Posting for

Wednesday, June 17, 1998

by: Bert Rush

brush@firstam.com

STREAMLINED PROCEDURES/EXAMINATION AND OPINION/ELIMINATING MORTGAGES

One of the stories included in Claims Chronicles 8 suggests streamlining run amok. Today we'll invite John Hollenbeck to tell us why the "Streamlined Procedures," written about in his March '97 memo, do not make us vulnerable so this type of claim.

The claim arose in Brentwood, CA, where a First American agent was asked to insure the sale of a home for about $2.6 million. The agent relies on an automated title plant, so the title order caused a computer run to be generated showing documents of record affecting the PIQ for the past ten years.

The examiner reviewed the computer run and noticed there were to deeds of trust recorded on 10/30/90 in amounts of $1,500,000 and $725,000, respectively. Scanning further down the page, the examiner saw two documents coded "PR" for "partial reconveyance (release)" which referenced the same instrument numbers as the aforesaid deeds of trust. The examiner concluded that the deeds of trust had probably encumbered the property under search as well as other property, and that the partial recons operated to fully release the PIQ leaving the (supposed) other property still encumbered. This might make sense, because if the subject deeds of trust still affected the PIQ then the encumbrances of record would appear to total about $3.7 million--or about $1.1 million more than the pending sale price.

The examiner disregarded the subject deeds of trust, and caused First American's new owner's policy to be issued with no exception(s) for them.

After closing our new insured owner was confronted by the lender on the subject D/Ts (same lender on both). The lender claims the D/Ts haven't been released. We pulled copies of the partial recons and now find that they affected only a 1.25 strip along the rear boundary of the PIQ(!)

The story is that the prior owner got into a beef with his neighbor to the rear when the prior owner was installing a tennis court in his backyard. The neighbor went to the City, and the City engineer agreed the prior owner's fence encroached onto the neighbor's land. The City required the prior owner to agree to a lot line adjustment--and the prior owner gave his neighbor a deed to the 1.25 foot strip. Then, almost as an afterthought, the City required that the prior owner's mortgage lenders execute partial reconveyances affecting the strip. These were the partial recons that showed up (coded "PR") on the computer run.

First American has paid about $2.4 million to purchase the offending D/Ts--and we're now pursuing the seller for recovery. The seller received almost $1.1 million at close of escrow--quite a windfall--and we suspect this money is out of the country. We're having to deal with the seller through his lawyer. Legal expenses exceed $180,000 to date.

Although this claim arises in the context of an automated title plant, it's easy to imagine the same thing happening in a courthouse search county, with the examiner looking at a summary or cover sheet on top of an abstract or search package--and not bothering to look at underlying copies of docs.

So, John, is this an example of "streamlined procedures?"

Bert:

Here is my response:

The company advocates the implementation of Streamlined Searching Procedures as a part of its overall reengineering strategy. For California, these procedures are outlined in a March '97 memo entitled Streamlined Searching Procedures. Using this memo as a model, other States are encouraged to outline streamlined searching procedures which make sense in the market involved.

The core behind streamlined searching procedures is the introduction of "multiple assumption point searching." Instead of solely relying on a prior policy as a starting point for a title examination, the examiner would rely on two assumption points. The first "assumption point" would be a prior policy, which is used for purposes of determining certain exceptions existing at the date of policy such as easements and CC&Rs. The second "assumption point" would be the last insured deed recorded concurrently with an insured first mortgage. This assumption point is used for determining vesting and monetary encumbrances. I'll track down a copy of this memo and send it to everybody in a subsequent e-mail. I would encourage its implementation. If you have concerns, this would be a perfect forum to open up discussion.

Meanwhile, let me address Bert's claim.

The reason for this claim is the failure of the title examiner to do his or her job. It had nothing to do with streamlined procedures. The biggest risk here is that the company allows claims such as this to prevent it from implementing much needed improvements in its searching and examining processes.

For two separate and distinct reasons, this would have never been a claim had streamlined procedures been followed. First, under the company advocated streamlined procedures, the examiner would have actually pulled a copy of the partial reconveyances and reviewed the legal descriptions. In this case, the examiner relied on the fact that the partial reconveyances were posted to the property. Not very smart, particularly in light of the fact that no subsequent transaction existed which would likely have generated the funds necessary to pay down the mortgages to give rise to the partial releases. Second, under our streamlined searching procedures, an examiner may disregard a mortgage (albeit not released) if a subsequently insured deed and insured first mortgage appear in the chain. This simply was not the case in this claim.

John

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Following up on our posting Wednesday, David Dickson (Memphis) wrote:

Re: Streamlined Procedures, one problem we see with agents in Arkansas is what these procedures do to the substantial investment they have in their abstract plants(I assume Arkansas isn't unique here) . They want to have to go back and pore over documents in the chain of title that have long since lost any meaning. They fear that the procedures suggested by John's memo will allow people doing courthouse "standup searches" to destroy the value of their plants and are constantly busy lobbying to tighten abstractor licensing. Licensing which usually features a requirement that to operate in a county you have to have a title plant and defines abstracting as going near the court house thinking about who might own some piece of land.

Reply to David: I'm not going to weigh in against the agents. Our agents are our customers--we want and need them to succeed. But most agents realize that in order to remain competitive with all the changes taking place they simply have to improve productivity within their operations. If their operations aren't measurably more productive in the next few years, they might not survive. Streamlined procedures are a means for the agent to claim greater productivity. They have to find other ways to beat sloppy competition--how about "customer satisfaction," how about fast service w/o greater risk to the consumer or underwriter? How about concentrating on smooth closings to make realtors, consumers, etc. want to use you again? This was our pitch (one of 'em) at the National Training Meeting in May.