Fein, Such, Kahn & Shepard, P.C.

7 Century Drive, Suite 201, Parsippany, NJ 07054

Phone: 973-538-4700 Fax: 973-538-8234

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The Importance of Clearing any Title Claim

Dateline: August, 2001

        The plaintiff in a foreclosure action will always want to complete a title search on the property to be foreclosed. We represent several institutional lenders in these foreclosure actions. The purpose of the title search is to identify and extinguish all ownership and lien interests of all possible parties.

        Often, questions arise about the significance of a Purchase Money Mortgage (“PMM”) versus a Non-Purchase Money Mortgage (Non-PMM).

        A PMM is that type of mortgage entered into by a borrower to purchase the subject property. If a plaintiff forecloses a PMM it can include all lien holders that appear on the title search. This is the case even if a lien (mortgage, judgment, etc.) is filed prior in time to the PMM. The one exception to this rule is tax sale certificates which must be redeemed at or prior to a foreclosure sale.

        Liens which are prior in time to a Non-PMM cannot be included in the foreclosure. All too often, upon reviewing the foreclosure title report, liens are discovered that have been recorded prior to a Non-PMM. These "prior recorded" liens impair title. In other words, without undertaking title clearing efforts, the "prior liens" remain on the eventual title that is passed following a foreclosure sale.

        To undertake title-clearing efforts, we would file a title claim with the prior insurer of the plaintiff's mortgage. If the plaintiff has the proper documentation from the time the loan was originated, we are able to clear these title impairments. Such documentation would include a copy of the title commitment, loan title policy, HUD-1/RESPA Settlement Statement or an Affidavit of Title as signed by the borrowers.

        Examples of title claims would include open prior liens such as a prior recorded mortgage, judgment, federal tax lien or tax sale certificates. These prior liens are usually cleared either by a letter of indemnity from the prior insurer or via copies of the releases that are sent for filing to remove these prior liens from the county records.

         Another example of a title claim is the open ownership interest of a prior owner. In this case an individual who was on title to the property did not sign plaintiff's mortgage at the time it was executed by another co-owner. This type of claim is also resolved by a letter of indemnity or the prior insurer may provide proof of death for that individual.

        In these basic situations, we immediately file a formal "NOTICE OF CLAIM” with the title insurer and demand they take the necessary steps to clear the prior liens or resolve another title claim issue that presents itself in the foreclosure title search. Title insurers often look for any and every excuse to avoid or disclaim liability. These claims can often take 6 or more months to resolve - hence an early claim with diligent follow up is critical. We excel at resolving these title claim issues – often we follow up with as many as 5-10 phone calls and 10-15 letters.

        It must be understood that if we complete a foreclosure sale and there are prior liens which were never addressed, this will impair the marketability of a subsequent real estate owned (“REO”) sale unless the property is worth enough to satisfy the mortgage debt AND the value of the prior liens. This is rarely the case. In the event the foreclosure does go to REO, state law requires that plaintiff pay a realty transfer tax computed on the amount of plaintiff's bid at the sale PLUS the value of the prior liens. Also, it should be noted that many investors of the plaintiff require that a foreclosure sale be held off until the investor's mortgage lien is in first position.

        For the reasons described above it should be understood that a title claim to clear prior liens or other title defects is a necessary and invaluable service.

This Article is a service of the Foreclosure Practice Area of Fein, Such, Kahn & Shepard, P.C. It does not constitute legal advice nor create an attorney-client relationship. For more information contact Alan F. Such at afs@feinsuch.com.

© 2001, Fein, Such, Kahn & Shepard, P.C., all rights reserved. Permission is granted to reproduce and redistribute this article so long as (i) the entire article, including all headings and the copyright notice are included in the reproduction, and (ii) no fee or other charge is imposed.