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Does Forgery Really Happen? Why You Need Title Insurance.

May 16, 2023 Title Insurance Share:

While your title company will always present a clear title at closing, there are hidden risks that still remain. Title insurance is key to protecting you from those hidden risks.

One of those hidden risks is forgery. And while forgery may sound like the type of thing that doesn’t ever happen, you might be surprised to learn that it’s a genuine risk.

Fortunately, your title company is aware of the risk of forgery and does everything it can to prevent it before closing. Erin McConatha, attorney and underwriter at South Oak Title, shares more about the real risks that can impact your title.

What is Forgery?

While you may have a general idea of what constitutes forgery, it’s important to understand the legal definition. Erin McConatha says, “Forgery involves the altering of a document so that it’s false with the intention to defraud. If you ever signed your mom’s name on a permission slip while you were in school, you committed forgery. While you probably didn't get in legal trouble for that, forgery is a real form of fraud that impacts real estate transactions.”

Fake signatures are only one type of forgery. Falsified documents used as part of the real estate transaction are also considered a type of forgery. While most attempted forgeries are discovered before the real estate transaction is complete, some forgeries are successful and discovered after the fact.

“Your title company is aware of the risk of forgery and other types of fraud, and they’re always diligent to ensure that every aspect of the transaction is legitimate and above board,” McConatha explains. But in the very rare case that a forgery attempt is successful, it can pose a tremendous risk to a homeowner’s title.

Types of Forgery in Real Estate Transactions

While criminals can be creative, forgery attempts commonly impact deeds, powers of attorney, and mortgage release forms. Your title company is dedicated to protecting clients from forgery and fraud.

Forged Deeds

A deed is a legal document that conveys ownership of a piece of real property from one owner to another. A forged signature on a deed can have serious consequences. If a signature has been forged, the true homeowner may not have knowledge that the deed has been signed and property ownership has been transferred.

“This could occur in the case of a messy divorce where one spouse forges the signature of another without their knowledge. Forgery can also happen in the unfortunate case of elder abuse, in which an elderly individual signs a deed under duress or without full mental competence. We always want to be sure that all of the true owners have knowledge of the sale and genuinely want to sell the property,” McConatha explains.

Another type of forgery involving deeds occurs when the signatures on the deed are accurate but the deed itself is not. In other words, an individual who doesn’t have the authority to convey the property has signed the deed.

McConatha says, “This can happen when a person claims to represent an entity, such as an LLC, in an attempt to sell a piece of property, but the LLC did not give them the authority to do so. We also see this in estate situations where the deed doesn't include all of the legal heirs to the property."

Forged Powers of Attorney

A power of attorney (POA) is a document that gives legal authority for a person to act on behalf of another. In real estate transactions, these are usually used to allow one individual to sign on behalf of another person, known as the principal, at closing. When used legally, these can be helpful when one owner cannot be present at closing.

Unfortunately, there are several ways an individual could attempt to forge a power of attorney.

  • Falsifying or changing the date: This can happen when an individual uses a power of attorney that was legitimately signed for previous use but then alters the date on the document.
  • Falsifying the signature: This occurs when an individual other than the principal on the power of attorney signs the document on their behalf, usually without their knowledge.
  • Undue influence: If someone is encouraged to sign a power of attorney under duress or without a full understanding of what they're doing, the power of attorney is considered forged and invalid.

There are legal and ethical limits to using powers of attorney. Realtors can never serve as the power of attorney for their clients. The principal must also be mentally competent at the time the power of attorney is signed. Powers of attorney cannot be used after the principal is deceased. Your title company will employ several safeguards to prevent the use of a forged power of attorney.

“Whenever there’s a power of attorney in use, we always make sure to talk to the principal and ensure that the document is valid,” McConatha says. At South Oak, all powers of attorney must be approved by both the closing company and the lender.

Forged Mortgage Release

A mortgage release is issued when the mortgage lender removes their lien from a property, usually when the mortgage loan is paid off and fulfilled. “Mortgage releases are routine and perfectly legal. But we've heard of cases where the homeowner presents a forged mortgage release just prior to closing, attempting to indicate that the mortgage has been paid off. If the fraud is successful, the homeowner receives the seller proceeds without ever paying off their previous mortgage loan,” McConatha says.

Because mortgage liens are attached to a piece of property instead of to an individual, the new owner inherits the lien and has to deal with the consequences. “This is a situation in which title insurance is key, because the owner’s policy will protect their interest and satisfy the lien,” McConatha explains.

While it isn’t impossible to pay off a mortgage shortly before closing, the title company will always investigate these cases carefully to ensure that it was done so legitimately and legally.

Forgery Red Flags

Your title company is always working to protect its clients from attempts at forgery and fraud. When they see certain red flags, it’s a cue to the title company to pause and ensure that there’s no fraud at play. McConatha says, “Realtors can also be attentive to these red flags as they spend time with their clients.”

