Many lenders have asked me lately if they are a successful bidder at foreclosure, should they take title to the real estate secured by the foreclosed original loan. In this situation, lenders want to know if they should obtain a new owner’s title insurance policy after a foreclosure or a deed in lieu of foreclosure, or should they continue to rely on the existing loan policy?
Usually, a loan policy continues to protect the lender after it takes title to the land and improvements by foreclosure or a deed in lieu of foreclosure. However, in some situations, the insurance company may attempt to deny coverage after the lender has obtained title. It is important to note that there are limitations to relying on an existing loan policy.
If the lender takes title under a different entity than the original insured, an insurer may try to deny coverage. This result can occur when a lender takes title in the name of an affiliate without assigning the deed of trust or mortgage. It should be noted that, in general, a loan policy includes the originally named lender and “its successors and assigns”. The successor and assign language provide for the continuation of coverage under the loan policy after an assignment of the loan is granted. Without an assignment, the new entity is not considered an insured under the loan policy.
If a loan is assigned and the loan policy continues to provide protection, it should be noted that obtaining an owner’s insurance policy offers some benefits beyond that of a loan policy. One reason is that a loan policy only insures the lesser of the face amount of the policy or outstanding amount of secured debt. However, an owner policy insures the face amount or purchase price of the insurance policy. Therefore, an owner policy provides a higher coverage amount.
Also, a loan policy does not cover the lender if the foreclosure was not done properly. This is because the effective date of the policy is the time of the original deed of trust or any subsequent endorsement or modification, therefore, matters arising after the effective date are not covered. Obtaining an owner’s policy after a foreclosure will create a new effective date and insure title during up to the date of the foreclosure.
Finally, “loss” is defined differently under an owner policy than under a loan policy. Under an owner policy, the insurer is obligated to provide coverage to the insured at “first loss.” Under a loan policy, a “loss” only occurs after the collateral is liquidated and all collection efforts have been exhausted.
Obviously, obtaining a new owner policy creates additional cost, which discourages lenders from getting a new owner policy. However, the benefits of an owner policy often outweigh the additional costs. Therefore, my advice to lenders is to consider buying an owner title insurance policy whenever taking title to real property.
If you have any questions about this process or wish to discuss this topic further, please contact me at Ewise@eagletitlellc.com.
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