As lenders pick up the pace of foreclosures in the commonwealth, First American, one of the largest title insurance companies in state, announced last month it won’t insure the titles to properties entering the foreclosure process after July 17, 2015, unless the foreclosing entity has been compliant with the state’s foreclosure laws and “has procured a final decree from a court of competent jurisdiction that shows compliance with the Pinti case.”

The announcement, written by First American special counsel Gene Gurvits, included a summary of Pinti v. Emigrant Mortgage Co. Inc., where the Supreme Judicial Court reversed a foreclosure because while the mortgagee followed the state’s foreclosure law, it failed to follow its own requirement to notify the mortgagor of their right to challenge the foreclosure in court.

That decision troubled title insurance companies doing business in the Bay State because that sort of error is not ordinarily part of the title record. Any property that a lender begins to foreclose on after July 17, 2015, could have an “invisible” title defect, like Pinti, and that increases the title insurer’s risk.

“The Pinti decision will result in a treasure hunt of the registry of deeds ‘contrary to the purposes of the recording system,’” Gurvits wrote.

Gurvits’ memo gave examples of potential problems with insuring titles in light of the Pinti decision, noting that various lenders have different internal requirements and ensuring compliance with them individually will be complex. In addition, the person who signs the affidavit that the default notice was sent out may not be the same person who actually sent it out.

“These factors make the insurability of titles based on such affidavits questionable at best,” Gurvits wrote.

In a recent interview, Gurvits said he thought the memo was a reasonable response to the Pinti decision and wouldn’t necessarily result in a lot of additional expenses or delays.

“I’m not sure it’s going to add a lot of additional work,” Gurvits said. Prior to the decision, the borrower had to vacate the property prior to foreclosure. In the process, the borrower had the right to challenge the foreclosure. It’s the difference between the contract being void [completely unenforceable] and voidable [partially enforceable].”

Gurvits said he thinks the memo speaks for itself.

“It was the result of careful analysis by First American on the best way to approach to the situation from the point of view of both lenders and agents,” he said.

Scaring Off The Buyers

Richard Serkey, of Winokur, Serkey & Rosenberg PC and co-chair of the title standards committee of the Real Estate Bar Association for Massachusetts (REBA) said he thinks American Standard’s new policy is going to increase the cost of purchasing a foreclosed-upon property.

“It’s a cost that’s measured in not only dollars, but delays,” Serkey said. “It certainly lessens the marketability of a property that’s been through the foreclosure process. It’s either going to cause a further delay in commerce or it’s going to chill the sale to a third-party buyer.”

Serkey said there are many scenarios could add to the expense of delay of selling foreclosed homes.

“Imagine a foreclosure when the property is vacant,” Serkey said. “You’d have to file an eviction against a non-existent occupant in order to document the process. Then you’d have to locate the person to serve them. I don’t think leaving an envelope of the doorstep of their last known address is going to satisfy the court.”

Serkey said he understands why a title insurance company would require the additional protection of a judicial decree, but he thinks it will “dry up the number of third parties interested in purchasing a foreclosure to a trickle.”

Serkey said other title insurance companies practicing in Massachusetts may follow First American’s lead.

“In my experience, when one company takes a position, other companies very often take similar positions,” Serkey said. “It’s not because they’re in collusion with each other, but they all face the same risks and they’re all competing for the same business. This particular aspect of [real estate law] has been so fraught with uncertainty and litigation that all the title insurance companies are terribly scared because they don’t know what future SJC decisions will bring.”

Attorney Rich Vetstein of Vetstein Law Group said First American’s memo could have some unintended consequences.

“Without a doubt, this makes foreclosed properties less marketable and may result in additional ‘shadow inventory’ for REO/bank owned property,” Vetstein said. “It’s also going to affect real estate investors and flippers who deal with distressed properties. On the other side, it could be an opportunity for growth for Stewart Title, Old Republic, Chicago and Westcor as they do not have a similar policy.”

He added that this development may push the pending Title Clearing Bill “over the hump, especially with Gov. [Charlie] Baker in office.”

Fidelity Has A Lighter Response

On Aug. 27, The Fidelity Group sent a four-page memo to their approved agents and other attorneys that echoed First American’s concerns about the SJC’s decision in the Pinti case. It also said the company would require verification that pre-foreclosure default notices were sent before insuring the title on a property that had been foreclosed on.

The memo encouraged recipients and their staffs to contact their legislators and ask them to support S. 1981, currently before the Senate. The bill would provide that an affidavit of sale pursuant to M.G.L. Ch. 244 Sec. 15 and would become conclusive evidence of compliance with M.G.L. Ch. 244 and Ch. 183 Sec. 21, unless challenged by the mortgagor in a court action within three years.

The state senate is expected to vote on the bill shortly after Labor Day before moving on to the House.

Attorney Joel Stein’s practice concentrates on real estate law, title services, title insurance and Land Court practice. He also chairs the REBA committee on title insurance. Stein said he thinks legislative action could make the post-Pinti landscape a little more clear.

“Some people think it [First American’s memo] was drastic, but it’s based on good, practical advice,” Stein said. “I think we need the Legislature to act.”

Stein said that after the SJC handed down the Eaton decision in 2012, there was confusion about who was authorized to sign “the Eaton affidavit,” as it came to be known.  He said he’d like to see the state Legislature codify who is authorized to sign an affidavit that pre-foreclosure default notices were sent to mortgagors.

“After Eaton, there was a period of time where there were no provisions for who would provide the Eaton affidavit,” Stein said. “Then the legislature stepped in and gave us those provisions. I’d like to see them do the same with Pinti.”