The Foreclosure Crisis & Title Insurers

The foreclosure crisis, which initially started as just another factor that added to the prolonged financial woes of the nation has since become the leading story and perhaps the biggest stumbling block for the economy’s recovery. Every sector of the housing industry has been taking a severe beating since the start of the crisis and there seems to be no end in sight.

The prevailing uncertainty will severely impact the refinancing prospects of homes that were purchased while undergoing foreclosure. This will affect the sales of foreclosed and distressed properties, which constitute majority of the current home sales.

Investors and buyers of foreclosures risk facing ownership challenges and even potential “clawback” of the purchased properties if previous owners claim and are able to prove that they were deceived by a faulty foreclosure process.

The massive investigation that’s currently being carried out by all fifty states has been discovering many shortcomings and questionable practices by banks and mortgage servicers, some of which apparently go back several years. This means the investigation could go on much longer than anticipated, cost a lot and may find several guilty parties along the way. The Attorney General of Ohio has already cited one mortgage servicer for questionable practices and it could potentially cause them to pay billions in damages. The high cost of fighting multiple lawsuits could mean more bank bankruptcies, especially those with low reserves against losses.

While all these and many other problems continue to add fuel to the foreclosure fire, “title Insurers” could potentially transform this proverbial fire into a raging inferno and bring the sales of foreclosures to a grinding halt. Here’s the problem. Lenders require title insurance in order to issue a mortgage because it ensures that buyers have a clear title to their property. This is done to protect the financial interests of both the buyers and the insurers.

Thanks to the robo-signing scandal, insurers are applying their emergency brakes on insuring new foreclosures to limit their liability. If prospective buyers can’t get title insurance, they won’t get a mortgage and this could stall or completely shut down sales of future foreclosures. Also, those who’ve already purchased foreclosed properties from lenders accused of robo-signing could file claims against their title policies and this could inundate underwriters with claims and put some insurers out of business.

In conclusion, there is no end in sight for the continuing foreclosure crisis. Some mainstream financial media commentators and legal pundits have been using phrases such as “housing Armageddon” to describe the debacle and its future course.