Lien Foreclosure: The Problem of Title Insurance

Lien foreclosure, for many homeowners associations, is a measure of last resort to collect severely delinquent association dues or assessments. It is the process by which a homeowners association can file a lawsuit to obtain a judgment against the homeowner and his or her Lot or Unit for the delinquent assessments and associated late fees and legal expenses, and then to have the homeowner’s Lot or Unit sold by the Sheriff at auction to satisfy the judgment. As you might expect, this process does not come without expense and financial risk to the Association, so many factors should be considered before the decision to pursue lien foreclosure is made, including alternative cost-effective collection methods.

A relatively new consideration in the lien foreclosure decision process has arisen due, in large part, to concerns about improper judicial foreclosures in the wake of the nation-wide mortgage meltdown: Will the purchaser of a foreclosed property be able to obtain title insurance? In the vast majority of cases, the answer is “No.”

Title Insurance is generally issued to buyers of property as protection against claims by third parties contesting the nature and extent of the buyer’s legal interest to the property. In the case of most real property transactions, the title history of the property can be determined with reasonable ease, and involves a series of mutual conveyances. However, in the case of a judicial foreclosure, title to the property is transferred by court order, and generally extinguishes other interests in the property.  In addition, most foreclosures of homeowners association liens are for debts less than $10,000.00 inclusive of all costs, for properties that may be valued 10 to 20 times as much. Therefore, there is a much higher likelihood that someone, usually the former owner of the property, may contest the sale. This increased risk has led most title insurance providers and underwriters to shy away from issuing policies to buyers after judicial foreclosures. In fact, some insurers will not issue a title insurance policy on a new sale of a judicially foreclosed property until five years or more after the judicial sale took place.

When title insurance is not available, the buyer takes on a substantial risk having to defend title personally against any adverse claimant without the financial protections that come along with title insurance. This risk can be transferred to the seller through a Warranty Deed, wherein the seller generally agrees to defend the buyer against adverse claims to the property. It is not unusual for the homeowners association that foreclosed its lien to acquire the property at the Sheriff’s sale because there were no other interested bidders.  Without the possibility of title insurance, a homeowners association could find it difficult to find a willing buyer of the property, and may have to consider leasing the property to a tenant until such time as the property can be sold.

Written by: Michael Shupe
September 2014