John Kovalick, who purchased a foreclosed house from Deutsche Bank, with his wife at their home in Deland, Fla. As they learn of sloppy foreclosure proceedings around the country, the Kovalicks hope nothing goes awry in their purchase.

When homebuyers and people refinancing their mortgages first see the itemized estimate for all the closing costs and fees, the largest number is often for title insurance.

This moment is often profoundly irritating, mysterious and rushed — just like so much of the homebuying process. Lenders require buyers to have title insurance, but buyers are often not sure who picked the insurance company. And buyers are so exhausted by the gantlet they’ve already run that they’re not interested in spending any time learning more about the policies and shopping around for a better one.

Besides, does anyone actually know people who have had to collect on title insurance? It ultimately feels like a tax — an extortionate one at that — and not a protective measure.

But all of the sudden, the importance of title insurance is becoming crystal clear. In recent weeks, lenders like GMAC Mortgage, JPMorgan Chase and Bank of America have halted many or all of their foreclosure proceedings in the wake of allegations of sloppiness, shortcuts or worse. And a potential nightmare situation has emerged that has spooked not only homeowners but lawyers, title insurance companies and their investors.

The ‘What if?’

What would happen if scores of people who had lost their homes to foreclosure somehow persuaded a judge to overturn the proceedings? Could they somehow win back the rights to their homes, free and clear of any mortgage? But they may not be able to simply move back into their home at that point. Banks, after all, have turned around and sold some of those foreclosed homes to nice young families reaching out for a bit of the American dream. Would they simply be put out on the street? And then what?

The answer to that last question may depend on whether those new homeowners have title insurance, because people who buy a home without a mortgage can choose to go without a policy.

Title insurance covers you in case people turn up months or years after you buy your home saying that they, in fact, are the rightful owners of the house or the land, or at least had a stake in the transaction. (The insurance may cover you in other instances as well, relating to easements and other matters, but we’ll leave those aside for now.)

An imperfect process

The insurance companies or their agents begin any transaction by running a title search, sifting through government filings related to the property. They do this before you buy a home or refinance your mortgage to help sort out any problems ahead of time and to reduce the risk of your filing a claim later. But sometimes they miss things, and issues can arise later.

For instance, the person doing the title search may not notice that a home equity loan is still outstanding or that a contracting firm filed a lien against the owner years ago. That could create problems for you later, when you try to sell the home.

Then there are the psychodramas that can ensue. The previous owner’s previously unknown love child or long-lost heirs could show up saying that they never agreed to the sale of the property. Or perhaps there was fraud against a seller who was elderly or had a mental disability, or forgery of an estranged spouse’s signature.

While the title insurers are not supposed to kick back money directly to companies or brokers that send business their way, various government investigations have turned up all sorts of cozy dealings that make you shake your head in disgust. But since you have to buy the insurance if you need a mortgage, there is not much you can do except hold your nose.

That’s what John Kovalick did in January when he bought a foreclosed house in Deltona, Fla., for $102,000 from Deutsche Bank. But in recent weeks, he’s seen the headlines about other banks halting foreclosures and wondered whether something might have gone wrong with the foreclosure on his new house. A spokesman for Deutsche Bank declined to comment.

Kovalick is not the only one pondering what could go wrong. While the banks were pressing the pause button on many foreclosures, some title insurers were growing concerned as well. On Oct. 1, Old Republic National Title Insurance Co. released a notice forbidding any agents or employees to issue new policies on homes that had been recently foreclosed by GMAC Mortgage or Chase.

Clearly, the title insurer was also worried about a situation in which untold numbers of former homeowners have had their foreclosures overturned. At that point, those individuals might claim the right to take back their old homes, but they would also be responsible for, say, a $400,000 loan on a home that is worth half that.

So what would happen next? The banks might start the foreclosure process over again. At that point, lawyers for the people who had been foreclosed upon might take the next logical step and try to show that the banks never had the documents to prove they owned the mortgage in the first place.

Banks might settle at that point, writing checks to everyone who had gone through a disputed foreclosure in exchange for each of them giving up the title.

But if banks did not settle, or if the evicted homeowners refused to settle and fought on and won, they might end up owning their homes once again and not owing the bank either. Or banks might agree to slice big chunks off remaining balances in exchange for release from any liability for the errors they made.

At that point — and again, this is what Old Republic and investors in other title insurers fear — those homeowners might actually want to move back into the homes. But some foreclosed homes were sold by the banks to others who now live there. And those new residents would have big, fat title insurance claims if their predecessors ever turned up at their doorsteps, proclaimed them trespassers and told them to leave.

Be sa

fe or stay away

Chances are, it will not come to that. After all, title insurers could settle with the previous residents, allowing them to walk away with a big check to restart their lives elsewhere.

Still, for anyone considering buying a bargain home out of foreclosure anytime soon, consider asking your title insurer if any special riders are available that can cover appreciation on your home in the event of a total loss.

That said, if you can possibly help it, stay away from foreclosed homes until the scene shakes out a little bit. Some people will undoubtedly make a fortune investing in these properties in the next few months. But if your down payment represents most of what you have, it’s hard to justify betting it all on a situation like this one.