If the lender has title insurance
protection and the owner does not, what possible danger of loss exists?
As an example, assume real estate was purchased for
$100,000. A down payment of $20,000 is made, and a lender holds an $80,000
mortgage lien, or beneficial interest. The lender acquires title insurance
protecting the lender's interest up to $80,000. But the purchaser's down
payment of $20,000 is not covered.
What if some matter arises affecting the past ownership
of the property? The title insurance company would defend and protect the
interest of the lender. The purchaser, however, would have to assume the
financial burden of his or her own legal defense. If the defense is not
successful, the result could be a total loss of title.
The title insurance company pays the lender's loss and
is entitled to take an assignment of the borrower's debt. The purchaser
loses the down payment, other equity in the property that may have
accumulated, and the property. And the balance on the note is still due!