A wonderful LA Times story today related to the financial crisis. During the boom years, some lenders looked for ways to reduce costs, etc. etc. One way was to forgo the usual title insurance policy, which protects lenders from title issues such as judgments, unknown heirs, and other defects in the title to the property owned by the borrower that was used as collateral.
One bright idea was “Lien Protection” coverage. This worked more like regular insurance – if a lien ever cropped up, the insurer would pay it. It was cheaper, because there were no title searches or attorneys reviewing the title to make sure everything was in order.
Now, when the lenders are foreclosing and taking title to the properties, they are finding all kinds of liens on the properties from judgments. Those who are foreclosed are likely having other financial troubles, so they are likely to have creditors place liens on their real estate in order to collect the judgments.
Now, without the title policy, the lenders are not protected from these liens, and the “lien protection” insurers do not have the cash to pay all of these claims.
I love smart ideas, except when you know that they are penny-wise and pound foolish five years later.