Chapter 21 — Exercises

Title and Insurance: Title Search, Title Insurance, Homeowners Insurance, and Clearing Defects

Items marked † receive worked solutions in the answers appendix. Everything else is on you. Where a question asks for a dollar figure, show the arithmetic — an answer without a denominator is not an answer.

Several items reference the exercise commitment reproduced at Section D. Read it once before you start Section D; you will use it four times.

Section A — Recall and definitions

Exercise 21.1 — In one sentence each, distinguish title, a deed, and possession.

Exercise 21.2 — Every lien is an encumbrance but not every encumbrance is a lien. Give two examples of encumbrances that are not liens, and say what makes them encumbrances.

Exercise 21.3 † — State the job of each of the three parts of a title commitment in one sentence each: Schedule A, Schedule B-I, Schedule B-II. Then state which one a loan officer should check against their own loan file the day the commitment arrives, and why.

Exercise 21.4 — Define marketable title and insurable title and give one situation in which title is insurable but not marketable.

Exercise 21.5 — Why is a cloud on title still a cloud even when the underlying claim is demonstrably invalid? Answer in two sentences, using the word "record."

Exercise 21.6 — Name five things a title search cannot discover, and say for each why the search misses it.

Exercise 21.7 † — Title insurance is described in the chapter as retrospective and homeowners insurance as prospective. Explain the difference and name two consequences that follow from it — one about premium and one about renewal.

Exercise 21.8 — What is "the gap" in a title transaction, and name two ways title companies address it.

Section B — Priority and the chain

Exercise 21.9 — State the general rule of lien priority in one sentence. Then list four categories of exception to it and identify which of the four is most likely to appear on a purchase of a house that had a new roof installed eight months ago.

Exercise 21.10 † — A forced sale produces \$268,000 in net proceeds after costs of sale. The recorded claims are: delinquent property taxes of \$9,800**; a first mortgage of **\$241,000 recorded four years ago; and a judgment lien of \$34,500 recorded last year. Compute what each claimant receives, in order, and state what happens to the unpaid portion of the judgment.

Exercise 21.11 — A mechanic's lien is recorded in June for work that began in March. A mortgage was recorded in April. In a state whose statute provides for relation-back, which lien is senior, and what does that tell you about why the standard exception for unfiled labor and material claims exists?

Exercise 21.12 † — Explain, in the terms Chapter 1 established, why an investor purchasing a pool of loans will not accept a second-position lien on any pricing terms. Your answer must name what the lender is representing and what the consequence is when the representation fails.

Exercise 21.13 — A deed conveys title "subject to all matters of record." Your borrower asks what that phrase costs them. Answer in plain language in under sixty words.

Exercise 21.14 — A subordination agreement is recorded. What has changed and what has not? Give one real situation in origination where this is the ordinary solution.

Section C — Applied reasoning

Exercise 21.15 — Your file's commitment shows title vested in three people. The purchase contract is signed by two. List, in order, the four things you do today, and state which of them is time-critical and why.

Exercise 21.16 † — Schedule A of your commitment shows a proposed loan policy amount of \$310,000. Your borrower switched from 5% down to 10% down last week and the loan is now \$297,000. Nothing else changed. What is wrong, who fixes it, when does it become expensive, and what does it cost you today?

Exercise 21.17 — A listing agent tells you the mechanic's lien on Schedule B-II "was paid years ago — the contractor confirmed it on the phone." Write the two-sentence reply you send, and say what you do next regardless of the reply.

Exercise 21.18 — The title officer says, "We can insure it." Write down the follow-up question you ask, and explain why "we can insure it" and "title is clean" are different statements.

Exercise 21.19 † — Rank these five defects by expected time to clear, fastest to slowest, and state the instrument that clears each: (a) a judgment against a stranger with the same name as your seller; (b) an unreleased home equity line with a zero balance; (c) a deceased owner in the chain with no probate; (d) a legal description error in a recorded deed; (e) a contested boundary requiring quiet title.

Exercise 21.20 — Your borrower's file is fully approved with one open condition: clear title. The seller's attorney says curative "should take about a month." The lock expires in nineteen days. List the four separate actions available to you, and say which one you take first and why.

