Q: I attempted to buy a Fannie Mae foreclosed home. A few days before closing, the title insurance company used by my attorney, found a title defect & were not willing to insure title unless defect was corrected. My attorney indicated that I might have trouble selling the house in the future if the defect wasn’t corrected, so I cancelled the deal. My questions are:
1. Are some title companies more cautious or reputable than others? Would the sellers title company be required to correct the defect if I could not sell in future, or reimburse the purchase price of the home? Am I still protected if title company goes out of business?
2. Was this a matter of my attorney trying to protect me from protracted legal problems when I tried to sell, but the title company would have eventually been forced to correct the defect when I sold? How long does a title company have to clear up defect? Months? Years?
3. As MERS is involved in over 50% of foreclosures, it is likely that I will encounter this problem again. Is there a way to find out if there is a title defect up front before spending money on inspections, survey, & attorney fees?
A. Title insurance is typically written by agents for the underwriter, similar to other insurance products like home and life. Like any product, the decision to proceed on the risk is up to the insurer. For example, if you are a heavy smoker, a life insurer might charge more for a policy, or not insure at all. Title is no different; some are more cautious than others.
I share your counsel’s concern about future sales. The defect might prevent you from selling, and if the insurer fails to cure the defect (rare, but it happens) you may have a problem.
As for your question about the future, there are transaction costs that are not recoupable unless the contract provides it, and typically a seller in a foreclosure is unwilling to make such concessions. That is what makes buying foreclosures more difficult than many think.