As such, lenders should request particular types of coverage and be mindful of timing issues and state-specific matters associated with portfolio transactions. This article will address common issues associated with portfolio transactions so that lenders can be better prepared.
Managing title insurance for portfolio transactions can be a complicated endeavor.
While single property transactions require that the lender obtain a single loan policy, portfolio transactions may require multiple security instruments, opening the door to several complications.
- Complication #1: The title company may refuse to issue a single insurance policy covering all of the properties.
- Complication #2: The premiums may be excessive if several title policies are required and the lender wants each policy to cover the full loan amount.
- Complication #3: Separate policies with coverage that equals the individual allocated loan amounts for such property would be required to stand on their own. As a result, a loss at one property over the insured amount would leave the lender uninsured for the difference.
Tie-in endorsements can alleviate these complications.
The American Land Title Association (ALTA) Endorsement 12-06, also known as a “tie-in” endorsement, addresses these concerns and is necessary for many portfolio transactions. The ALTA 12-06 endorsement will allow the lender to collect from one of the other policies if a given policy does not have enough coverage to make the lender whole on a claim.
A tie-in endorsement will allow the title company to issue separate policies for each mortgaged property with insured amounts equal to a grossed-up portion of the total loan amount. It then aggregates the insured amount of the policy with the insured amounts listed in the tie-in endorsement. The total insured amount will equal the total of all the tied-in title insurance policies, producing the same result as a single policy covering the entire portfolio.
With a tie-in endorsement, the lender can take advantage of an individual property’s increase in value. If a single property suffers a loss above the loan amount, the lender can make itself whole with the remaining portion of the insurance coverage. This type of insurance will also protect against fluctuations in the value of individual properties within the portfolio.
It is important to note that the rules governing title insurance vary from state to state. For example, Florida, Delaware, and Pennsylvania only allow tie-in endorsements for properties located within the state’s borders. In this situation, lenders should increase the coverage amount, accounting for the loss of a tie-in with the rest of the portfolio.
Lenders must also be aware that some states place a cap on liability amounts for aggregated policies. In that situation, ALTA Endorsement 12.1-06 should apply, and the aggregate insured amount will be capped at the state limit.
Portfolio transactions may result in co-insurance issues.
Portfolio transactions also raise co-insurance concerns, especially when the transactions involve high loan amounts. If a loan amount exceeds certain thresholds, many title companies have maximum risk guidelines in place, requiring the diversification of insurance risk among multiple title companies. These guidelines will vary depending on the title company providing the insurance.
When it comes to portfolio transactions, especially those with tight timelines, it is advisable to bring a co-insurer into the deal as soon as possible. That will allow the co-insuring title company to perform its due diligence without delaying the scheduled closing date. Lenders financing a significant loan portfolio transaction must ensure that ALTA Endorsement 23-06, which deals with co-insurance and is also known as a “Me-Too” endorsement, is obtained early in the timeline.
Reinsurance should also be a consideration.
It is also advisable that lenders consider reinsurance as a way to manage risk further. In this case, the lender is managing any risk associated with the creditworthiness of the title insurance company.
Reinsurance is title insurance purchased by the original title company from a third-party title company to cover liabilities above a specific dollar amount. Reinsurance applies to the same transaction as co-insurance and, therefore, will diversify credit risk.
When obtaining reinsurance, lenders must be sure that it allows the insured to have direct access to the insurer, to ensure that coverage is not derivative.
Having a full grasp of the proper title insurance coverage, state-specific nuances, and timing considerations in portfolio transactions helps lenders achieve a smooth closing by avoiding unnecessary time delays and potential pitfalls.