Section D — Read the document

Use this commitment for Exercises 21.21 through 21.24.

COMMITMENT FOR TITLE INSURANCE (excerpt)     [constructed teaching example --
                                              not one of the book's anchor files]
────────────────────────────────────────────────────────────────────────────────
SCHEDULE A
  1. Commitment (search) date .................. 22 days before the closing date
  2. Policies to be issued:
       (a) Owner's Policy ....... proposed insured: the two buyers
           Proposed amount .................................. $298,000.00
       (b) Loan Policy .......... proposed insured: the lender, its successors
           and/or assigns as their interests may appear
           Proposed amount .................................. $268,200.00
  3. Estate or interest in the land: FEE SIMPLE
  4. Title is vested in: A and B, husband and wife, as tenants by the entirety
  5. The land: Lot 22, Block 7, of a platted subdivision, together with the
     improvements thereon.

SCHEDULE B, PART I -- REQUIREMENTS
  1. Pay the agreed amounts and all charges for the transaction.
  2. Deed from the record owners to the two buyers, and a security instrument
     from the buyers to the lender, executed and recorded.
  3. Release of the security instrument in favor of the sellers' first lender,
     or a payoff statement funded at settlement.
  4. Release of a SECOND security instrument recorded in favor of a credit
     union, securing a home equity line of credit reported at a $0 balance,
     together with the borrower's WRITTEN REQUEST TO CLOSE THE LINE.
  5. Certified copy of the death certificate of the record owner "B," together
     with such evidence of the devolution of title as the Company may require.
  6. Affidavit of identity from record owner "A" as to a recorded judgment in
     the amount of $6,240.00 against a party of the same or similar name.
  7. Evidence that the homeowners association assessments are current, and a
     statement from the association of any unpaid assessments constituting a
     lien.
  8. Owner's affidavit and indemnity as to parties in possession, unrecorded
     easements, and unpaid labor and material.

SCHEDULE B, PART II -- EXCEPTIONS
  1-5.  [standard exceptions -- parties in possession; unrecorded easements;
         survey matters; unfiled labor and material; taxes not shown of record]
   6. Real property taxes for the current year, not yet due and payable.
   7. Declaration of covenants, conditions, and restrictions for the
      subdivision, and the assessment lien created thereby.
   8. Recorded judgment, $6,240.00, against a party of the same or similar name
      as record owner "A."
   9. Second security instrument in favor of a credit union, recorded.
────────────────────────────────────────────────────────────────────────────────

The file: a \$298,000** purchase, conventional, **10% down**, loan **\$268,200. Closing is 22 days after the commitment's search date. The buyers are relocating for a job and their lease ends four days after the scheduled closing.

Exercise 21.21 † — List every Schedule B-I requirement and, next to each, write (a) the role that owns it, (b) whether it is yours to chase, and (c) the single sentence you would send that person today. Then answer: which requirement carries the most schedule risk, and why?

Exercise 21.22 — Requirement 4 asks for a release and a written request to close the line. Why both? What would happen if only the first were obtained?

Exercise 21.23 † — Requirement 6 and Exception 8 describe the same judgment. Explain how a single document can be both a requirement and an exception, and what happens to Exception 8 when Requirement 6 is satisfied.

Exercise 21.24 — Requirement 5 is a death certificate. Write the two sentences you say to the buyer's agent about what this means for the closing date. Do not promise a timeline you cannot support.

Section E — Insurance

Exercise 21.25 — A borrower is purchasing at \$298,000** with a **\$268,200 loan. The carrier's replacement cost estimator produces \$232,000 for the improvements. What dwelling coverage amount does the lender generally require, and what is the one condition attached to that answer? Explain, in one sentence a borrower would understand, why the coverage is less than the loan.

Exercise 21.26 † — The same file. The quote used at pre-approval was \$1,440.00 per year. The bound premium comes back at \$2,160.00. Compute: (a) the old and new monthly escrow amount for insurance; (b) the change in the 12 months prepaid at closing; (c) the change in a 3-month escrow deposit; (d) the total change in cash to close. Then state the two file-level consequences beyond cash.

Exercise 21.27 — Same file, \$232,000 of Coverage A. Compute the out-of-pocket difference between a \$1,000 flat all-perils deductible and a 2% wind/hail percentage deductible. State the sentence you say to the borrower about it.

