CPN - January 2009 - (Page 22) INDUSTRY PULSE TITLE INSURANCE No Room for Error Personal-Property Lenders Find Security in Title Insurance By Amanda Metcalf T he capital markets are dry. Defaults are up. Borrower insolvency proceedings are on the rise. Lenders’ security is down. And all of this is revealing the chinks in the titles at the foundation of real estate deals, jeopardizing both the real estate and collateral connected to it. Back when capital was king and deal flow,especially in the secondary markets, motivated lenders more than did other considerations, defects in documentation often remained under wraps.The ultimate consequence—millions of dollars in collateral lost—certainly was great, but in the rare event of a loan default, workouts or alternative sources of capital kept the danger at bay. Historically, noted Theodore Sprink, senior vice president & national marketing director for the UCC Risk Management program at Fidelity National Financial Inc., losses on defaults, especially as a result of a defect in title, were not very high. Lenders did not need insurance until a default arose and prompted a challenge to a company’s security interest in the collateral. “While the defects were always there, they’re only now bubbling to the surface,” he said. A sad game of connect the dots has forced to mind the need for tidier titles, according to Sprink. First, subprime and Alternative A-paper, or Alt-A, loans fell apart.The toxicity spread to traditional residential real estate loans, then commercial real estate loans and finally the commercial asset-backed lending market. Now,lenders, investors and even the regulatory authorities blamed for allowing excessive subprime and Alt-A loans will likely be on the prowl for tools to manage risk relat- Have you or your company recently received coverage in Commercial Property News? www.cpnonline.com Borrower’s Motto: Be Creative __page 18 Net Lease Players Pair Off page 20 U.S. Investors Dream of Dubai __page 25 The Commercial Real Estate Authority September 2008 What’s Your Next Move? Can Previous Cycles Still Provide Insight to Succeed in Tough Times? page 16 Place your press directly inin the hands of Place your press directly the hands of those who matter most—your customers those who matter most—your customers and prospects with custom reprints from prospects with custom reprints from Commercial Property News. CommercialProperty News. The YGS Group is the authorized provider of custom he YGS Group is the authorized provider of custom reprint products from Commercial Property News. reprint products from Commercial Property News. 800.290.5460 I cpn@theYGSgroup.com ed to lien perfection and priority. And now that real estate asset values have plummeted, a relatively new kind of collateral is in town: title insurance for non-real estate collateral,which can be used as part of a real estate transaction or in a non-real estate case where collateral coverage is needed. UCC insurance—named for the Uniform Commercial Code’s Article 8, which deals with investment securities, and Article 9, which defines non-real estate, or personal property, collateral—helps lenders manage risk by insuring validity, enforceability, attachment, perfection and priority relating to liens for such assets as inventory, furniture, fixtures, equipment, accounts receivable, deposit accounts, securities and pledges. Since 2001, major title insurers have issued UCC policies covering $450 billion worth of secured loans, asset sales, refinancings and mergers and acquisitions, reported Sprink, whose company, Fidelity National, offers UCCPlus Insurance Protection. First American Title Insurance Co. offers a similar Eagle 9 UCC Insurance Program, while LandAmerica Commercial Services also offered UCC insurance, though its parent, LandAmerica Financial Group Inc., has been operating under Chapter 11 bankruptcy protection. The $235 million sale of LandAmerica Financial subsidiaries Commonwealth Land Title Insurance Co., Lawyers Title Insurance Corp. and United Capital Title Insurance Co. to Fidelity National closed on Dec. 22. The notion for the product arose,Sprink said,from a simple concept: Every bank originating U.S.real estate-secured loans requires title insurance, so why not banks originating non-real estate financing? The policies typically span the life of the loan—making them suitable for secondary-market transactions. They also cover the cost of defense if a lender’s security interest or priority is challenged by a third party, such as a bankruptcy trustee. Inaccurate searches or filing—both simple mistakes, especially at the hands of junior staff at banks and law firms—can result in millions of dollars worth of lost collateral.However, without UCC insurance, Sprink noted, a lender’s recourse is limited to the cost of the search or filing rendered by the vendor. In Puget Sound Financial L.L.C. v. Unisearch Inc., for example, the Washington Supreme Court upheld the defendant’s claim that it was liable for only $25, the fee for its search on liens for assets held by The Benefit Group Inc., according to a 2003 report, “Limitation of Liability for UCC Searches: Can UCC Insurance Provide an Alternative?” by John Murray, vice president & special counsel for First American Title Insurance’s Chicago National Commercial Services office. When the borrower defaulted on the $100,000 loan, Travelers Insurance Co. was found to have priority on the lien. Unisearch had not reported the earlier lien, as it had been filed under “The Benefits Group Inc.,” the simple difference being the added “s.” UCC insurance offers increased value in mixed-collateral transactions—those with both real estate and non-real estate assets—noted James Prendergast, senior vice president & general counsel for First American Title’s UCC division and an adjunct professor of law for Pepper- 22 COMMERCIAL PROPERTY NEWS • January 2009 • www.cpnonline.com http://www.cpnonline.com http://www.cpnonline.com
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