Title insurer addresses latest mortgage mess

Been wondering how title insurers were reacting to the failure of banks to properly document foreclosure proceedings.

From the bowels of this New York Times story:

Fidelity National Financial, the country’s largest title insurer, said Wednesday that it had its own method of making sure foreclosures were done properly: it would be requiring all lenders to provide warranties that the eviction complied with state law.

Title insurers have been trying to gauge the risk associated with faulty foreclosures re-entering the real estate market. While the insurers minimized the likelihood of former owners dispossessing new buyers, a little indemnification is clearly lessening their worries. Fidelity National’s stock, which had fallen about 10 percent since the foreclosure furor started, rose modestly on Wednesday.

(Update: More here.)

Remember, title insurers sell new homeowners peace of mind – that the home they are in is truly theirs and that no one else holds a lien or any other kind of claim against it. (The exception being the bank that lent to the new homeowners.)

And if the title insurer slipped up in its research, if someone does have a claim, then the title insurer defends in the interest of the latest homeowner and pays any settlement, up to policy limits. Wikipedia has a nice writeup, which includes a lucid account of why the United States is the only country with a developed title insurance market.

The title insurer isn’t too worried about indemnifying the loss of property. After all, we’re talking about a paperwork problem, that, once fixed, leaves the property exactly where it started.

But the insurer is very concerned about the legal costs of defending the title. Lawyers cost money, and the actuaries didn’t price the costs of bank botchery into the policy.

From an insurance perspective, Fidelity National’s action would seem to shift the responsibility from the title company to the bank issuing the warranty. So if the bank screwed up a foreclosure, its errors and omissions policy would ride to the rescue, or so it seems without reading the actual policies.

Obviously, I’m too far removed to know how many properties were improperly foreclosed, but I’m not sanguine about the situation, as the Wall Street Journal and others profess to be.

[Pause to mount soapbox.]

The fundamental rights in this country are life, liberty and property. In our society, before a person is deprived of any of these, there are a whole bunch of laws that have to be followed.

That’s why the march to the gallows is filled with legal challenges. And it’s why suspects get read Miranda warnings. And it’s why all the paperwork has to be in order before the state wrests your home from you.

That can be annoying – sorry – but the power of the state is awesome in these areas. When it comes to abridging fundamental rights, the rules are strict and must be followed. World history is filled with abuses that result from any of these three rights being abridged arbitrarily.

[Dismount soapbox.]

An interesting history of how unclear property rights can make fortunes – and break them – is the history of Cooperstown, N.Y. In the chaotic wake of the Revolution, William Cooper took over lands held by Tories but subdivided before legal title was cleared. Made it rich, lost most of it and somewhere in between raised James Fenimore Cooper.

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