It has come to our attention that Fidelity National Title Insurance Company, First American Title Insurance Company, Stewart Title Insurance Company and Old Republic Title Insurance Company will no longer issue title insurance in connection with a deed-in-lieu that is held in escrow (or bailment). An example of the scenario where a deed-in-lieu is held in escrow is as follows:
Borrower defaults and lender agrees to forbear from enforcing its rights while borrower attempts to secure financing. In exchange for the time, borrower delivers a deed-in-lieu, which is held escrow/bailment by lender or its counsel pending a default/satisfaction. Upon an event of default, the settlement/loan modification documents provide that the deed-in-lieu is to be released immediately (often without notice to the borrower). At that point, lender would record the deed in its name or in the name of an SPE and seek to obtain title insurance.
In the past, lenders or their assignees have been able to obtain a title insurance policy insuring their interest and hence marketable title. We have learned within the last week or so, these title insurance companies will no longer insure title for an interest obtained under such circumstances. The two main reasons articulated to us for their determination are: (a) the title insurance companies are fearful of being embroiled in litigation over claims that the deed-in-lieu was improperly or prematurely released from escrow (apparently the number of claims concerning this issue has skyrocketed) and (b) there is a concern that other creditors may attack the deed-in-lieu if it turns out that the value of the collateral increases substantially from the time that the deed-in-lieu is placed in escrow and actually recorded, thereby giving the lender a windfall.