Were I not driving across this great big nation of ours, I would have been far more productive on blogging about foreclosuregate. As it is, I’m fairly limited to writing at various truck stops in a larger work that hopes to lay out all of the issues and what the real estate industry can and should do about it.
At the same time, there are issues that I find compelling to at least discuss, seek comments and insights, as I work through the extraordinarily complex scenarios. One such issue is the impact on title.
In discussions with title industry experts on the topic, I’ve been assured that the whole “foreclosuregate” which began with the robosigning scandal won’t have a dramatic impact on title. First, various experts have told me that all the robosigning stuff is just technicalities, details that don’t change the actual economic fact of a borrower who owes money, and a lender who is owed money. Some servicers have cut corners and possibly committed perjury and fraud, but once people get into the files and start unravelling things, it’ll all come clear. Second, I have been advised that the actual act of foreclosure itself clears title, at least for subsequent good-faith purchasers.
Upon further review, I’m not convinced that either scenario will hold up. There may indeed be serious and significant title issues that could affect millions of properties, millions of buyers, title insurance companies, and lenders for years to come.
Standing and Title
Let’s start with judicial foreclosure states which require that the lender bring a lawsuit to foreclose on a property. The key issue with all judicial foreclosures is whether the party who brought the foreclosure suit has standing — the legal right to bring that lawsuit in the first place. (We’ll be exploring some of the ins and outs of standing in a later post or publication.)
In order to bring the foreclosure suit, the lender/servicer bringing the suit had to prove that it was the rightful owner (holder) of the promissory note. In many cases, they could not find the actual note, and claimed that the note was lost or destroyed. This claim is where the robosigning became a major problem. Someone had to provide a legal affidavit to the court that the note, and other documentation relating to the loan, was lost or destroyed, but that its terms could be reconstructed from computer records or other information. In virtually all cases, such an affidavit requires the affiant to swear that he has personal knowledge of the terms/facts by having examined or reviewed or in some other way worked with the original documentation. This, as we now know, turned out to be outright falsehoods in some cases.
One of the major problems that this fraud revealed is that in some cases (no one knows exactly how widespread this problem is) the notes may not have been properly transferred from the originator to the ultimate owner (usually some sort of a RMBS trust, a REMIC). Again, this is a complex issue, and we’ll get into that more later as well. For now, the main thing is that there are problems and questions as to chain of title.
Judicial foreclosures would, of course, come to a halt until the chain of title issues are resolved. But my concern/question has to do with past foreclosures.
Lack of standing by a party means that the court simply has no ability to rule on the case, because there is no “live controversy”. It would, in fact, be unconstitutional for a court to pass judgment when one of the parties lacks standing. Every single one of those judgments would have to be reversed and remanded for a retrial. But in past foreclosures, the deed is already done. The borrower has defaulted; he has lost title to his home. Some lender has foreclosed, and the property has been sold again to a bona fide purchaser.
On the one hand, reason dictates that the past owner, who has in fact defaulted, probably has no claim on his former house. On the other hand, there could be a very reasonable claim that the “proper note holder” might have agreed to a loan modification or some other arrangement in lieu of foreclosure. That the borrower was deprived of that ability by fraud is something that might give rise to damages.
Furthermore, if the foreclosing party cannot be shown to have been in possession of the note, thereby lacking standing, it is not at all clear that they would have had the right to release the mortgage lien on the property at all. And there comes the cloudy title.
Finally, what if the former homeowner simply moves back into the house claiming that the foreclosure was invalid, and that as a result, he still owns the house until proper foreclosure can be conducted? The bona fide purchaser might have the right to the house, but would law enforcement really get into the middle of an unclear legal situation? The sheriff, after all, would need a court order to evict a homeowner. At least in the California case linked to above, the police refuse to intervene, calling it a “civil matter”. Would the court actually grant said eviction while there is a raging controversy before the court as to whether the past homeowner does or does not have title to the property?
But… California is a Non-Judicial Foreclosure State…
The family above is an interesting case, since California is a non-judicial foreclosure state. In a non-judicial state, assuming that the power of sale clause exists in the mortgage or deed of trust, a lender simply has to follow the process:
A notice of sale must be: 1) recorded in the county where the property is located at least fourteen (14) days prior to the sale; 2) mailed by certified, return receipt requested, to the borrower at least twenty (20) days before the sale; 3) posted on the property itself at least twenty (20) days before the sale; and 4) posted in one (1) public place in the county where the property is to be sold.
The notice of sale must contain the time and location of the foreclosure sale, as well as the property address, the trustee’s name, address and phone number and a statement that the property will be sold at auction.
The borrower has up until five days before the foreclosure sale to cure the default and stop the process.
