holley Dupee
Many banks are foreclosing on homes or taking ownership of them by a deed in lieu of foreclosure. One question that has come up is whether the bank has continuous coverage under the Mortgagee Title Insurance Policy from when the mortgage was originated. This can be important if title problems are discovered after the bank has already taken title to the property.
Paragraph 2(a) of the 1992 ALTA mortgagee policy Conditions and Stipulations states in part:
2. CONTINUTION OF INSURANCE
(a) After Acquisition of Title. THe coverage of this policy shall continue in force as of Date of Policy in favor of
(i) an insured who acquires all or any part of the estate or interest in the land by foreclosure, trustee's sale, conveyance in lieu of foreclosure, or other legal matter which discharges the lien of the insured mortgage; (ii) a transferee of the estate or interest so acquired from an insured corporation, provided the transferee is the parent or wholly owned subsidiary of the insured corporation, and their corporate successors by operation of law and not by purchase ...
The policy language above does tell us that the bank may continued to be insured. However, there are a few problems that arise:
One problem is when a bank has a 3rd party bid at the foreclosure sale. This often happens when the bank's parent or subsidiary company bids at the sale without having an assignment of the mortgage. If this happens, the property has been acquired by a 3rd party, not the mortgage holder, and the title policy terminates. So, there is no continued title coverage!!
Another problem is the amount of damages that are available under a mortgagee title policy. The amount payable under a mortgagee policy is limited to the amount of indebtedness as compared to the value of the property. So, if the title defect does not diminish the property's value below the amount of principal owed on the mortgage, then there is no payable insurance claim on a mortgagee policy. In contrast, an owner's policy would pay for the decrease in the value of the property without regard to the balance owed on the mortgage. This makes a big difference in cases where the mortgage balance has been paid down or where the lender did not loan the full value of the property.
An additional problem that arises is the effective date of the policy. The effective date of the mortgagee policy is the date that the mortgage was originally recorded. So, any title defects that arose after that date will not be covered by the existing mortgagee policy.
For all these reasons, banks should consider purchasing an owner's policy when they buy a property at a foreclosure sale rather than relying on continued coverage for title defects under the mortgagee policy.
If you are a lender in North or Central Florida that needs legal advice regarding real estate issues, please contact Zana Dupee to schedule a consultation. Zana has significant experience in representing lenders who own properties with title defects, and we would be happy to assist your bank as well. Often, our fees for fixing title defects are paid from a title policy claim. If you need assistance with real estate, probate or trust litigation, you can call Zana Holley Dupee to schedule a consultation at (352) 379-5900.
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