Why Title Insurance Is A “Joke” When It Comes To MERS …
Originally posted by Dave Krieger Clouded Titles Blog
The author of this blog post is a consultant to attorneys in civil litigation matters involving real property law and has won two quiet title actions in his tenure of real estate ownership (as an investor and not as a former real estate agent). For more information about the author, go to his website … CLICK HERE! The opinions expressed in this blog are that of the author and does not constitute the rendering of legal advice. If you need legal advice in matters involving foreclosure and other real estate issues, consult with an attorney who is qualified and competent to render such advice.
It never ceases to amaze me when I hear a real estate agent or investor tell me that they’re not worried about issues involving their planned or recent real estate purchase or sale because “the title insurance will cover it”. That is the biggest myth being propounded in this day and age, largely by the title companies. For decades, we’ve all been led to believe that title policies are “necessary evils” if we want to purchase real estate.
I had an investor contact me the other day to inquire about paying cash for a property as a rental investment. I asked whether they had done a search of the land records to see what the condition of title looked like, only to hear the stock answer, “Do I need to be worried? Won’t the title insurance take care of it if there’s a problem?”
If you can find me a case where a title insurance company actually paid out a claim or paid legal fees to represent an owner or investor where an unknown intervening assignee (called mesne assignees; that’s pronounced “mine”, which means “many”) came back years later, claiming an interest in the subject property and foreclosed on it, then I’ll print a retraction to this post and apologize to every single title company that complained about my post IN WRITING because title companies, like any other insurance company, look for reasons why NOT to pay out on a claim when an issue arises.
When it comes to dealing with the chain of title where MERS (an acronym for Mortgage Electronic Registration Systems Inc.) is concerned, Schedule B of every title commitment or policy issued clearly excludes coverage for issues that arise after the fact if the claim of lien is not recorded in the real property records of the county where the subject property is located. You see, when the MERS business model is applied to title insurance, anything goes. Because MERS’s Achilles’ heel involves NOT recording assignments (except apparently in Pennsylvania according to the latest case ruling, which you can read about on my corporate website … CLICK HERE), the lien transfer isn’t in the public records and is thus excluded from title policy coverage. A lot of good that does a homeowner or investor after the fact, huh? And blindly, real estate deals all over America continue to close and title companies continue to make gobs of money off the backs of hardworking Americans … and for what? Where is the homeowner covered here? When it comes to insuring against the unrecorded interests of mesne assignees, the title companies know they won’t be paying many, if any, claims at all!
When a document related to real property is NOT recorded in the land records (despite the fact that the parties involved in the transaction are aware of it because they allegedly inputted their transfers into the MERS electronic database), there is no “constructive notice to the world”. This is one of the fundamental reasons why we have real property records … to track such constructive notices. When a property changes hands, a deed is generated, signed by the Grantor (assigning and transferring the rights to property to the Grantee) and recorded as soon as possible in the real property records of the county where the property is located. Many states have laws that require the timely filing of these deeds or they could be ruled void.
When it comes to lien interests on title, if the new Grantee has to encumber the property with a mortgage, the lender funding the purchase of the property requires a title policy to insure against loss in the event a defect shows up later that the title company overlooked. The title policy basically covers the title company’s mistake in missing a defect; however, a majority of the homeowners out there buying property think they have title insurance when they don’t. If they get a loan, they pay for the lender’s policy, not a homeowner’s indemnity policy; not unless they ask for one, specifically. Since most of today’s lenders are involved in the MERS System, there’s an “understanding” that with the MERS business model, assignments don’t get recorded and MERS won’t share its database with the title companies, hence, increased risk upon the purchaser when it comes to buying property with MERS in the chain of title. And all the time, MERS says, “We haven’t done anything wrong”? The problem is … when it comes to title policy coverage, MERS whole business model is flawed.
“CAVEAT EMPTOR” TAKES ON A WHOLE NEW PERSPECTIVE …
Understand that title policies only cover what “covered” claims arise from the past, not the future. So many homeowners misunderstand that title policies are a catch-all for every defect on title, no matter where it is in the history of the chain of title to their property … that is patently false! So “buyer beware” when it comes to buying property that has had MERS anywhere in its chain of title!
The intent of the creators of the MERS business model was to set up an electronic database to facilitate transfers of eNotes (or electronically digitized promissory notes) within its own database, which title companies in general do NOT have access to. Title companies rely on “title plants”, or electronic versions of what is recorded in the real property records of any given county, to have ready access to data to confirm condition of title so they can issue a policy. Title companies make money when policies get issued. When property is uninsurable, title companies can’t make any money.
When I was lecturing to the Texas Clerk’s Association “Clerk’s School” a few years ago, one deputy clerk asked me how it was that title companies could insure property that was involved in the MERS business model. After making note of her topical question out loud so the rest could hear how this clerk was thinking “outside of the box” on title insurance, I told the group that the title companies, most of whom have agreed to participate in this folly called the MERS System, simply write around the defects created by the unrecorded assignments, excluding them from coverage under Schedule B. You should have seen the jaws drop!
Sadly, most of the State legislatures have been duped into believing that permissive recording is okay as long as the lien interest has some sort of constructive notice to begin with. There is a difference between actual notice and constructive notice however. Actual notice only occurs when one party becomes aware of another party’s lien interest BEFORE it gets recorded, where on the other hand, constructive notice occurs when the actual recordation takes place. Many states are “race notice” states, which means that whoever records their lien first gets first priority when it comes to getting paid on their recorded lien interest. I can wager here that the mortgage banking industry was behind the effort to dilute our state recordation laws to allow these mesne assignees to get a “go pass” on recording their assigned interests to save money by using MERS. MERSCORP Holdings, Inc., MERS parent, actually promotes that by using the MERS System, MERSCORP members will save millions of dollars (collectively) a year. What they’re really saying is that the county recorders, auditors, clerks and registers of deeds will get screwed out of millions of dollars a year, while MERSCORP members play high-speed transfer games with securitized eNotes on Wall Street. Welcome to the MERS business model folks!
This is why I recommend conducting a chain of title search in the land records BEFORE you plunk one dollar down on a piece of property.
Another common denominator I hear from real estate agents is that they’re not liable for defects in title. They too have been led to believe that “that’s what title insurance is for”. If a hidden transfer is excluded in the title policy, who do you think the homeowner, investor or REIT is going to sue if something goes sideways down the road and the title insurance company won’t pay out on the claim because it’s not covered? Everyone involved in the transaction, that’s who! Which means the agents who handled both ends of the transaction (and their brokers) get to cough up cash out of pocket to defend themselves in court (or maybe their errors and omissions insurance carrier will pay for it … ROFLMFAO).
So you see … when you have Schedule B floating around out there in title insuranceville … you’re not as “safe” as you think you are!
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So the bottom line to this whole equation? Why are we paying for title insurance when there’s really no benefit for “the little guy”?
If there’s anything to take away from this scenario, it’s that there is a big difference between insurable title and marketable title. A title that is insurable means the title insurance company will only cover certain items. Marketable title means title to property that is conveyed with the understanding that there are no defects anywhere in the chain that could haunt the future property owner with litigation at any time down the road … ever!