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Wrongful Foreclosures and Clouded Title

posted by Adam Levitin

I think there's a much bigger problem lurking in the shadows behind the GMAC/JPMChase foreclosures freezes due to concerns about faulty foreclosures:  clouded title.  

There's a lot of wonderful technical stuff involved with wrongful foreclosure claims, but the basic problem is pretty easy to understand:  you have to own a mortgage in order to bring a foreclosure action.  If you don't own the mortgage, you don't have any right to kick someone out of his/her house, even if that person has defaulted on his/her mortgage.  And GMAC/JPMChase are sufficiently worried that the trusts they service might not own the mortgages they are foreclosing on that they have put a halt to their foreclosure actions.  

Consider, though, what it means if there have been widescale wrongful foreclosures.  If these foreclosures were nonjudicial foreclosures (and maybe even for judicial foreclosures), it means that the foreclosure sale purchasers have clouded title.  The homeowner still has claim to the property and there might still be a valid mortgage on it.  And as many foreclosure sales end up with the lender buying the property and reselling it, what does that mean for the eventual end-buyer?   What does that mean for their title insurer?   This raises all of the classic bona fide purchaser protection issues, but as the linked article reports, at least one title insurer has gotten spooked.

Consider also what this means for homeowners who are current on their mortgages and want to sell their house.  Are we sure who actually owns their mortgage?  If not, there's a problem.  If it is owned by A, it doesn't do any good for B to release the mortgage upon the sale.  I think the title insurers' potential problem goes much further--it's not just title to foreclosed mortgages that are in question, it's potentially all private-label securitized mortgages.  Once the title insurers recognize the potential danger here, how willing will they be to write new policies?  And without those policies, how many folks will be able to get mortgages to buy houses?   (And without new business, the title insurers are themselves going to be a bind).  I'm very curious to see how the title insurance industry handles this problem.  


The title insurance companies in question have legal departments, and people who -- for excellent reason -- spend as much time thinking about these things as any of the experts here assembled. They have been in on the MERS project from the beginning, and my impression is that they feel that they are quite successfully riding the tiger that you describe. But I have a suggestion: find the legal officers in question and ask them. It could be illuminating.

As a former title claims attorney for a title insurance underwriter, I was requiring that the foreclosure attorneys sending in minor title claims to prove to me that they owned the note. If they didn't own the note, they did not have title insurance on the property since the title insurance only applies to successors in interst.

However, the title insurance industry has an extensive business set up, through affiliates, to provide foreclosure services to servicers. They may contractually be required to provide title insurance for the outsale in order to complete the foreclosure services.

Another issue will be the title insurance industry's use of 'letters of indemnity' - essentially this is where one title insurer will indemnify another title insurer who is issuing a policy to the new owner. The letter is limited to the extent of the potential cloud on title that the issuing title insurer would be responsible to pay if the risk ever came to fruition. These letters of indemnity were given out indiscriminately during the boom years. There is no registry, or any way to determine the extent of these promises between title insurers.

In answer to the last question - Old Republic Title Insurance apparently has instructed its issuing agents to avoid issuing title insurance policies for properties which have been foreclosed by Ally/GMAC.

Links to Old Republic GMAC denial announcements.

Gee... Maybe if people had just started listening a scant decade ago... Better luck next time I guess....

Look past foreclosures themselves!

Look at a state like MA. We have non-judicial foreclosure (other than the servicemember hearing). But we have some interesting protections for home owners, including a 90 day (recently extended to 150 day) cooling down period. If lender doesn't comply with M.G.L 244 35A, they don't get to use their power of sale... and so sale is void. Do you think the national banks are following that law? Of course not.

So the foreclosure itself may be perfectly valid, the note could have been properly assigned, but there still could be problems because of state law!

I live in a non-judicial state and here they have your attorney lie. They have your attorney refuse to file an adversary for you. They allow court minions to remove documents out of a court record. They provide proof they initiate foreclosure knowing they don't have standing. Then the judge endorses the withdrawal and FU up. You have others still in Fed dist court to remove records as well.

I used to make the banks a lot of money being fair and honest. So much for HONESTY!Tell the truth and they just try to remove it...

Anyone who thinks this doesn't involve the people as I mentioned haven't looked at the court records. Unfortunately, I know them forwards and backwards.I have a memory that reminds me how much I was encouraged to break the law in an attempt to collect an honest dollar!

No matter what injustice there is there's none like having lies told to you day in and out! Justice Dept the whole bunch of them needs to be removed in MO...Homeowners are suffering so bad! Yet they protect the REAL THIEVES!

I got a sub prime loan with New Century Mortgage 10/16/06. Tried to get a Modification and was unsuccessful. Was served Lis Pendens on 3/10/08 by Citigroup filed by David J. Stern with a Lost Note Count and was not endorsed by New Century Mortgage. MERS was nominee for lender and was Mortgagee. At the time I did not know of the fraud that was going on and felt obligated to short sale and closed on 5/23/08. Do I and all the poor soles who lost their homes have any recourse?

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