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.