First American Title Insurance Company v. Vision Mortgage Corporation, Inc.

298 N.J. Super. 138, 689 A.2d 154 (App. Div. 1997)
  • Opinion Date: February 25, 1997

MORTGAGES; TITLE INSURANCE—In a mortgage loan transaction, the lender bargains for a bona fide mortgagor with the financial capacity to make the mortgage payments; a first lien on the property subject to foreclosure, if necessary; and the right to seek recovery of a deficiency after foreclosure from the mortgagor. When a title company’s “Approved Attorney” participates in a fraudulent transaction, the title company is liable notwithstanding that lender did, in fact, have first lien status.

A realtor, an attorney, and a property owner masterminded a scheme to defraud a mortgage company. They applied to the mortgage company for a loan in the name of a particular buyer, but the buyer of that name was unaware of the transaction. Title insurance was purchased and the title insurance company issued a “Closing Protection Letter” to the mortgagee. There was no question that there was fraud on the part of the approved attorney in connection with the closing. Nonetheless, the title insurance company refused to make the mortgagee’s loss good, claiming that title insurance does not guarantee a mortgaged property’s value. Additionally, the title company argued that the focus of the Closing Protection Letter is to secure first lien status for a lender’s mortgage, backed up by the title insurance company, and that is exactly what the mortgagee received. Consequently, according to the title insurance company, any loss sustained by the mortgagee was the result of its own overvaluation of the property in the first place.

In the Appellate Division’s opinion, a lender bargains for a bona fide mortgagor with the financial capacity to make the mortgage payment; a first lien on the property, subject to foreclosure, if necessary; and the right to seek recovery of a deficiency after foreclosure from the mortgagor. If, despite exhaustion of these remedies, the lender still sustains a loss, that loss would not be related to the approved attorney’s misconduct and thus would fall outside the scope of the Closing Protection Letter. Under the facts presented, the Court ruled that the mortgagee did not get what it bargained for. While it was true that the mortgagee had first lien status despite the approved attorney’s fraud, and that the validity of the mortgage was not affected by that fraud, this was a sham transaction from the outset. By falsely using the name and financial credentials of a stranger to the transaction, an immediate default was guaranteed because there was no bona fide mortgagor to make the mortgage payments. The fraud also eliminated the possibility of the mortgagee recouping the foreclosure loss through a deficiency proceeding against the mortgagor. That it was possible for the mortgagee to recoup its investment through foreclosure had it placed a lower value on the property at the time of the transaction did not insulate the title company from liability. By making the attorney an “approved attorney,” the title company put him in a position to steal from the mortgagee by creating this sham transaction.