06 November 2010

Fannie, Freddie want Servicers to assume Risk


Fannie Mae and Freddie Mac are in talks with U.S. title insurers to require mortgage servicers to assume insurers' liabilities if there are legal challenges to foreclosures on homes whose mortgages Fannie and Freddie underwrote, a source familiar with the matter said.

Fannie Mae and Freddie Mac, which are controlled by the U.S. government, together own or guarantee more than half of the $11 trillion of U.S. home mortgages.

Allegations that some banks used shoddy paperwork in processing foreclosures has sparked a wave of lawsuits, and more borrowers are expected to challenge foreclosures in court.

The disputed foreclosures could create a headache for title insurance companies, which protect homeowners against the risk of a prior owner claiming to still have a legal right to the property.

Fannie Mae and Freddie Mac are negotiating with the American Land Title Association, the trade group for title insurers, to ensure that any legal costs associated with faulty foreclosure paperwork by loan servicers are borne by the servicers, the source said. Both Fannie and Freddie declined to comment.

The biggest loan servicers are owned by banks.

"Fannie and Freddie are interested in (servicers agreeing to provide warranties) because they want to make sure that the market for foreclosed properties opens up," said Peter Sadowski, spokesman for the largest U.S. title insurer, Fidelity National Financial Inc.

Fannie Mae and Freddie Mac buy up pools of mortgages from lenders in order to free them to make new loans and then package some of the mortgages into securities that are sold to investors.

If an improperly foreclosed home is sold, the owner who defaulted could sue the current owner. The title insurer would have to defend the current owner in court, and if unsuccessful, have to pay the owner back.

ALTA chief lobbyist Justin Ailes said title insurers hope lenders and servicers will reassure insurance companies that the insurers would not be on the hook for liabilities and costs if home ownership transfer is challenged because of banks' mistakes.

Title insurance is virtually a required step in a foreclosure sale and provides extra footing for a security.

Fidelity National as of Wednesday requires such an assurance from lenders as they have to assume any liabilities that the title insurer might incur in foreclosure sales closed on or after Nov. 1 if owners who lose their homes challenge the foreclosures.

Fidelity National reached a similar agreement with the Bank of America earlier this month.

Sadowski said his company is working toward similar indemnity agreements with three other large lenders, JPMorgan Chase, Citigroup and Wells Fargo.

The four largest national title insurers -- Fidelity National Title, First American Financial Corp, Stewart Information Services and Old Republic International Corp -- control 90 percent of the market.

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