  • Out-of-state sellers: Most out-of-state sellers are perfectly legitimate. But when you haven’t met the seller, it’s always a good practice to do a little investigative work to ensure that the person selling the home is who they say they are and is also the legal owner of the property.
  • Properties owned by an LLC: In the wake of the low interest rates of the past few years, it’s becoming more common to find properties that are owned by investors. Many of these investors are legitimate, out-of-state LLCs. But if you find that an LLC is listing a property for sale – especially one that is out-of-state and unfamiliar - you’ll want to verify its legitimacy.
  • Uninhabited properties: Any time there’s a vacant property, the opportunities for fraud increase. When the owner isn’t present, it’s much easier for bad actors to forge a deed or transfer the property illegally.
  • Estate properties: When the owner of a home has died and the property is in estate, it’s always worth the extra time to ensure that all of the rightful owners of the home are the ones who are also selling the home. While missing heirs are another issue that can impact title, you’ll want to be on the lookout for siblings that are attempting to sell a property without the knowledge of others.
  • People using their own notary: An individual who insists on using their own notary always presents a red flag to the title company. McConatha says, “We always want to ensure that the notary isn’t compromised in any way. To do this, we will always use our own notary. If we’re doing a mail-away closing for an out-of-town owner, we’ll even set up the notary for an individual rather than allowing them to choose their own.”
  • Hurried sellers: There are legitimate reasons to want to close quickly, and not every seller who’s in a hurry is trying to commit fraud. “When a seller is in a hurry to close, we always want to understand the reason for that rush. No matter how quickly the transaction closes, we refuse to skip any safeguards for our clients,” McConatha explains. “It’s always important for us to slow down and ask the right questions.”
  • Deeds signed prior to closing: An individual should never come to closing with a deed that’s already been signed. “In some cases, the seller will arrive with a deed that’s been signed by a spouse or an elderly parent. This is especially concerning if this individual hasn’t been involved in the sale at all,” McConatha says.

When one of these situations arises, your title company will always take a little extra care to ensure that everything is conducted legally and ethically.

A Real Estate Agent's Role in Preventing Forgery and Fraud

Real estate agents have a role to play in preventing forgery and fraud in real estate transactions. “Know the red flags and trust your gut. If something feels suspicious, you should always investigate. A little time on the front end to verify the legitimacy of the seller will always be worth it,” McConatha emphasizes. Legitimate sellers shouldn’t mind the extra steps, either.

McConatha recommends some specific things agents can do to verify the identity of the seller and ensure that the person selling the home has the legal right to do so.

  • When working with an out-of-state seller, ask for a copy of their driver's license. Use FaceTime to call the seller and match their face with their identification.
  • If you're working with an LLC, verify that the LLC is a legitimate entity that has ownership of the property in question. You should also verify that you're working with a genuine representative of that LLC who has the authority to list that property for sale.
  • For estate properties or homes that are vacant, check public records to verify their ownership rather than relying on the word of the individual.

Your title company is also a valuable resource and ally. McConatha urges real estate agents to reach out to their title company any time they need help. “We can help you verify the owner of a property before you list it, and we can assist you with a background search if needed.”

McConatha also reminds agents that a title search and exam can be helpful before going under contract. “You also don’t need to purchase title insurance to order a title search. For a small fee, we can conduct a complete title search and exam to ensure that the title for a property is clear. This can give you additional peace of mind before listing the property.”

The Importance of Title Insurance

Although forgery and fraud are rare, they’re legitimate hidden risks to title. Fortunately, forgery is one of the many risks that are covered by title insurance. If an individual is impacted by forgery or fraud after the close of your real estate transaction, their standard owner’s policy will provide protection up to the amount of the purchase price of the home for the entire time they own the home.

“In many cases, attempts at forgery or fraud are caught prior to the completion of the sale. But in the rare case that it isn’t, title insurance provides valuable protection. The consequences of forgery can be catastrophic and financially devastating if you don’t have title insurance,” McConatha says.

Title insurance protects against forgery, fraud, and other hidden risks that may threaten a title after closing. This relatively small, one-time premium provides protection and peace of mind to the homeowner. In the event that a homeowner needs to file a title insurance claim, their title insurance company will handle everything, including legal fees and the cost of resolving the claim.

At South Oak, we’re committed to preventing forgery and fraud before a transaction takes place. Contact us with your questions or concerns about title insurance, or order a title and schedule a closing today.

Erin Mc Conatha

Erin McConatha is an attorney and Title Underwriter at South Oak Title and Closing in Birmingham, Alabama. A graduate of UAB and Cumberland School of Law, Erin has been part of the South Oak team for three years.

This post is not meant to be taken as legal advice and is not to be a replacement for the legal advice of a lawyer. If you are buying or selling your home, please contact your lawyer for more information.