Pub. 6 2011-2012 Issue 2

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. W HAT ARE THE ADVANTAGES OF obtaining a newpolicy? The following situations would give the lender better cover- age with a new owner’s policy. 1. Indebtedness is greater than policy amount. Example: The original indebtednesswas $100,000, and the lender has a policy with policy limits of $100,000. At fore- closure, with interest, penalties, and fees, the outstanding indebtedness was $125,000. The bank acquired the property in foreclosure. In the case of a total title failure, the lender’s coverage of $100,000 is insufficient to cover its total indebt- edness. A new policy in the amount of $125,000 covers the bank’s entire investment in the property, includ- ing unpaid interest, penalties, fees, the cost of foreclosure, etc., assum- ing the property is worth at least $125,000. 2. Equity coverage. Example: Same scenario as above, except that a cur- rent appraisal also has determined that the current fair market value is $150,000. By obtaining a new owner’s policy in the amount of $150,000, the lender could pro- tect the entire current value of the Advantages of a New Owner’s Policy for a Lender Acquiring Property in a Foreclosure Carol A. Hayden , Esq. , Investors Title Insurance Co. property, not just its outstanding indebtedness. 3. The servicing bank no longer owned the debt. Example: The note had been pooled and sold on the secondary market as a part of a mortgage-backed security. The se- curitized entity, owned by investors who now own the debt, forecloses on the property. The loan-servicing bank bids and acquires the property in foreclosure, without ever having actually re-purchased the debt from the investors. The lender’s coverage does not continue, because the ser- vicing lender no longer owned the debt. The bank has purchased the property out of foreclosure, just like any other third party. 4. The bank still owns the debt, but a related entity purchases the property out of foreclosure. The entity that has been set up to acquire the assets out of foreclosure is not wholly owned by the bank, but by some of the bank’s major share- holders. Since the insured lender or its wholly owned entity did not acquire the property out of foreclo- sure, coverage does not continue for the new entity. 5. Update to the current date. By obtaining a new policy, the coverage extends through the current date and is not limited to encumbrances that attached prior to the original loan policy date. Although, typically, the foreclosure would wipe out junior encumbrances, such as junior liens that the bank hadn’t subordinated to, we have had some claims where a junior lienholder has sued, as- serting that the lien was not wiped out by the foreclosure. This claim would not be covered as a post- policy encumbrance on the original loan policy. But, by obtaining a new policy, defense coverage would be available under the new owner’s policy, as long as the lender did not create the problem by performing a defective foreclosure. After an insured lender acquires a property via foreclosure or a deed in lieu of foreclosure, the lender’s coverage continues under the loan policy. Some lenders choose to purchase a new owner’s policy, despite continued loan policy coverage.