The Case of the Void Deed: How Lender's Title Insurance Saved the Day

Can a lender recover losses if a property transfer is later ruled invalid?

First American insured a $550,000 refinance mortgage for a property in New York. The borrower had purchased the home two years earlier and refinanced the original $350,000 loan with a new $550,000 mortgage. Everything appeared routine until years later, when a hidden legal issue threatened the borrower’s claim to the property.

Unbeknownst to the mortgage lender, before the borrower purchased the property, a court proceeding had begun to appoint a guardian for the seller, claiming he was mentally incompetent. This meant the seller may not have had the legal capacity to transfer ownership at all. Although the sale went through, a legal notice (called a lis pendens) was later filed, warning of the ongoing competency case.

A guardian was formally appointed for the seller, and legal action was taken to reverse the sale. After years of litigation, the court ruled that the seller’s deed to the borrower was void from the start, and a new deed returning title to the property to the seller was recorded. As a result of the voiding of the original deed, the insured mortgage could not be enforced against the property.

The lender faced the possibility of a total loss on its $550,000 mortgage they had provided to the borrower with confidence years earlier. That’s when First American stepped in.

Because the lender could not enforce its security interest, First American paid the lender the full $550,000 policy limit under its Lender’s Title Policy, protecting the lender from the loss of its original loan amount.

This case underscores the critical role of title insurance — providing protection, financial security, and peace of mind when unforeseen title defects that are covered by the title insurance policy surface years after closing.

Disclaimer:

As with any insurance contract, the insuring provisions express the coverage afforded by the title insurance policy and there are exceptions, exclusions and conditions to coverage that limit or narrow the coverage afforded by the policy. Also, some coverage may not be available in a particular area or transaction due to legal, regulatory, or underwriting considerations.

Please contact a First American representative for further information. The services described above are typical basic services. The services provided to you may be different due to the specifics of your transaction or the location of the real property involved.