Chris:

If by he, you are referring to me...then for the record, I am a title insurance agent as well as an attorney...as all title insurance agents are required to be in the State of Connecticut. The above questions would be the ones I would ask if a claim arose, and they would certainly be the ones which I would explore if I were representing someone in such litigation.

Ultimately full disclosure is required in order to avoid claims of bank fraud or insurance fraud. Those matters impacting on title to real estate which are objectionable are listed as exceptions to coverage. Many items appear on a credit report or loan application that are never recorded in the land records possibly because they do not impair title.

By the way, it is not that easy to escape conviction for bank fraud by "playing stupid." There is always something in the paper trail that trips defendants up. I know an attorney who did something that he believed quite innocent, but was convicted, disbarred and sentenced to pay a $10,000.00 fine and serve 1,000 hours of community service.

With respect to your water pipe scenario, I assume that an easement, encroachment or reservation of water rights would have been recorded. If so it should have shown up in the land records, title abstract and on the title insurance committment. If not, then I think the problem lies with the recorder's office. In Connecticut the various Town Clerks are liable for negligence, and are not protected by the Sovereign Immunity Doctrine which protects State and Federal employees. If it were some type of prescriptive easement or adverse possession, it would have had to have been held openly and notoriously, and would be common knowledge to all.
I would also think that there would be construction records filed with the local engineering /building dept, possibly showing up in tax assessor's records, possibly improvements showing up in appraisals or surveys/maps..

In so far as your criminal defendant is concerned ...it is a poor example. Remember, defendants are innocent until proven guilty beyond a reasonable doubt. He may be completely innocent, and as you say have super credit. In which case the renegging party may be open to a suit for slander of credit. I do agree that if the matter came to one's attention some discussion should be had on the issue, but I assume that this would have been explored early in the loan application process. Usually questions are asked as to the purpose for which the loan has been taken. If there is no conviction and no other title problems, it is difficult to see how a problem would result if the subsequent mortgage is recorded with the appropriate priority.

Even liens filed by crime victims are subsequent in priority to previously  recorded mortgages. I know someone that was convicted on various counts of fraud several years ago. The "victims" were six insurance companies. They filed crime victims liens on any property of the defendant's that they could find...whether or not it was truely subject to their lien rights. I represented a partnership in which the defendant was included and to which he had conveyed real estate. Connecticut has a statutory tenancy by partnership through which property conveyed into partnership is treated almost the same as if it had been conveyed into a corporation. The six insurance companies filed crime victims liens on the partnership property. I was able to successfully argue that the lien was invalid because of the statutory tenancy by partnership. The judge agreed, and the lien was released. So, I have some difficulty with your example.

Finally, I do agree that if an unrecorded mortgage does come to your attention, it should be listed as an exception to coverage to the extent that such inforamtion is available. It can also be covered in the general exceptions to coverage built into every policy. I draft them into every policy I generate.

However, I do not think that all is lost in the event of an unrecorded mortgage not coming to your attention before the closing. Here in Connecticut, the purpose of the recording is to notify subsequent lien holders of the security interest, and to preserve the mortgagee's priority among the lien holder's. It is my understanding that a security interest must be properly perfected by recording or else it is defective. If unperfected, it will be effective as between the signatories to the mortgage, but not against third party lien holders who would have relied on the notice. In such case it would be arguable as to whether there was any encumbrance on the property, and if so it would not take priority over lien holders that had recorded since the date of signing, but prior to the recording.  The lender's option is to sue on the note instead for money damages and to secure the claim through attachment/garnishment of a variety of other assets belonging to the mortgagor...possibly more attractive than a foreclosure.