Wednesday, August 3, 2011





EDITOR’S NOTE: The issue is not just with foreclosures. It is any property which was subject to a closing in which the loan was claimed as securitized. 95% of the transactions did not go into foreclosure. But those owners are unaware that the satisfaction of the old mortgage was signed by a party who had no right to do so. If the house was EVER foreclosed in PRIOR transactions, the title is probably defective — fatally so. Most homeowners are sitting on a ticking title time bomb.

Title Problems for Foreclosed Properties

The impending title problems resulting from foreclosures being processed too quickly is now becoming a major problem in this country with a direct effect on housing prices.  Old Republic National Title Insurance, told its agents that it would not write policies on foreclosed Chase properties until “the objectionable issues have been resolved,” according to a memorandum sent out by the firm’s underwriting department.
A Chase spokesman declined to comment. Old Republic executives did not return calls for comment. The title insurer, which is based in Minneapolis, said earlier in the week that it would not write policies for properties that had been foreclosed by another big lender, GMAC Mortgage.
Let me put it in non-lawyer terms.  Even if a bank wins a foreclosure lawsuit, if service of process on the homeowner was ineffective (and it often is, especially if service was done via publication), or if the bank failed to join all necessary defendants (e.g. junior lien holders or the mortgage holder of record), or if the bank relied on evidence that was fraudulent (like the affidavits of ROBO SIGNERS), then the Final Judgment may be vacated.  This means, essentially, that even if the bank won a foreclosure lawsuit, was the high bidder at a foreclosure sale, and sold the house to an independent third party, the original homeowner may still ask the Court to vacate the Final Judgment and re-take possession, and ownership, of the home.
The bank filed a foreclosure suit, won, took title, and sold the property to an independent third party.  Now imagine you’re the independent, third party purchaser.  You bought a home from a bank that obtained title via foreclosure.  You did nothing wrong.  You’re living in a house you purchased from a bank.  Yet suddenly, out of nowhere, the original homeowner, who owned the property before the bank foreclosed, has convinced a court that it still owns the property.  Incredibly, in light of the bank’s failure to prosecute the foreclosure lawsuit the right way, the homeowner is right – it’s still his house.  Hence, you’re being forced to vacate the home that you purchased even though you did nothing wrong.
If that happened to you, what’s the first thing you’d do?  I know what I’d do – make a claim against the title insurance policy.  That’s what title insurance is for – to protect homeowners in the event of a problem with the title to the property they’ve purchased.  Title insurance is routine in real estate closings.  The purchaser pays a little extra at closing in exchange for an insurance company agreeing to pay that homeowner the entire sale price in the event the seller does not actually have title to the property.  The way it’s supposed to work, the insurance company collects a little bit at a lot of closings and rarely has to pay anything, so it makes money, and the homeowner has the peace of mind of knowing that if the seller did not have title to the house that the title insurance company will pay.  Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.
Think the risk isn’t real? Then why has Wells Fargo bothered to insist that REO buyers sign a new type of addendum, when it has been selling REO for decades? This effort to shift all title risks on to the buyer is a tacit admission of problems. And look at the document itself. The buyer has to initial it in eight places as well as sign it. That’s a clear statement of Wells’ intent to shift the risk to the buyer.
Now imagine this scenario playing out over and over again, thousands of cases at a time.  If you’re the title insurance company, wouldn’t you stop issuing title insurance properties when the bank obtained title by foreclosure?  Absolutely.  It wouldn’t be worth the risk.  You couldn’t possibly afford to stay in business.  As far as I can tell, that’s precisely what is happening right now.
Title insurance companies have realized that title via foreclosure is unreliable, so they don’t want to write title insurance policies for such properties
The problem is created through a break in the chain of mortgage ownership. Until the 1980’s, most mortgages were loans between the homeowner and a bank, who lent the money directly. More recently, the mortgage financing system transformed into an international system of securitization, with mortgage lenders packaging their loans into securities, bought and sold by investors like stocks. These transactions even split individual mortgages into sections, where each loan could have parts owned by different investment banks.
The transfer of ownership in these mortgage backed securities (MBS) was done with contracts on the balance sheets of Wall Street investment banks, such as Morgan Stanley and Goldman Sachs. The company who originally appeared to make the loan was normally a retail lending company such as Countrywide or Lending Tree, who typically acted as a sales company, and sometimes remained contracted to service the loan.
In the event that the loan goes into foreclosure at a later date, the then-current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The land records would show a deed of transfer from the investment bank to the new owner. This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place.
First, MERS announced it changed its procedures to require that an assignment of mortgage be filed prior to the start of any foreclosure suit.  To me, this is a tacit yet glaring admission of the huge title problems that have existed in a huge percentage of foreclosure cases.  This isn’t a complicated issue, either – it’s just one that everyone has ignored.
Take your standard MERS mortgage – a mortgage recorded in the public records with MERS as nominee for XYZ Corp.  Invariably, when the foreclosure lawsuit is filed, it’s not filed in the name of XYZ Corp., it’s filed in the name of Bank of America, JP Morgan Chase or some securitized trust – an entity with no relationship to XYZ Corp.
In most foreclosure cases, banks’ lawyers argue the plaintiff has standing if it is the “holder” of the Note, i.e. if it possesses the original note with a special indorsement or indorsement in blank.  Many judges accept this position, no questions asked.  In other words, an assignment of mortgage is often viewed as irrelevant/superfluous.
But I’ve often asked “what about title?”  Remember, the ultimate purpose of a foreclosure lawsuit isn’t merely to foreclose, it’s to convey title to someone.  Has that been happening?  Unfortunately, no.  Even if Bank of America, JP Morgan Chase, or the securitized trust has standing (a huge if, but that’s a whole other blog), without an Assignment of Mortgage in the public record, XYZ Corp. is still the mortgage holder of record.  This means that even if Bank of America, JP Morgan, or whoever prevails in the foreclosure is the high bidder at the auction, acquires title, and sells the property to a third party, XYZ Corp. is still the mortgage holder of record.  What does that mean?  Essentially, the entire foreclosure case was like a wild deed – it took place, but XYZ Corp. can still institute a foreclosure lawsuit in its own name, as it would have priority over the bona-fide purchaser who acquired title from the bank.
That sounds crazy, I know.  But think about it.  If XYZ Corp. is the mortgage holder of record, and it’s not named as a party in the mortgage foreclosure suit, and there is no Assignment of Mortgage, then the mortgage in favor of XYZ Corp. still exists, even after the foreclosure, even after the auction, and even after the sale to the third party.  Yes, the foreclosure happened, but as far as XYZ Corp. is concerned, the foreclosure is irrelevant – it still has the mortgage.
There are only two ways to prevent this – join XYZ Corp. as a defendant in the lawsuit (meaning the final judgment of foreclosure would be res judicata as to any subsequent claim on the mortgage), or record an Assignment of Mortgage in the public records.
In my view, MERS finally caught on to this problem, hence the change in its procedures.  But what about the hundreds of thousands of foreclosure cases those were completed or remain pending (prior to this change)?
It’s up to all of us to educate judges about this problem.  “Yes, judge, the plaintiff may have standing.  But even if it does, XYZ Corp. is an indispensible party, and you cannot enter a final judgment of foreclosure without it.”  When the judge acts confused, explain that since XYZ Corp. is the mortgage holder of record, it can prosecute a foreclosure lawsuit even after the plaintiff acquires title and sells the property to a third party.  And since that defeats the purpose of a foreclosure, subjects homeowners to two lawsuits on the same debt, and will cause indescribable title problems (for innocent third parties), we cannot allow that.  Apparently, MERS now realizes as much, hence the change in procedures.
Old Republic is starting to feel the impact of title problems, announcing it may have to stop issuing title policies.  Is the timing of this announcement a coincidence, coming right on the heels of MERS changing its policies?  Maybe, but I doubt it.  Apparently … hopefully … the title insurance industry is finally catching on to the huge, widespread title problems that are emerging as a result of foreclosure cases being pushed through in a sloppy, haphazard manner.
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4 Responses

