An extended moratorium on home mortgage foreclosures could wreak havoc on the title insurance business.
Even if banks quickly resume in pressing ahead with foreclosures, some buyers are likely to hesitate buying a home out of foreclosure amid concerns about ownership.
A title insurance policy is issued whenever a home changes hands, guaranteeing that the seller had a right to sell the property. A “clear title” paves the way for a sale. The questions that triggered the moratoriums last week have “clouded” titles.
Buyers, industry experts say, will now naturally wonder whether there might be a “defect” in the title. They’ll also worry about what might happen at the point they decide to resell a house acquired out of foreclosure.
All of these fears, whether based on legitimate concerns or not, already are causing turmoil in the title insurance business.
Lenders whose servicing units have been implicated in the crisis may soon be required to provide warranties to title insurers in order to sell the foreclosed homes on their books.
Bank of America this week agreed to provide such warranties to its national title insurer, Fidelity National Financial.
The crisis flared in mid-September when GMAC said it was halting foreclosures in 23 states amid revelations it had failed to double-check its right to seize particular homes. Bank of America last week announced it would suspend foreclosures in all 50 states while reviewing its procedures.
In response, Old Republic National Title, one of the country’s largest title insurers, announced it would no longer provide title insurance for homes foreclosed on by GMAC as well as JPMorgan Chase.
Whether other title companies do the same remains to be seen.
If they do, the crisis, according to some, would send the already crippled housing market into a tailspin.
Hoping for a silver lining, Colorado Springs Stewart Title Co. sales manager Darrell Harrison sees some potential upside to the moratorium.
“What we hope is that this will spur more short sales, get more distressed properties off the books,” he said.
That’s possible, because banks will be more motivated to get these homes sold rather than allowing them to fall into foreclosure.
A long-term moratorium on sales, however, could have a disastrous effect on lenders.
Unable to divest their portfolios of distressed properties, banks could fail in greater numbers. And with fewer banks around to make loans, fewer homes would be bought and sold and fewer title policies issued.