Since so many of my buyer clients are interested in distressed homes sales (bank owned and foreclosure properties) I wanted to be sure that everyone is aware of a major change in title insurance.

USA Today reports, that Old Republic National Title Insurance, one of the nation’s largest title insurance companies, will no longer write new policies for homes foreclosed upon by J.P. Morgan Chase and Ally Financial’s GMAC Mortgage unit –– a sign that concerns about faulty foreclosure paperwork could now endanger future sales of foreclosed homes. The concern is that other title companies will also refuse to issue policies for major lenders, which could have major ramifications for the housing industry. Because of potential faulty paperwork, homeowners who purchased foreclosures could find their ownership challenged. A bank could have foreclosed upon a property and sold it to a third party. Later, the former homeowner could come forward and say the foreclosure judgment has to be set aside because of faulty documents. The current homeowner could find they no longer have any right to a home they had paid for, and in that case, they’re likely to go to the title insurer and ask that their financial losses be covered.

Title insurance companies don’t want to take on the liability of foreclosures since there is so much risk involved, so they have begun denying policies. With hundreds of thousands of distressed properties moving through the banking system and so many liens on each property, some banks have made paperwork errors or taken shortcuts to try to process the home faster than they should have and these mistakes can be costly for the title companies and future owners of the homes where they were made.

This has major ramifications for home buyers who are looking to buy foreclosures. If you are interested in purchasing a foreclosure, be sure that you speak with legal council before entering into any purchase contracts. An Owner’s Policy of Title Insurance protects a buyer’s cash investment in a real property. If you have a loan on your property your lender will require a separate lender policy. Without the ability to obtain a title policy you will not be able to finance the property and in the case that any future liens of title issues arise you will have no financial protection. If you pay cash to avoid this issue and want to resell the property, your only buyer pool will be cash buyers who are willing to waive title insurance.