Is There a Lawyer in The House - Continued

Gaylene: My pleasure, Tom.

NP: What is an owner's title policy, and what is a mortgagee title policy, and why are they needed?

Gaylene: Essentially, an owner's title insures the buyer that the seller actually had the authority to sell the property and that a valid conveyance has taken place. It insures the buyer there are no encumbrances against the property (other than as specifically set out in the title policy) prior to their taking title. This means when a buyer purchases a property and an owner's title policy is issued, and at later date, someone presents a claim to title, or a lien or other encumbrance was missed during title search and therefore was not specifically excepted to in the title policy, the buyer would be protected from any loss as a result of the outstanding claim, up to the amount of the title insurance policy.

NP: So in a nutshell, if I buy a property, and receive an owner's title policy, and a long lost heir appears, or a husband sold me the property, without the wife's permission, or a lender way back when was not paid off, I would be protected up to the amount of the policy? But without an owner's title policy and a lien pops up, or an heir who has claim to the property pops up, I am more or less stuck, unless I want to get involved in a long drawn out court battle with the sellers to get my money back.

Gaylene: In a nutshell, that is correct. The title insurance company will either resolve the outstanding claim, at its cost, or pay you, as the buyer for your actual loss, up to the amount of the title policy.

NP: Ok, now explain a mortgagee title policy.

Gaylene: A mortgagee title policy is similar to the owner's title policy, except it is insuring the lender (only) that the lien is valid, and insures the lender's lien position, whether it be in first lien position, second lien position, or even third or fourth lien position.

NP: So, again, in a nutshell, if I sell my property and take back a note that I believe to be in first position, and I obtain a mortgagee title policy, and then after the closing, another lien pops up that turns out to be superior to mine, I would be insured against any losses up to the amount of the loan (i.e., the amount of the title policy). If there were no mortgagee policy, I would be stuck with any losses because my note got "demoted" so to speak.

Gaylene: In a nutshell, that is correct. Just remember, that to recover, there must be a loss to the lender, meaning that the borrower has to stop paying the debt before there can be any recovery.

NP: Do institutional lenders require a mortgagee title policy.

Gaylene: Absolutely. In fact, if you are going to sell these loans in the secondary market to an institutional lender, you must have mortgagee title insurance before they can be purchased.

NP: Thanks for clearing that up. I know when I purchase a note, I require the note sellers furnish a mortgagee title insurance policy. If the sellers do not already have one, takes away from the money they would receive. What is the cost of a mortgagee title insurance policy?

Gaylene: If you are purchasing the mortgagee title policy and no owner title policy is being issued, it is the same rate schedule as an owner's title policy. A $100,000 mortgagee title policy would be the same price as a $100,000 owner's title policy.

NP: If I were to sell my property and use owner financing, and furnish the buyer with an owner's title policy, how much would a mortgagee title policy be.

Gaylene: If the mortgage title policy is purchased simultaneously with the owner's title policy, the owner's title policy is at the standard rate, and the cost for the mortgagee title policy is minimal…in the $150 range. It is almost like getting two policies for the price of one.

NP: Thanks for clearing that up. I know I often see people sell their property using owner financing, will close at a title company, but do not get the mortgagee policy. When they try to sell the note, they have to purchase the mortgagee policy at full price. It does make more sense to just pay the little extra and get the added coverage, doesn't it…especially if you might be thinking of selling that note in the future.

Gaylene: That makes sense, yes. It is false economy not to get both at the same time on the front end.

NP: Many of my readers are out of Texas. We are a deed of trust state. Some states are mortgage states. What is a deed of trust and what is a mortgage, and how are they different.

Gaylene: A mortgage and deed of trust perform somewhat the same function. Some states use a deed of trust, some states use a mortgage. Both are security instruments that give the lender the recourse to foreclose on the property if the terms of the loan are not being met. The main difference is the foreclosure procedure.

A deed of trust conveys title to a trustee for the benefit of the lender until the loan has been satisfied. Should the payor stop making payments, the trustee would then notify the payor they are in default, and go through the procedures to sell the property on the court house steps. No courts are involved. This is called a non judicial foreclosure.

With a mortgage, the lender must actually sue the payor in a court of law. This is called judicial foreclosure. It can be time consuming and expensive.

NP: So it is the deed of trust or mortgage that is recorded in the courthouse that tells the world there is a lien against the property.

Gaylene: Yes.

NP: Is there a "standard deed of trust"?

Gaylene: There is really no standard deed of trust form. The Texas Bar has created some forms, but they are by no means standard. Each lender has there own requirements based upon different issues they have dealt with in prior transactions. Their current deed of trust forms will reflect these modifications.

NP: Yes, I have seen deeds of trust that are 28 pages, and some that are 8 pages.

Gaylene: I have clients where the deed of trust is 5 pages, and clients where the deed of trust is well over 28 pages.

NP: Are there any provision that you suggest to always have in a deed of trust?

Gaylene: Of course, you want the default provision, and specific foreclosure provision. Some forms will simply say "what ever the State of Texas requires" in connection with the required foreclosure proceeding.. You would want a due on sale clause, to clarify that the note is not assumable unless you specifically intend for it to be assumable.

NP: If I am a newbie, and want to sell my property using owner financing, but have fears of the legalities of notes, and how to write a deed of trust, can a title company help them?

Gaylene: Of course. In my office, we prepare these frequently. All I really need is a few minutes of your time to find out what your goals and needs are. I can draft the document to fit those needs. We do it all the time for investors and home owners. The charge is generally nominal, but depends on the particular situation.

NP: So there is no reason to be afraid of the paperwork. You can help them there.

Gaylene: Absolutely. We do it on a regular basis.

NP: In the next issue of THE NOTE PROFESSOR NEWSLETTER, I want to discuss the foreclosure process. It is too lengthy to go into here, but I would like to set the stage a little. I know you can only speak for Texas, but here is the foreclosure process difficult?

Gaylene: Not really.

NP: And I will let this be the last question until the next issue. How much does it cost to foreclose on a property?

Gaylene: I can foreclose in Dallas County and Collin County for about $750, plus costs (recording, postage, and other fees). Possibly less if the situation is simple or maybe a bit more if the transaction is somewhat complicated. This is, of course, assuming that nothing out of the ordinary comes up. I can send the required notification letters, file and post the notice, for around the $750 - $1000 mark. So between $750 and $1,500 should get the job done in most cases. For foreclosures in surrounding counties I would have to charge additional amounts to compensate for my time in traveling to these locations.

NP: I hear figures of a couple of thousand and upwards to foreclose. Are you saying these prices are high?

Gaylene: I am saying I can foreclose on a property for between $750 and $1,500.

NP: Thanks, Gaylene. That is good to know.

In the next issue, we will be discussing the foreclosure process from beginning to end, deed in lieu of foreclosure, and wrap notes, or all inclusive trust deeds. If you have some general questions for Gaylene, please email me, and I will ask her. If you have a specific question, call Gaylene.

I want to reemphasize that this is general information, and not to be used for specific legal issues. You should consult a competent real estate attorney for any specific information. If you are in real estate, and do not have a real estate attorney, you need to be taken out of the gene pool.

Gaylene Rogers Lonergan is Board Certified in Commercial Real Estate Law by the Texas Board of Legal Specialization. She has practiced real estate law in the Dallas area for over 20 years. She is also a fee attorney and operates a closing office for LandAmerica Commonwealth Title of Dallas, Inc. If you would like to contact Gaylene, here is her contact information.

Phone: 214.503.7509
Email: rogersg@lonerganlaw.com