Mortgage lenders need title insurance too!

Nov 12th, 2013 | By Daniela DeTommaso

Why would that be? In earlier posts, we discussed the significant risks that title insurance covers for homeowners.  But why would mortgage lenders care about title insurance?  They just provide the money, right? Well that’s right, but it’s not the whole story.  Daniela DeTommaso, FCT’s Vice President of Lenders Advantage, explains:

Keep in mind that a lender provides a lot of money for someone wanting to finance a home and, in addition to earning interest, a lender needs to know that its money is secure and will be repaid.  A mortgage is that security – it gives a lender the right to sell or acquire the property should the borrowing owners default on the loan.  So, a mortgage lender can actually become the property owner and need to sell that property to someone else.  Viewed through this lens, the need for title insurance becomes clearer.  The lender needs the same protection from title errors, defects, claims, etc. as any homeowner and needs to know that the title is marketable to allow for the ultimate sale of the property to another buyer.  The lender policy gives this protection.  But, let’s back up a bit.

Mortgage Validity, Enforceability & Priority

The most fundamental element of the lender’s security is its ability to take over the property upon default.  The entire lending proposition relies on this premise.  What if it’s not so?  What if the mortgage is found to be invalid or unenforceable by the lender?  This can occur for a number of reasons, not the least of which is fraud.  A lender policy insures these critical elements of the mortgage and it also insures that the mortgage has its rightful priority against other claims.

Lack of Survey

This is a very interesting provision of the lender policy that benefits both the lender and the borrower.  From a protection viewpoint, the lender has coverage for any defects that would have been shown on an up to date survey.  Since the lender is covered, the survey is redundant and, unless the borrower has other reasons for requiring a survey, the often significant cost of a survey can be avoided.

Numerous other protections are offered in the lender policy for situations such as:

  • Lack of pedestrian or vehicular access to and from the property
  • Failure of the property to contain a single family residence
  • Outstanding work orders against the property
  • Unknown planning act violations

There is also protection built in for things that may occur after the policy is issued.  Certain construction lien situations and lack of appropriate municipal permits for renovations are two common examples in which coverage is provided.  And, there is important fraud and forgery coverage for post-policy events such as a fraudulent mortgage discharge.

The general policy provisions described above provide some insight into the breadth of protection contained in the Lender Policy.  For a full understanding of these and other provisions, you should refer to the actual policy for specific coverage and exclusions.

Clearly, many of these policy elements have been crafted to meet the unique needs of lenders.  Title insurance is not a ‘one size fits all’ concept.  The expertise in each of FCT’s product areas allows unique risks to be analyzed and understood.  The result is an evolving set of title insurance and business solutions for a wide variety of complex customer needs.

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