Today, there are an estimated 25 million mortgages serviced within the U.S. Of these, over 4.5 million are going unpaid, as of October 2013 according to DS News. As the aftermath of the housing crisis draws to a close, there remains a lingering problem many servicers still face: a surge in title issues. This relatively sudden increase is a result of incautious origination practices, rushed refinances, and inadequate title underwriting in the high-volume period politely known as the housing bubble.
According to industry estimates, a solid one-third of insured mortgage loans – meaning those with a lender’s title policy – have some title-integrity issues, however remote. And, it is our experience that between seven to ten percent of most servicing portfolios have what could be categorized as “fairly severe” title or documentation defects, which if left unresolved could result in an uncommon asset or complex curative situation, and significant financial losses.
Traditional Vs. Complex Title Defects
The distinction between routine title issues and what we consider “complex title defects” is drawn on (1) the time and difficulty involved in curing the defect and (2) the severity the defect poses to the subject loan’s security interest. Complex issues generally need to be resolved, or at least closely examined to confirm they pose no genuine threat to the underlying security. However, and not insignificantly, certain investors often contractually hold servicers to higher standards than the industry or even state law demands, turning otherwise routine issues into must-fix situations.
Complex issues are usually comprised of (1) lien position concerns; (2) discrepancies or ambiguities in the property description; (3) breaks in the chain of title and missing interests issues; and (4) other various errors and omissions in the recorded documents (e.g., misspelled names, missing homestead language or witness signatures, defective acknowledgments, etc.).
They are typically, in the average servicing portfolio at least, accounts in the foreclosure process in a “hold” status (alongside active bankruptcies, contested foreclosures, and missing collateral file documents). Such holds generate significant costs to the servicer in the form of compensatory fees and repurchase risk, neither of which are likely to be covered by the title insurance policy. In REO, they may be designated as “unable to market,” which in name alone implies the obvious array of costs.
The Curative Factor
Complex issues need to be resolved, and they need to be resolved quickly. The challenge, of course, is in determining how to do so in a way that’s acceptable for both the servicer and its investors. The traditional approach has been to file a claim pursuant to the title policy and then leave the account in the hands of the insurer. But relying solely on the title insurers for curative efforts far too often results in bloated timelines and, in many cases, insufficient cures.
This is largely because the interests of the title company, and even of retained counsel, are simply misaligned with those of the servicers, even if unintentionally. The title companies’ insistent utilization of indemnity offers, or “Letters of Indemnity,” largely disregarded by certain large institutional investors as unacceptable resolutions, is one illustration. The title company may have legally discharged its obligations under the terms of the policy, but the servicer is, practically speaking, in no better place for it.
Filing suit when certain pre-litigation efforts could more swiftly effectuate a cure is another example. Law firms are unsurprisingly adept at litigation, but they over-leverage it as a result. It is rarely needed in the curative context (though it certainly is sometimes), and the “sue first, settle later” mentality tends to carry with it significant costs to the servicer, in terms of both time and fees but also in the form of reputational risk. And unless the title company can easily fix an issue where an LOI – Letter of Intent or specific documentation – won’t suffice, counsel may be required to be retained.
To be sure, the title insurance industry should play a significant role in the curative process. But as the underwriters bear the weight of the title issue influx, it’s prudent for servicers to be pro-active as well. Shaving off even a month from the average claims processing or curative timeline can generate substantial savings.
A Centralized Solution
Although many complex title defects are somewhat nuanced, a streamlined and analytics-driven “process flow” approach can still be effectively leveraged. Particularly if combined with a pre-litigation focus on outbound settlement efforts and a national legal footprint to allow for a centralized solution, this system can optimize the time- and cost-efficiency typically absent from the traditional model.
The ability to successfully locate and obtain cooperation from necessary parties is critical to the premise, but traditional title shops are staffed with title agents, not skilled call agents and skip-tracers. Traditional law firms similarly tend to be myopic in their approach and in their skill-set. As with the title companies, they do what fits their model. Working with a trusted source specializing in curative title services is essential in resolving documentation defects and avoiding financial losses.
It is increasingly clear that a different structure and a better alignment of interests are necessary for servicers looking to stem costs and compete effectively. Getting away from the passivity of the current philosophy and taking a more hands-on approach is critical.
About The Author
Tom Huddleston serves as senior vice president of Carrington Title Services where he is responsible for managing client relationships, as well as business and strategic development focused on providing real estate and technology solutions within the institutional business channel. With more than 30 years of experience in the financial services industry, Tom possesses an extensive knowledge of all aspects of the real estate continuum, including mortgage lending operations, title and settlement management, default asset management, cash management operations, support services, product development and product management.
Jason Pinson is the founder and CEO of Ursus Holdings LLC, which provides Title Curative Services, Consulting, Analytics and Legal Services to the mortgage servicing Industry. He is a graduate of The University of Tulsa College of Law where he was Editor-in-Chief of The International Law Review, holds an MBA from the University Of Tulsa Graduate School Of Business and is a licensed Texas attorney.