No judges are involved, therefore no standing issues, and therefore no affidavits, and therefore, robosigning isn’t a problem.
Or is it?
According to at least one California attorney, Michael Rooney, robosigning does void and nullify even non-judicial foreclosures, at least in California. He raises some excellent points, and I haven’t yet seen the counter-argument, but here’s the part that is relevant for our discussion of title:
1. Good Title Cannot Be Based on Fraud (Even as to a 3d Party).
In the case of a fraudulent transaction California law is settled. The Court in Trout v. Trout, (1934), 220 Cal. 652 at 656 made as much plain:
“Numerous authorities have established the rule that an instrument wholly void, such as an undelivered deed, a forged instrument, or a deed in blank, cannot be made the foundation of a good title, even under the equitable doctrine of bona fide purchase. Consequently, the fact that defendant Archer acted in good faith in dealing with persons who apparently held legal title, is not in itself sufficient basis for relief.” (Emphasis mine)
Again, that one lawyer in California believes this does not mean that the law is settled. Far from it. One issue with foreclosuregate is that it presents so many legal problems that really have not been addressed authoritatively one way or the other. However, based simply on the uncertainty and the unsettled state of the laws, one can infer some consequences, particularly for real estate.
Possible Consequences, From Bad to Worse
The first consequence, I think, is that any real estate agent who works in a fiduciary capacity to a buyer in a REO or short sale transaction should advise the buyer to expend additional effort to establishing a clear chain of title, free of any doubt. If a court has any reason to question the validity of the foreclosure action, your buyer is going to get stuck in legal hell, even in a non-judicial state, until the legal question can be settled. That may take a couple of years.
Second, I’m looking for this data, but as yet, I haven’t the faintest idea what the exposure of the title insurance industry is to this mess. We do know that the major title insurers had considered demanding indemnification from lenders and loan servicers, but dropped them after pushback. Since title insurance covers all of the expenses associated with clearing title, I have no idea what the costs might be. Presumably, title insurers would not be responsible for any damages awarded to a past owner, but at this stage, who knows? We do know that roughly 8 million foreclosure notices were sent out between 2007 and 2009, and we know that banks actually foreclosed on some 918,000 properties in 2009 alone and some 850,000 properties in 2008. If every single one of those 1.7 million or so properties are found to have title problems, what would be the cost to title insurers?
I have no idea, because I don’t know what the average costs are in one of these foreclosure-related title clearance actions. If it’s $2,000 each (seems pretty darn cheap given costs of lawyers), that’s $3.4 billion. But again, who knows?
FYI, Fitch Ratings believes that these title-related issues won’t make much of a difference to title insurers. I don’t have a copy of that report, so can’t say whether I think Fitch is on the money or is jumping the gun, given the uncertainly of the underlying legal issues.
Third, much of this may become moot, because we’ll be dealing with global financial meltdown as every single major American bank is overwhelmed by the collapse of the RMBS structures. This is a far more complex issue we’ll be examining further later. But at that point, who cares about clear title? It’ll be time to worry about stocking up on ammunition, canned goods, and medicines.
Your Expertise Wanted
As is evident, this is a rather incomplete (and quite possibly incorrect) set of observations and questions. I would love to get any expert opinions, reports I don’t have, or other sources of information from folks in the legal, title insurance, brokerage, and other industries. And as always, your considered opinions are welcome.
10 thoughts on “Title Issues in Foreclosuregate”
Excellent post and this is a topic that deserves considerable concern. You make some outstanding observations and I’ll just throw in a couple of my own.
First, if the conduct of the lenders and their agents and attorneys is even partly true as has been reported, then it is beyond question that they engaged in criminal conduct and anyone who materially participated in the conduct should be prosecuted. And as a member of the industry, I am horribly frustrated by the continual failure by the major institutions to continually fail to realize that real estate requires educated, experienced personnel to insure that transactions are handled properly and that management by assembly line and algorithm is a disservice to customers. The fact that the industry has to grapple with these issues is an embarrassment and an outrage.
Second, let me address simply this statement: “the lender/servicer bringing the suit had to prove that it was the rightful owner (holder) of the promissory note”. If a foreclosure is an adversarial proceeding where the owner being foreclosed actively contests the foreclosure, then this statement is correct. From my personal experience from reviewing hundreds of Pennsylvania foreclosure cases, the foreclosure that is contested is rare. How rare? Just by my own unscientifically measured impression: less than 1%. And without a demand by the defendant that the lender prove their standing, the court (at least in Pennsylvania) will not intervene or question the truthfulness of the lender’s averment that it is the bona fide note holder.
