Although the mortgage market mess persists, one aspect of the fiasco appears to have worked itself out. Several major title insurance companies were demanding that mortgage servicers take on liability for title problems, but dropped that request on Thursday. This matters a lot, because it could mean that purchasers of foreclosed homes won’t shy away from buying due to the fear of not getting title insurance.

Elizabeth Razzi of the Washington Post reports that three big title insurers, First American Financial, Old Republic International and Stewart Information Services, are no longer demanding indemnifications from banks and servicers on foreclosed properties. Those three firms make up more than half of the title insurance market.

Calculated Risk explains why this is so important:

This is means that the buyers of REO (lender Real Estate Owned) will be able to obtain title insurance, and that the new owner can sell the property. There was some concern that buyers would shy away from REOs.

So the demand problem is partially solved. Although some buyers might still worry about purchasing a foreclosed home, it won’t be due to a lack of title insurance. Instead, they may fear title insurers’ ability to back up a flood of claims if many titles are bad. Since that’s likely less of a concern, however, this new development should prevent a plummet in foreclosed property sales.

But it doesn’t fix the supply problem. Some banks and servicers are still investigating their documentation and procedures and halting some foreclosures temporarily. This will reduce the number of defaulted properties that hit the market, which will further delay the sector’s recovery. Housing cannot move confidently forward until all properties from bad mortgages have been absorbed by the market.