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Real estate title issues in the next decade
by Dave Pelligrinelli
| 2009/12/31 |
The past decade, from 2000 to 2009, has seen the most developments, and activity in the real estate industry; and by extension the title industry. After a slow escalation in volume which started in 1999, the first few years of the decade exploded into a frenzy of activity for those who search, examine, insure, or process title work. Only a handful of years later this trend reversed course, reverting back to the capacity of the 90's, and lower.
It wasn't just the volume that changed during that time. The nature of the activity, and the structure of the transactions taking place did not resemble the landscape of the past decades, even the past century. The history of the '00 decade will affect real estate records, title searching, and the status of properties forever. For 50 years or more, those involved in the business of dealing with property title will be cursing this decade for its complicating of title records.
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To see where these complications will lie, let's go back a few decades to observe the changes to the nature of residential real estate ownership and transfer. In the 1950's and 1960's, ownership of single family homes became commonplace for the first time, due to the advent of planned subdivisions, returning GI's starting families, and overall prosperity after WW2. Title issues were typically simple: guy buys house, maybe financed through builder or local bank. Guy keeps house for 25 years+. Abstracting a clear picture of title history was simple because of the uncomplicated nature of the transactions.
The 1970's showed the first glimpse of some changes to American demographics. People began to move more frequently, and own their properties differently. Several government programs began to influence the real estate market in the 1970's. Incentive programs for ownership, as well as the government's involvement in the secondary mortgage market began to kick in during the 1970's, with the expansion of Fannie Mae and then Ginnie Mae. The result was the first significant change to the pace and type of activity in real estate records recording.
In the 1980's, Americans began to be more creative with their ownership and financing of real estate. Lower downpayments and PMI became more popular, along with 2nd mortgages. It was the beginning of the idea that residential real estate could be used as a business venture. Selling a prior residence to move up, or to a different location became less risky, and even profitable. The "yuppie" years in the mid 80's also fueled this trend.
In the 1990's, a floodgate opened up, of mechanisms to turn loose fast transactions of real estate. Automated loan underwriting, a liquid secondary mortgage market, and rapidly appreciating prices created an environment very appetizing to consumers. During the early part of the decade, losses from the stock market, and higher interest rates kept the stampede at bay until in the later part of the decade everything opened up.
By 2000, the phenomenon of flipping houses, tapping home equity lines, and "investing" in real estate was mainstream. The absurd proliferation of "Flip This House" shows on TV made the less-silly real estate infomercials from the 80's look tame by comparison. (Remember Tom Vu and Dave Del Dotto?) A frenzied rush into real estate, by individuals of many backgrounds outside of the industry created a volume of activity never seen before. Besides the sheer volume, the nature of the transactions was different from past decades. The mechanism of MERS and other nominee trustees, along with serial refinancings, second, third, and HELOC mortgages, make the search process, abstracting, and examination of title more complex than looking at a simple purchase and sale from a typical title chain in the 60's or 7o's.
The title business in the next decades will not be for the faint of heart, or inexperienced. Serious abstracting of title records will become the norm. Electronic title searches will be insufficient for genuine interested parties, although "insuring over" will become more accepted. Sorting through the myriad of records in a title chain from this past decade will be complex. MERS nominees, foreclosures, loan modifications, short sales, 2nd, 3rd, HELOCS, MBS's, flipped ownership, straw buyers, will muddy the title waters. Not to mention the sheer volume of recordings, and serious shortfalls in municipal budgets, which can erode the integrity of the title records themselves.
Some questions which may affect title opinions in the future may become more commonplace. If a foreclosure was found to be handled improperly, can a prior borrower claim against the title? If a lender was found to have not completely owned the loan? What if proper notices were not given to the mortgagee? What happens if it is discovered that a lender rejected a government mandated modification improperly? Will case law result in mortgage broker fraud invalidating a lien? In some recent cases, judges have invalidated mortgages when they did not like how the lender handled the foreclosure, in a new form of "judicial activism." A searcher and/or examiner can cancel off a mortgage with this "release", and not show it on an abstract. But should they? What type of asterisk notations will need to go on title reports in the future? We are already seeing conflicts in the order and priority of payoffs on refinancings with multiple prior loans and multiple new loans. This is just a small part of the future problems to be resolved.
The craft of understanding property title is a matter of "I's dotted and T's crossed." In the past 10 years, there were so many more "I's and T's" that the error rate, and amount of ambiguity is bound to be higher. Many in the real estate industry, from brokers to agents to abstractors had less experience in the industry as many new representatives entered the business to fill the demand. At the same time, even seasoned professionals were not used to some of the mechanisms of transactions, since many were new to the era.
Skilled expertise will be necessary to sort out the chaos of the 2000's decade. Even with that, some of the issues will just end up being insured over, or resolved through litigation. The real estate industry will require assistance from title abstractors with extraordinary skills and expertise. While electronic searching will replace the need for amateur records-fetchers, hands-on examination and knowledgeable understanding of documents cannot be replaced when the title history is complex. I expect a two-tier pricing model to become more common for title searching. One price level for "easy" searches, and another for those properties with complex records.
There are lots of those ready to come out of the woodwork.
Dave Pelligrinelli
TitleSeachBlog.com
daveafx@gmail.com
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