So, what's title insurance for again?

The Tribune has a good story today about, frankly, the excesses of the cowboy dealing that was going on the last few years. Ticor Title Insurance Company is refusing to pay out on a lender's title insurance policy where Countrywide was the lender on the grounds that Countrywide was grossly negligent in its underwriting of the loan that led to the claim. (Full disclosure: my title company, River West National Title & Escrow, is not a Ticor agent, but it is an agent of a competitor.)

In essence, what happened was this: the owner of a property on the South Side died in 2001 but the deed was fraudulently transferred through forged deeds, notarized documents from relatives, and loans originated by still more relatives. Countrywide quickly foreclosed on the house and sold it to a speculator, who, by the way, found the dead body of the original owner's son inside.

Gross, huh?

Anyone who spent more than five minutes looking at the file would, in my opinion, have seen some red flags A warranty deed allegedly signed in 1996 but containing the name of a recorder of deeds who did not take office until 1999 would be one. But the go-go nature of residential real estate was such that this just didn't happen. Common sense was trumped by greed in many cases.

So who's to blame here? Ticor claims Countrywide botched this one so bad that it has no liability. With due respect to my friends at Ticor, with whom I've done some great deals over the years, I just don't see it that way myself. As Barbara Gilbert notes:

Countrywide hired Ticor Title to do a title search of the property. The housing market was still going great guns at this point, and Ticor was so busy, it subcontracted the title search to a Lombard firm called Tri-Star Title---the now defunct and under investigation for mortgage fraud Tri-Star Title.

Stated more simply, Ticor or its agent blew it by hiring a bad title searcher and not raising these issues. You buy title insurance for that very reason: to look for possible defects in title such as fraud. I agree with Tom McNulty of Neal, Gerber & Eisenberg:

All the fail-safes in place didn't work. What should have happened was the title researcher would have seen the problem with the deed and would have reported it to Ticor, which would have reported it to Countrywide. Ticor should have said, 'We are not going to insure this title until the following questions are answered.'

Yes, Countrywide did some really dumb deals, but this one does not fall in its lap. Ticor had a duty to make sure title was clear before issuing a commitment and then entering into an insurance contract with Countrywide.

In addition, the potential chaos creates a public policy reason for being cautions, as the Trib points out. "The fate of tens of thousands of troubled properties around the country would be thrown into limbo while lenders and title insurers duke it out."

I'll be asking the River West folks to keep an eye on this one.