The Finality of Foreclosure Sales
Over at the New York Times, Ron Lieber has an article today with a new angle on the document problems that have caused mortgage lenders like GMAC Mortgage, JP Morgan Chase, and Bank of America to call a halt to foreclosure proceedings. Lieber asks what would happen "if scores of people who had lost their homes to foreclosure somehow persuaded a judge to overturn the proceedings?" What would happen to the persons who had purchased the homes out of foreclosure and are now living in them?
The answer, Lieber writes, might depend on whether they have title insurance. Lieber is not necessarily wrong, but the article conveys more of a sense of crisis than is probably appropriate for the title insurers. That is not to say that the mortgage documentation problems are not serious for other reasons or that the title insurers are home free. The law, however, strongly protects the finality of past foreclosure sales.
At first, these rules might seem unfair. Why should the law protect old court proceedings that have been tainted by mistake or, even worse, fraud? The answer, of course, is for the instrumental reason that a court system could not operate where every old judgment was open to attack. Losing parties will almost always feel the judge make a mistake or the opposing party misled the court through half-truths or outright lies. Before a court enters final judgment, procedural rules and court appeals are designed to maximize the possibility the truth will win out and to minimize the possibility of judicial error. The law imposes a very heavy burden on those seeking to attack final court judgments.
The same ideas strongly protect the finality of a court's foreclosure judgment. The foreclosure judgment, however, is only an interim step to the ultimate disposition of the property at the foreclosure sale and the transfer of the deed. Now, third party rights will come into play, and the need for finality becomes even stronger. If foreclosure deeds were subject to attack, at worse we might have no bidders at the sale, and at best we would have drastically lower prices. Even if the successful purchaser at the foreclosure sale is the lender, it will be selling later to a third party, and we will have the same need for finality.
For these reasons, and not surprisingly, most every (or maybe even every--I'll let someone else do the 50-state survey) state provides the strongest possible finality protections for deeds obtained through foreclosure sales. We also see similar rules for other judicially supervised sales in other contexts such as sales of personal property subject to a security interest or bankruptcy sales. Illinois law, for example, states that the transfer of a deed of foreclosure is an "entire bar" of all claims by anyone who was a party to the proceeding or anyone who had notice of the proceeding. Even if someone manages to overturn a judgment of foreclosure, the claim is limited only to the proceeds of the, not to a return of the property. See 735 ILCS 5/15-1509. Illinois is a judicial foreclosure state, but similar rules exist in states that allow nonjudicial foreclosures through powers of sale. E.g., Cal. Civil Code § 2924(c).
Suppose Henry and Helen Homeowner lost their home in foreclosure proceeding, and it has since been purchased by Bill and Betty Buyer. Now, Henry and Helen discover the affidavits in their foreclosure proceeding had some of the very same apparently fraudulent signatures reported in the media. When Henry and Helen complain to the court, the answer should be: "Your complaint is against Deutsche Bank (or whoever foreclosed) and not against Bill and Betty. You can recover damages from Deutsche Bank but not eject Henry and Helen from possession." In turn, this will mean that that Bill and Betty (or their lender) will not have to look to the title insurer for recovery.
In theory, the law on the books thus should protect title insurers, but they have should have some very real "on the ground" concerns. One of the best and worst parts of our judicial system is that anyone has access to the courts to assert their grievance against another. Henry and Helen Homeowner should not have a claim against Bill and Betty, but that does not mean they won't attempt to assert it, drawing in turn Bill and Betty's title insurer into the litigation. It is very understandable that title insurance companies are trying to limit their exposure to litigation by stopping to write title insurance on foreclosed properties sold through some of the troubled financial institutions. Also, one must remember that hard facts often make for bad law. Bill and Betty have a hard luck story that may lead some judges to try to find ways around long-standing doctrines they should let be. Another legitimate concern is the political pressure that will build for a legislative or administrative solution that will drag in the title insurers.
Right now, I'm more concerned about whether the documentation problems are symptomatic of broader problems where the financial institutions cannot document they own loans they say they own or, even more pproblematically, don't actually own the loans.