Exercise 21.28 † — Write the checklist you run against an insurance binder before you call it satisfied. Minimum six items. For each item, state the failure it prevents.

Exercise 21.29 — Explain the difference between replacement cost and actual cash value using a twenty-two-year-old roof as the example, and say why a borrower comparing two premiums may be comparing two different products.

Exercise 21.30 — A borrower asks why they must pay twelve months of insurance in advance and put three more months into escrow. Answer in under seventy-five words, without teaching them the aggregate adjustment.

Exercise 21.31 † — A flood determination on a file you are working returns a designation inside a Special Flood Hazard Area, on day 38 of a 45-day contract, after a map revision took effect. List what has just changed about (a) the payment, (b) the cash to close, (c) the approval, and (d) the calendar — and state what you tell the borrower and the agent, in that order.

Exercise 21.32 — A condominium's master policy is written on a bare-walls basis. State what the borrower must carry, what it covers, and the two places that policy shows up in your qualifying math.

Exercise 21.33 — Name five insurance-side reasons a condominium project can be declined, none of which involve the borrower. For each, say who would have to act to fix it.

Section F — Judgment, ethics, and communication

Exercise 21.34 † — Write the borrower conversation about the optional owner's title policy, in full, for a file where it costs \$875.00 and the borrower will have 4.16 months of reserves after closing with it and 4.45 months without it. Requirements: name what the lender's policy does not do, state the cost in months of reserves rather than only in dollars, give an honest account of the case for declining, and end with a recommendation you would be comfortable having read back to you in six years.

Exercise 21.35 — A settlement agent you have never used offers to "take care of" the owner's policy question with your borrowers directly so you do not have to have the conversation. Identify what is uncomfortable here and name the chapter that governs your relationship with settlement service providers. Then say what you actually do.

Exercise 21.36 — Your borrower is buying in a market where carriers have been non-renewing policies. Their agent quotes a premium 40% above what they budgeted, and the borrower asks whether they can "just get the cheap one and switch after closing." Write your answer. Address both the mortgagee clause and the honesty of the qualifying figures.

Exercise 21.37 — A colleague tells a borrower the owner's policy is "a waste of money, nobody ever uses it." Write two sentences you would say to the colleague, privately, and state the professional obligation at issue.

Section G — NMLS-style exam items

Exercise 21.38 — Which of the following is TRUE of a lender's title policy? (a) It protects the borrower's equity in the property. (b) It is written for the purchase price and does not decline. (c) It protects the lender for the loan amount and declines as the balance declines. (d) It covers defects arising after the policy date.

Exercise 21.39 † — A title commitment's Schedule B, Part II lists a recorded easement. This means: (a) the easement must be removed before closing; (b) the policy will not insure against loss arising from that easement; (c) the easement is invalid; (d) the lender must obtain a subordination agreement. Answer, and then explain in one sentence why the three wrong answers are attractive.

Exercise 21.40 — Flood insurance is required by federal law when: (a) the borrower requests it; (b) the property has flooded in the past ten years; (c) improved real property securing the loan is located in a Special Flood Hazard Area in a participating community; (d) the appraiser notes a drainage easement.

Section H — The Loan File

Exercise 21.41 † — Using the Linden Street figures, compute the chapter's share of the transaction: add the lender's title insurance, settlement fee, recording, owner's title insurance, survey, and pest to the twelve months of homeowners insurance, the three-month insurance escrow deposit, and the flood determination. Express the total as a dollar figure, as a percentage of the \$9,720.25 in closing costs where applicable, and as a percentage of the \$25,376.34 cash to close. Then answer: which single line in your total is optional, and what does removing it do to reserves?

Exercise 21.42 — Rebuild the eleven days between day 19 and day 30 as a task list with owners and due dates, as you would enter it in a loan origination system. Then mark the two tasks whose slippage would have moved the closing date, and say how you would have known they were slipping.

Exercise 21.43 — The Linden Street lock was taken on day 12 and expired on day 42. Title cleared on day 30. Compute the percentage of the lock consumed before title was clean, and write the two-sentence status update you would have sent the buyer's agent on day 30 — including what you would have said about the remaining calendar.