Expert: Lori Frankfort - 10/12/2010

Question
Hello Lori,

I recently completed a short sale (i was the seller) here in California.  It closed on August 13, 2010.  I was under the impression that the primary lender (which covered 80% of the purchase price) was the only entity that I needed to negotiate with.  For the remaining 20% of the purchase price, there was a combination of I think 4 other loans.. in addition to the 3% I put down.

In talking with the primary lender, I had the impression that the other loans were all subordinate -- and that if the primary lender approves the short sale, all other loans have to cooperate and go along with the short sale (and remove their liens from the property).

So as I mentioned, this short sale closed on August 13.  The following week I discovered one of the smaller loans was still active.  They had not been informed of any short sale, and as far as they were concerned, I still owe them money.  Current balance on that loan is about $9,000.

I spoke with the title company, who acknowledged that they made a mistake and should have caught this matter during escrow.  They also said they will file a title insurance claim to pay off the balance on this loan.

This has always been my (layperson's) understanding of what a title company does.  They take responsibility for any outstanding liens that slip under their radar.

Well a few weeks go by, and now the title company is apparently backpedaling on their decision to pay off the loan via title insurance.  They've told me that all further communication needs to happen through their attorney.

It appears that they are fighting the situation and refusing the pay off the lien.

My big question for you is - what do you think of this situation?  What is the title company's responsibility and what is mine?  As of right now I dont have any sort of stick to wave at the title company.  The $9,000 loan is still in my name, and it's my credit rating that will be hurt if I don't pay off this loan.  Looks like the title company can just sit there and do nothing if they want.

Anyhow I'd be very curious to hear your thoughts on this.

Thanks!
Eric


Answer
Hi Eric,

Fortunately, I've never had a client need to file a claim on their title insurance, but it is my understanding that this type of claim is exactly what title insurance is for.  It's puzzling to me that they've forwarded this to their attorney.  

I would ask these questions to your escrow officer, and if you can't get an answer there you may need to get advice from a Real Estate Attorney.

I'm sure you're aware that doing a short sale is going to affect your credit rating negatively, so I wouldn't be as worried about the $9000 lien.  That loan is technically now unsecured, just like a credit card.  Had it been properly negotiated it would have gone away entirely or been settled for pennies on the dollar.  If the title insurance doesn't pay you could try settling with them for a smaller amount (as little as 25%), or else just let them write it off.  Both scenarios will affect your credit.

I would follow up with escrow right away.  

Best of luck,
Lori Frankfort