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Why title insurance is important in a bad economy

Title insurance protects your property investment Unlike the Wild West — when declaring property and owning a shotgun was all you needed to become a landowner — the civilized world invented a better way of handling land disputes: Title insurance.

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In tough economic times, title insurance becomes a crucial tool in protecting yourself from others' financial woes. Lenders and homebuyers buy title insurance to ensure that a property can be legally transferred from the seller to the buyer. It protects you (or your mortgage lender) against problems relating to the property's title prior to the date of the policy. For example:

  • If someone forged a signature in a past transfer of the title from one owner to another.
  • If there are unpaid real estate taxes on the property.
  • If there are liens against the property, including foreclosure, that are unresolved.

"Problems with a title happen more often than you can imagine," says Ilyce Glink, a financial expert and publisher of real estate advice site ThinkGlink.com. "In order to avoid a number of problems with the initial sale, tile insurance is must-have for the buyer."

"Title problems often turn up in foreclosures, and with foreclosures come a higher number of claims," says Craig Page, executive vice president and counsel for the California Land Title Association. "When people get into financial trouble, they often look for deep pockets to get them out of a situation, so they file a claim against the title."

Dangers that affect titles in a bad economy

  • Debts: A lien on your property securing the repayment of a debt (such as foreclosure).
  • Divorce: Pension and property are the primary assets that are distributed in a divorce. If you are a couple that has negative equity in a home, you'll likely have to split the debt. Your spouse may contest the title and deny being the true owner to avoid paying his portion of the debt.
  • Fraud and forged signatures on a deed: Fraudulent mortgages can run rampant in hard times.
  • Falsified records: A corrupt real estate agent could declare that a house is marketable when it's not.
  • Seller disclosure: Misinformation related to the history of the home and its physical characteristics, conditions and other factors affecting the value of the property.
  • "Wild deed": An improperly recorded deed that affects ownership rights.
  • Adverse possession: Somebody who possesses the land of another for an extended period of time may be able to claim legal title to that land. They have to prove that they have been in an "actual, open, notorious, exclusive, and continuous occupancy of property" for the period required by state law.

According to a March 2008 report by Fitch Ratings, title insurers suffered historic net losses in 2007 due in part to an unexpected increase in claims related to swelling mortgage foreclosures.

Aside from the folks who are trying to find a way to ditch their mortgages, there are a number of problems that can occur with an unclear title.

"In declining markets, there is a strong argument that purchasing title insurance is more important than ever," says Page. "During these uncertain times, there is an unfortunate increase in unpaid child support and judgment liens, and tax and special district liens from delinquent assessments. In addition, there are now many local governmental agencies that are recording liens associated with maintenance of abandoned foreclosure properties that would be a costly surprise for an unwary buyer."

Everything in the real estate transaction process depends on having a clear title on the property. If your title is tainted, there will be a problem selling the home in the future.

"No one wants to inherit someone else's debt on a property," says Page. "The worse thing that could happen is that an owner finds out that their home is considered ?unmarketable' after the contract is signed."

An unmarketable property is poison when buying or selling a home. If a property doesn't belong to you, has an unpaid mortgage, or a claim filed against it, the property is considered unmarketable by industry standards.

"If you have $100,000 in cash down on a $500,000 property and it turns out that the seller didn't own it and shouldn't have ?sold' it to you, having title insurance means you won't lose money on the transaction," says Glink. "You will lose the property, but you will get the money you invested back."

Another good reason to have title insurance is in the event of a loss.

Title insurance will reimburse you in the event a monetary loss results from a lawsuit against the title. For example, an heir of a deceased property owner could decide he has an interest in the property. He could contest the title in court to determine who is the true owner, resulting in considerable legal fees. Title insurance will cover your legal bills.

Buying tips

When you purchase title insurance, Glink suggests paying close attention to what it covers, including "defects," "encumbrances" and, most importantly, "unmarketable titles" that are not expressly included in the title coverage policy.

"Because of this economy, people are getting smarter about the problems they can have without title insurance," says Glink, who notes that pricing is regulated by each state's department of insurance.

For more, read the basics of title insurance.

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