  1. Title problems far exceed even these homes —”If the house was EVER foreclosed in PRIOR transactions, the title is probably defective ”
    But, will not be resolved in QT — alone — need far more than that — have to dig deeper.
    QT involves “mortgages” — we are not dealing with mortgages as to subprime/alt-a/jumbo securitizations.
    Have to get the word “mortgage” out of the vocabulary.
  2. By the way this is what dave krieger has been yelling about for three years. Things you won’t post and things I have tried to get you to post and you won’t post. Its alsowhy you have to file a qt and a declaratory judgment action even in bankrtupcy court like some trustees are now doing. wake up neil
  3. We talked about this in 2008 and 2009 and even a title company known as APX I believe out of California gave a comprehensive view of what was going on then and what the repercussions would be. No one paid attention. We even put it in our lawsuit when fighting a civil suit against a lender for their ignoring the ownership chain of title and filing whatever they wanted.
    In every foreclosure and I brought this to the attention of two of the largest title companies in the U.S. and ask them: How are you handling your trustee’s deeds? You can see that the chain of title is not recorded and you admitted that you always double check to make sure the original payee lender is the same party foreclosing. If it is not, then you order any assignments at that time and in which so many servicers try to come up with them and then record them. It would be at that time that a trustee’s deed could be issue to convey the property to the lender or a third party.
    I said don’t you think it is a little late to record the assignments after the sale? Why is this now just coming up.
  4. WHERE HAVE YOU BEEN NEIL? My house was not foreclosed on, and I sought quiet title when I started having a prroblem with a loan mod. First thing I did was go get a preliminary title report from CT who said it was uninsurable because of the number of exceptions. That was over 15 months ago. Since when does foreclosure cause the problem in COT? It doesn’t. Its the MERS “recording system” and securitization of the loans that caused the COT problems. Wake up Neil.

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