Written By: Glenn Michaels, Op-Ed Writer
All institutional investors and all players in the Secondary Mortgage Market require that all loans that close contain a title report and a title policy of insurance.
Title insurance is a unique insurance as it is the only insurance that I am aware of that insures the past while all other insurance insures the future against a loss. For example Life Insurance insures against loss upon the eventuality of the insured death. Homeowners insurance and automobile insurance insures the insured against future automobile accidents or other peril. Homeowner insurance insures against future losses as well. However, title insurance insures against the title company issuing a defective title opinion.
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All borrowers will be required to order at origination from a reputable title insurance company a Mortgagee Policy and an optional home owner policy, often called a “fee policy”. In addition the borrower can also purchase an “inflation” or “market” policy to keep up with the increase of the property value.
The Secondary Market requires that the Mortgagee Policy be issued using the American Land Title Association (ALTA) language and coverage. In some states there is an additional cost for an ALTA policy through an endorsement called ALTA Policy or ALTA Coverage.
ALTA is not required for the home owner policy.
The Mortgagee Policy must be issued for the dollar amount of the mortgage and the optional fee policy will be issued in the amount of the sales price of the property being purchased.
The title report which is also known as the Preliminary Title contains several schedules and these schedules can differ depending on the state where the property is located. The title usually begins with a “Schedule A”. This schedule indicates the property being insured, the legal description of the property being insured, the insured, the amount of insurance for the mortgagee and the fee owner. If there is leasehold then there would be Leasehold policy.
Schedule B indicates the history of the property also known as the chain of title. The report also indicates the survey boundaries, tax history and indicates if there are any open taxes, judgments, liens, easements of record and any or all clouds on the title.
Normally prior to the closing the borrower or the borrower’s representative such as their attorney or title/escrow officer will attempt to clear up any title issues prior to the closing. All title exceptions will usually appear in a separate schedule.
In essence title companies state they are insuring everything that is in schedule “A” except that is in schedule “B” or schedule “C’ in some states. It is very important prior to closing to have all title exceptions reviewed and to have as many of these exceptions “omitted” so they can be insured by the title company.
At the closing table a representative from the title company will be present at the closing, usually called a closer. The closer marks up the preliminary title report as he has evidence presented to him that the “exception” is no longer an “exception”. In cases like this the closer will normally write the word “omit” next to all items that are no longer title exceptions. In addition the title closer will also write next to certain parts of the title the word “insure” so the item(s) will be covered by the title policy.
In order to save money when the Mortgagee title search and fee title was ordered it should have been ordered as a simultaneous fee and mortgagee policy. This way there is one search and two policies are issued.
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The Mortgagee Policy insured the lender and whoever acquires the mortgage by assignment. The coverage amount is in the amount of the mortgage. The fee or owner’s policy is issued to the homeowner in the amount of the sales price.
If there is ever a full claim for the total mortgage and sales price the tile company will pay the mortgage holder whatever is owed to them and the homeowner would receive the difference or the equity based on the original sales price unless the borrower purchased the inflation or market endorsement then they would receive the difference based on the current value of the property.
About The Author
Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
