Importance of Titles in Real Estate Financing
Abstract
Acquisition of real estate is not an easy process because it involves outlay of huge amount of financial resources. Due to the high investment requirement, prospective owners often involve financiers through a loan, which is risky and prone to fraudulent activities. This risk requires a protection against imminent losses through insurance companies. Real estate is one of the properties that require title as a proof of ownership and evidence in case of transfer. The party seeking to extend a loan facility should do a thorough background check through a process called title qualifying. In this process, the lender confirms that the details in the title are accurate and reflects the prevailing conditions. Cognizant of the possible emergence of disputes after issuance of loans, the borrowers and lenders should seek insurance cover should such issues come up in future through a lender’s and owner’s policies under title insurance. The risk is further reduced if Torrens system is updated and utilized effectively. It is an accurate system maintained by the government in nearly real time basis indicating the status of land sizes and ownership. Any other claim outside this system may not be binding explicitly under the law unless it is argues otherwise in courts.
The law of property considers a right to own a piece of property in totality or part, and it is manifested in a title. This interest could be equitable or legal in nature. Due to the commercial and financial interest associated with properties, transfer or proof of ownership is actioned through a document called title. Without this document, proof of ownership is difficult to validate. Although it has a significant economic value, real properties have very low liquidity due to the associated transfer procedures. It is often used as security for securing a loan because of its low liquidity and stability in value. During the transfer of property, conveyance of this document is required to signify a change of ownership, although it may not be all that is needed to prove the same. Real estate ownership is not like those of other real properties; it takes various forms, each of them having implications on how it may be transferred, financed, used as a loan security or improved. If the ownership is to be used as collateral, the title is subjected to scrutiny to ascertain how genuine it is and its suitability in a process called title qualification.
On the other hand, the owner may obtain owner’s policy of the title to insure that the holder of the title has good marketability and free from ownership challenges in future. Although the property buyer may be required to meet the cost of securing lender’s title protection, the policy does not take care of the buyer’s interests, and any claim is only possible if the lender suffers a financial loss emerging from the defects on the title details. The complexity of real estate and properties reveal that there are some defects in the title which may not be revealed explicitly through examination of public records. These defects emerge after a transaction has been concluded and in such instances, the buyer is exposed to huge financial loss. In such circumstances, the owner’s policy come into play and cushions the buyer against these losses. Therefore, before taking up a loan facility for real estate it is important for both the buyer and lender to obtain owner’s and lender’s policies of the title insurance respectively.
One of the main challenges facing real estate titles change of ownership in the land registry without the knowledge of the imminent holder. This challenge is being countered by use of Torrens system. This is a land title system through which a roll of land holding is kept by the government to guarantee title indefeasibility. The transfer of owner is only done through the registry instead of using title deeds. Using this method, it may not be necessary to have title insurance because the details kept at the Torrens titles system is considered accurate. However since it is prone to human error and malicious manipulation, the insurance is still important. One of the problems facing real estate is fraudulent activities by those trusted to offer professional services. An example is that of a Pennsylvania-based attorney, Susan C. Kevra-Shiner, who defrauded several clients by posing to be in a position to issue policies whereas she did not have the required licenses. She issued title insurance policies to unsuspecting clients, whom according to the indictment, stood to lose millions of money (Mortage Fraud Blog 2014).
References
Breuer, W., & Nadler, C. (Eds.). (2013). Real estate finance. New York: Springer Science &
Business Media.
Burke, D. B. (2000). Law of Title Insurance. New York: Aspen Publishers Online.
Mortage Fraud Blog (2014). Attorney Indicted for Title Insurance Fraud. Retrieved from
http://mortgagefraudblog.com/real-estate-attorney-indicted-title-insurance-fraud/
