I received a call last week from a mortgage broker with a question about a possible title insurance claim. He was contacted by a client who has a friend that refinanced in 2006. At closing the homeowners paid off their existing mortgage, a municipal utility lien for $15,000 and received a small amount of cash back to make some home improvements.
As rates continued to drop they refinanced again at the end of 2007. As part of the process the new lender required a new lender’s title insurance policy. When the title search was complete, the $15,000 municipal lien that was supposedly paid in full in 2006 was still showing as a lien against the property. The amount of the lien had increased another $500. The same title company who insured the transaction in 2006 was insuring the new transaction, and had assured the new lender that the lien was paid. The title company said the municipality never filed the appropriate satisfaction; unfortunately, the new lender took the title company’s word for it and never asked for proof of that payment.
Fast forward to January 2014 and the homeowners would like to refinance once again. The new lender orders the title search and, you guessed it, the lien is still there. This time the homeowners contact the municipal authority, who had no record of the lien being paid. Then they reach out to the title company, who assured everyone that they paid the lien in 2006, only to discover that their phone has been disconnected and they’re out of business.
I know what you’re thinking. How did the homeowners not know that the lien was never satisfied? Wouldn’t they be receiving past due notices? Unfortunately, there are some municipalities that do a very poor job when it comes to municipal lien collection. They place a lien against the property and forget about it. No past due notices, no collection letters etc. They know that when the homeowner goes to refinance or sell the property, the lien will appear and they’ll most likely get paid by someone.
In this circumstance the homeowners contacted the title agent’s underwriter to file a claim. But the underwriter denied the claim, taking the position that they were insuring the lender and not the homeowner. The way title insurance works is that you purchase an owner’s title policy when you buy the house. When you refinance, the lender is the only one being insured. Additionally, the underwriter claimed that the $15,000 was being held in escrow which, in their opinion, was not their responsibility, and said that their former agent claimed that a rogue employee stole the money from the escrow account.
All hope is not lost for these particular homeowners. We advised them to contact their current lender, who is the insured by the lender’s policy, and have the lender file a claim with the underwriter. The lender’s title policy insures the lender that their mortgage will be in first lien position. Since the municipal lien existed prior to the current mortgage, the municipal lien is currently in first position. Once the lender files a claim the underwriter will most likely agree to satisfy the lien.
These homeowners most likely have more than a couple of hours of phone calls and emails in their future before this whole mess is cleared up. It turns out that the mortgage broker, who assisted them with their refinances in 2006 and 2007, referred them to this particular title company because he had an ownership interest in the company.
If you’ve been reading this blog for any length of time, you know that we are proponents of independent companies that don’t have their hands in someone else’s pocket. Real estate companies should sell real estate, lenders should originate mortgage loans and settlement companies should make certain that you get a free and clear title along with a drama-free closing. When the real estate agent/broker or lender has an ownership interest in the settlement company they’re referring you to, there’s absolutely no benefit to you as the consumer. To the contrary, you’ll most likely be paying more money and trying to figure out who’s representing your best interests.