NU Online News Service, Oct. 12, 2:56 p.m. EDT

Title insurers said they will be unaffected by the recent spat of defective foreclosure paperwork that has caused some banks to halt their procedures, and Moody’s said the problems will not affect earnings.

In a credit analysis report, Moody’s said the recent discovery that mortgage foreclosures contained defective paperwork would not have an adverse affect on title insurers.

A number of lending institutions have stopped foreclosure sales, most notably Bank of America. In a statement, the bank said it was stopping the sale of foreclosed properties until its assessment of documents was complete, but noted that it felt the basis for the sale of past properties was accurate.

Moody’s said that title insurers could be harmed in three ways if a foreclosed property is sold improperly through documentation problems.

o Reimbursement to the new buyer if the property was incorrectly transferred.

o Higher legal costs to defend an increase in claims over incorrectly transferred property.

o A drop in business if property re-sales are curtailed by a market disruption stemming from such claims.

Moody’s said the most likely scenario is higher legal costs and a drop in business.

However, the largest U.S. title insurer, Fidelity National Financial, issued a statement Oct. 1 saying there will not be additional claims because “their lenders have the rights of good faith purchasers which should not be affected by potential defects in documentation.”

If a court sets aside a foreclosure because of a documentation defect, Fidelity National said, the lender would be required to return all funds “resulting in no loss under the title insurance policy.”

Moody’s said title insurers “have demonstrated their flexibility in adjusting to a stressed market through aggressive expense management” and they would be able to do this again if there is a disruption.