Third, until the legitimacy of a title is taken to litigation, the arbiter of what is a marketable title and what isn’t is determined by the practices of the major title insurance underwriters. Obviously, what the law provides has an enormous bearing on their underwriting standards but insurers are also businesses that sometimes make business decisions when considering risk. My understanding of the robosigning issue is that the notable depositions where the practices were discovered had occurred months prior to the issue receiving any notice and that it was only when Old Republic suspended insuring or required greater scrutiny before insuring the GMAC/Ally foreclosures in certain states that it became widely reported.
None of this excuses the conduct of the servicers or anyone else involved in the robosigning. I am frankly disgusted that no criminal charges have been brought thus far. And I think you’re right that even if the robosigning mess doesn’t lead to title armageddon that there are concerns about the long-term viability of the RMBS structure, but I’ll just keep an eye out for your pending posts on that subject.
Thanks so much for your thoughtful comments, Andy. I hope you’re right, I really do. Here’s what concerns me.
1. With respect to the fact that less than 1% of foreclosures are contested… I think that’s about to change, in a big way. The plaintiff’s bar in the U.S. is not exactly known for being reticent, or caring much about systemic risk. I think it’s a matter of time before we start seeing TV ads by lawyers: “Have you been victimized by greedy banks? Have you lost your home to foreclosure? Call us now! We’ll fight for your rights!” If mesothelioma, a rare cancer that no one knew about ten years ago, is now a mainstay of lawyers, I can only imagine how big this is going to get.
2. I’m reasonably certain that criminal charges will be brought. The state attorney generals are already conducting criminal investigations. I just read that Holder is having the DOJ look into criminal probes. We’re going to see people going to jail. And with criminal liability, civil lawsuits will absolutely take off.
3. What individual homeowners, even in class action, will claim will absolutely pale compared to what well-financed hedge funds, insurance companies, and pension funds will bring in lawsuits vs. the banks that sponsored the RMBS trusts, the banks that created and used MERS, and the banks and their servicing subsidiaries that created the fraud problem….
Although CA is non-judicial, many bank servicers are filing fraudulent assignment on deed of trusts at the last hour — after NOD is filed and before trustee sale date. The question is do these servicers have legal standing to the assignment and the legal authority to foreclose? If cases are filed in CA state courts, and brought before a judge and jury, this could become an issue.
Real world example from Missouri, a non-judicial state: In early 2010, before foreclosuregate, I sold an investor a foreclosed home which Deutche Bank owned in an all cash deal. The buyer received an owners title policy from a title company which the seller (Deutche Bank) was disclosed as having a financial stake in. After doing some repairs the buyer attempted to to a cash out mortgage on the home to pull back most of their cash from the property. A local title company was hired by the lender to do the title policy. Turns out Deutche Bank obtained the loan from JP Morgan Chase via a sale through MERS with NO assignment of mortgage having been filed. The local title company REFUSED to insure the property without an actual assignment from Chase to Deutche. Ultimately the deal was closed with the ORIGINAL, bank owned title company providing the title insurance. To my knowledge, no assignment was ever performed as Missouri law requires. The three problems I see with this are:
1. Is the bank essentially covering up its mistakes/fraud by utilizing a title company in which it has a financial stake?
2. How real of a title insurance policy does my investor buyer have??
3. Does my buyer even legally own the property?
I agree 100% that foreclosuregate is not just a technical issue. Real laws have been broken. But, I seriously doubt any real consequences will ever be felt given how deep the financial relationship between the big banks and Washington is. My guess is there will be some kind of brokered settlement between the banks and DOJ and then legislation passed to essentially whitewash the situation.
You ask some great questions, Jim. I wish I had authoritative answers. My sense right now, based on research so far, is that:
1. I doubt the bank is utilizing its own title subsidiary to cover anything up; it was probably just trying to make some money from title. Now, of course, DB might find its title subsidiary swamped with claims….
2. As far as I understand title insurance, your investor buyer has as good a policy as anyone else. Of course, he should read that policy…. The question is whether the title company that insured his owner’s title policy will be solvent once it’s all said and done.
3. Who knows? That’s the problem, isn’t it? And the DB title company is going to have to pony up all of the expenses to figure it out and clear title for your investor buyer/owner.
As to the solution… I have a feeling that the servicers will take it on the chin in any settlement between the big banks and Congress. Congress is focused on (and should be) preventing a global financial collapse. If they have to sacrifice title insurers and servicing companies, I think they will.
Rob, you should (and maybe you already do) follow Barry Ritholtz’s work on this subject. Here’s a link to his latest diatribe on the subject. http://www.ritholtz.com/blog/2011/01/can-banks-foreclose-on-mortgages-they-do-not-own/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+TheBigPicture+(The+Big+Picture)
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