The cost of title insurance varies by state and circumstance but is often roughly 0.5% of the mortgage — in the neighborhood of $1,000 for a $200,000 loan. Premiums are expected to rise as title companies brace for new claims.
A homeowner with title insurance shouldn't have to worry if the previous owner stakes a claim to the home. Even a successful claim, experts say, would almost certainly end up with the title company settling with the evicted homeowner — not the new buyer out on the curb.
If they failed to make payments repeatedly, evicted homeowners might not be able to afford their old homes anyway, something a judge would consider. They're more likely to seek a large check than a return to a house with an outsized debt.
The situation is murkier for people who bought their homes with cash and didn't bother with title insurance. The issue of who has proper title in that situation could be uncertain.
"It is not clear, which is why the banks have imposed their own moratoriums on foreclosure," says CEO Tim Dwyer of Entitle Direct Group, the holding company for EnTitle Insurance Co., an Ohio title insurer. "Potentially, you face a legal battle in that situation."
Analysts expect the sudden questions to lead to a flurry of claims on homes now in the hands of other people, some spurred by lawyers trying to capitalize on the uncertainty.
"Lawyers who represent homeowners in foreclosure are going to see an explosion in demand," said Tom Lawler, an independent housing economist in Virginia. In most cases, he noted, "it's unlikely that the foreclosure will actually be reversed and the title will revert to the original borrower. But it's possible."
Babcock, for one, says his phones have been ringing off the hook with calls from people who were foreclosed on and want to know if he can get their houses back.
He has sent off dozens of letters to recent buyers of those homes, alleging that because of defects in the foreclosure process they don't actually own the property, and suggesting impending legal action.
"I'm not saying that all of the titles are toxic," he says. "But many, many, many are."
Mark Stopa, a Tampa, Fla., lawyer who represents hundreds of homeowners facing foreclosure, contends that perhaps a quarter of cases have title problems that merit challenges.
Legal experts concede it's possible that there may be a judge somewhere who's disgusted enough with how the banks conducted themselves to throw out foreclosures. So if you're the new owner of a foreclosed property and worried, what should you do?
First, check to make sure you have a title policy and the title is clear, which means there are no liens against the property and the ownership is clearly established.
The fee to have a title search conducted should be $35 to $100, according to Jason Biro, a 14-year veteran of the mortgage industry who now runs the nonprofit consumer advocacy firm Saving Your American Dream.
If no problems surface, you may still want to run another title search every six months or so if you are interested in selling anytime soon, given the current confusion, Biro says. If you've had the property four years or so, it should be OK, Stopa says.
Those who paid cash and without title insurance will not necessarily be forced to pack up and leave.
That's because many states provide protections for those who bought in good faith, according to Biro — essentially anyone who wasn't trying to exploit a flaw in the foreclosure system. So the buyer of a foreclosed property should still be able to fend off a title-related claim. The downside: That fight could entail significant legal expenses.
In the future, there may be a bigger issue — what happens to foreclosure sales if buyers are concerned that they can't get title insurance. It's rare, but not unheard of, for a title insurance company to be liquidated.
Yet another risk in the flagging economy is that the title insurance company is liquidated, leaving you without protection. That's rare, but it does happen. Credit ratings agency A.M. Best Co. warned buyers as recently as last year of financial problems among some title insurers.
What about buying right now?
Rick Sharga, a RealtyTrac senior vice president, said buyers who are making a foreclosure purchase from a bank shouldn't be concerned. He says they should just double-check to make sure it's possible to get title insurance.
If the title insurance company won't sell a policy on a property, you probably shouldn't buy it, Stopa says.
AP Business Writers David Pitt in Des Moines and Alan Zibel in Washington contributed to this report.
Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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