Kurt PfotenhauerCEO of American Land Title Association
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This week Bruce is joined by Kurt Pfotenhauer. Kurt has been the CEO of American Land Title Association since 2008. Membership for the 100-year association is now at a record high of 3,700. Kurt is a veteran lobbyist and political operative. He handles the title industry’s most senior contacts at the white house, Senate and House of Representatives.
A year and a half ago, we figured out the appraisal industry was very important, and we’ve just figured out that the title industry is even more important. Its funny how we take things for granite when it works well for a long period of time, but as soon as those things stop working, we say “What happened to the lights? They usually turn on every time I hit the switch!”
We’ve just figured out that nothing in real estate moves without a title policy. What people do not realize in the United States is that private property is exchanged by private contract. When you transfer property, you must have someone to certify that transaction and make a public record of it. If you don’t have this system in place, a whole market can come to a halt. Kurt does not think we will see this happen with the REO sales, but every one has gotten a whiff of what it could be like.
The program for the annual convention is finalized in the summer. Bruce doubts anything about this problem could have been mentioned. We had no formal program set up, because planning for an annual convention goes on several months in advance. Nevertheless, this problem did get mentioned in a couple conversations.
If you looked in the dictionary for the definition of “robo-signers”, you probably wouldn’t find it, but most Americans probably know what that means now. Unfortunately, most lawyers know about this as well.
The flawed title system got Kurt’s attention immediately when the news reports first surfaced. When a title company has placed an owner/lender’s policy on a new home sale, we have a contractual obligation to defend that title in court. We relied on the public record to search the chain of title. The highest standard of determining the chain of title is a court decision. When the court decision is questioned, then we get pushed into a huge litigation process to defend those titles for anyone who has bought an REO.
Bruce’s original understanding of MERS was that it tracked beneficial interest of who owned the notes. Bruce has read a lot more about it now, and he wants to clarify that MERS’ purpose is actually to identify who has servicing rights.
Kurt believes that MERS has played an excellent role in adding efficiency to the market. If you are a title searcher, you go into the public record and you find MERS’ name on the mortgage. You then find the MERS identification number. You go onto the MERS system, search for the identification number, and then you can find out who owns the beneficial interest and where the servicing rights are. Without MERS, all updates to that information would have to be done at the courthouse. This would cause the courthouses to fall behind, and it did happen at one time. When the courthouses fell behind, you couldn’t get lien releases for months.
There were rumors that Stuart Title placed restrictions on policies for properties foreclosed on by JPMorgan and a few other lenders. Bruce asks if this was just a temporary concern, or if some insurers are going to not insure certain transfers. Kurt has been informed that Fannie Mae suspended all foreclosures on GMAC loans. JPMorgan voluntarily suspended foreclosures while they looked at their systems.
Fidelity, the largest title insurer in the country, has recently claimed that it would not insure any property on which it did not have an indemnity agreement with the bank owner. This was the first real restriction that Kurt has seen in this market.
The American Land Title Association has been working with Fannie and Freddie to craft an indemnity agreement. What this agreement says is, “I warrant that we have followed proper procedure in foreclosing on this property. Should there be any issues surrounding the foreclosure, we will hold you harmless for the legal cost that you incurred defending it.” An agreement like this will give companies confidence to issue insurance.
Fidelity recently said, “Even if a court sets aside a foreclosure due to a defect in documentation, the foreclosing lender would be required to return to our insurers all funds obtained from that – resulting in no loss under the policy.”
Bruce claims that people who buy at the courthouse steps cannot get title policies. Kurt disagrees. If those buyers seek to purchase a title policy on a property they’ve just paid cash for, they can. Bruce agrees with Kurt, however, if Bruce approached Fidelity and asked for a title policy, there would be no lender for the warranty. Every insurance company has a different appetite for risk. You should ask each company what they are comfortable with. Kurt believes that if you are persistent then you could probably get the policy from some company.
It is difficult to have different foreclosure laws in each state and to know when a foreclosure has been performed correctly. This also means that if something is broken, there is no single solution for each state. In some states, the foreclosures won’t be much of an issue, but in other states, the properties will get caught up in litigation.
Bruce read an article about the warranties, and one of them discussed the possibility of lenders providing a global indemnity. This would go beyond the lender to the securities world. Kurt thinks that is an overstatement, but it may have been a goal at some time. Right now, some of the largest title insurers are trying to get an indemnity with the largest banks. Fannie and Freddie may put some sort of guidance on this issue. This will probably have a fairly quick solution. No one is getting a free house.
Every week Bruce gets an email about another lender going out of business. Bruce asks what happens to title insurance when there is a warranty from a lender that no longer exists. Kurt believes that is an issue that title companies are taking into consideration as they pursue indemnities with lenders. If there is no lender, there is no indemnification. There will be no single and simple solution for all companies. If the warranty disappears for the title company, it wouldn’t necessarily disappear for the holder of the policy. If that happens, the title company must get indemnification from the bank. One of those two institutions will be held responsible.
The title insurance industry is very strictly regulated for its capital reserve requirements. It is a mono-line insurance, meaning they cannot co-mingle the reserves for title insurance with any other kind of reserves. This makes the industry extraordinarily solvent even through the down cycle. The statutory reserves cannot be touched. For example, when Land America failed two years ago, it failed because it got its 1031 exchange funds caught in the auctionary securities market, and it went illiquid. They were not allowed to tap statutory reserves for the title company. Know this, Kurt thinks it is safe to say that the title industry has been a regulatory success story, because it is still around to provide the protection it promised. When Land America failed, the title insurance units were sold to Fidelity National, which continued to operate them. The reserves that stood behind those policies went with those buyers.
The insurance industry cross insures itself. On large projects, companies will spread out the risk between other companies. So even if one company did not have enough reserve cash for a crisis, there would still be reserves from other companies.
On the 20th, New York courts were the first to institute new foreclosure filing requirements. Kurt does not know if this will happen in all states, and he is not familiar with New York’s requirements. He supposes that when you are facing a new problem, any solution may serve as a model for other states.
When Bank of America resumed foreclosure activity, they only resumed foreclosures in the judicial states. That surprised Bruce.
Most investors who buy an REO to resale gets a title insurance binder. Bruce does this when he gets a policy after a trustee sale. Doing this insures him that some sort of company is standing behind his ownership claim. There is always some sort of gray area in the law, but when you have title insurance on that bundle of rights, you have legal indemnification. This gives people involved in the transaction confidence that the collateral for the property is there. Without those guarantees, commerce does not move around very quickly.
Bruce knows of several cases in which a trustee sale buyer bought a property at the courthouse steps, fixed the house, and then was sued for quiet title actions. If those people had policies, then attorneys from the insurance industry would be protecting them. Also, some work would have been done to discover any potential flaws in the title claim. Buying insurance on your title claim gives you piece of mind, because you can be certain that what you have is yours. Even if the claim is challenged, you know the cost will not be covered by you.
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