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The Finality of Foreclosure Sales

posted by Bob Lawless

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.


Thank you - this question has been bothering me since the first post on Naked Capitalism. Now to see if anyone's written about clouded titles to properties that were disposed of through traditional or short sales.

I have to wonder if the bar for overturning foreclosure judgments issued by the Florida 'foreclosure mills' will be as high as indicated in the post.

If the action for the foreclosed is against the foreclosing bank for fraud, doesn't the foreclosing bank face treble damages?

The concern of the title insurers is not based on the prior owners coming back to challenge the sale, their rights have been foreclosed upon. The concern is that another purported owner of the mortgage comes to the new owner and says "You may have paid off X, but X did not own the mortgage, our lien is still valid."

This may seem to be far-fetched, but one of the title insurer's responsibilities under the title policy is a duty to defend the title. In my experience as a claims attorney at a title insurer, just picking up the phone and hiring counsel for an insured resulted in a bill of about $15K to the title insurer.

Even if the title claim is not supported, either by a prior owner or a lender claiming ownership of the foreclosed mortgage, title insurers can expect much higher claims rates and retention of counsel costs for insureds.

Also note that many title insurers have affiliates, such as LPS, whose contracts include a provision requiring the affiliated title insurance companies to issue a title policy after foreclosure; even if LPS or the counsel hired to complete the foreclosure make a mistake.

Okay.... How about a homeowner who is current on their mortgage let's say a 2006 vintage...? Say the homeowner puts the house up for sale, homeowner has a current mortgage originated by Countrywide, serviced by BoA, and securitized into MBS/CDO.... How is the title insured....?

Bear in mind this is not a foreclosure or a short sale.... This is your standard, residential property sale... If the there is a systemic problem clouded titles in foreclosures and shortsales, because of the securitization process, wouldn't all mortgaged properties have similar problems...?

Many thanks,


Econolicious, your hunch is correct; several points:

1- throughout the history of the invention of who owns things, real property has been treated specially; it has had a sacrosanct spot in the annals of ownership; for example the Statue of Frauds mandates that all contracts involving real property be in writing; Registry of Deeds were created in all counties in the land in order to process this necessity of writing and as a means of making sure that real property was handled properly- in writing; there are countless other examples;

2- adherence to contract law and the rule of contract is vital to the free flow of property (real and personal) in our society; the creation of the Uniform Commercial Code is an example of the recognition that contracts need be adhered to and executed properly;

3- a mortgage is a real contract about real property (yes, I know obvious, but needs stating) and the reason mortgage contracts are so long and contain so many clauses is to specify the rights of all parties under all existing law; it binds BOTH parties- the lender and the lendee;

4- in order to ensure that only the true holder of the note can kick a person off their real property, a paper trail is specified and required; everyone needs to know who owns the debt so that some other entity cannot claim ownership of the debt;

5- when the ownership trail of the true holder of the note is broken, chaos ensues because ONLY the holder of the note can exercise his/her foreclosure rights; so if no one know who owns the note, NO ONE has the legal right to foreclose to re-claim the real property

6- THAT is the true problem here; if these notes are not done properly or lost or not transferred properly vis-a-vis NY law (I use NY laws because most of the trusts wherein the notes were to be allegedly transferred stated NY law governs), then poof- the right to re-claim is- well, you can figure out what that means....

7- it may seem 'unfair' that the banks lose the right to foreclose when the mortgagor cannot/does not pay but that is the risk inherent in creating a contract; you have to play by the rules or really, the meaning of contract is gone-poof... ; who would make a contract if only one party had to play by the rules? If I screw up and don't pay my mortgage or something happens, the banks will foreclose. But if the banks do not follow the law/rules and cannot foreclose- whose fault is that?

A final note is that it is my guess that unless ones mortgage stayed with the group that made the loan, the transfer of the note was never done properly and any foreclosure done was illegal. It amazes me that any title company would certify title on a recently foreclosed property.

That means even if you are current on your mortgage there can be problems with the title due to the mistakes made in transferring the note.

There is no way to fix this without abrogating millions of contracts.

bokun59 above touches on my question, which is:

Is the title that is passed on to the new buyer in the foreclosure process unrevocable?

That is, if the *real* note holder (= title holder in I think 45 states where the title is subordinate to the note) shows up, they have no ability to challenge the existing title? I am not talking about Henry and Helen Homeowner here, I am talking about the IOU holder.

If such a title can be challenged, then of course the title insurance companies are going to be covering their butt. One can easily foresee an industry centered around such title challenges in the future,

Sure they can. That is why title insurance is necessary and why title companies are starting to back out off from writing policies.

Here you may have battles between the innocent property buyer, the title company, the former property owner who gave a deed, and the note holder.

Normally, I would say that the old property owner was probably an innocent seller but now, with the issue becoming quite well-known, there may be no good deed given by an 'innocent' deed seller. That is, if you know that your note has been sold and you don't find out who the true owner is and whether the note was handled properly and thus, whether the PROPER (if any) note holder was paid, you have most likely not passed on good title. And when you give a new deed, you are asserting (usually) that you have some good title to give.

As an example: Quite often, these notes are transferred in blank, as bearer notes (whoever has the actual physical note is the one who can make claim to be paid); let's say the note was never discharged and some trickster at the bank gets a hold of the note and demands payment? Well, "...when the endorsement is “in blank” – then only the party with actual possession of the note can be paid on it. Essentially, “in blank” is like turning the note into cash and so only the person with the cash in hand can spend it. [See California Commercial Code Section 3205].”

Imagine that scenario...

I have a question that might be related. My sister, who has had no problems with her mortgage payments was approached by her 1st-teir bank to refinance her loan. They offered her a full percent below her already good rate. When she told them "thanks, but no thanks", they dropped the fees down to $150. She then accepted. In the process, the bank told her that they could reissue the loan at such low cost because they were using an "Opinion of Title", rather than a "Certificate of Title". They stated that they did this because they had already run the title on the first loan. My gut feel is that this offer is more about giving the bank some opportunity (at their loss) to handle her title differently, and somehow shift the burden of risk over to her, or get some questionable paperwork corrected, or both.

If there is something questionable going on, I can't imagine my sister is the only one with this supposed windfall knocking at their door.

Does anyone know what the nuance is between a "Opinion of Title" and a "Certificate of Title"?

Brian C -

The other thing that may be going on is that your sister's loan just became a successful loan modification, for the bank's statistical purposes.

Banks have been cold calling people to do minor mortgage changes - to the benefit of people who are current on their mortgages, and don't need a modification.

Sometimes the changes are as small as a quarter percent drop in the interest rate - it makes no difference. It is still is counted as a successful non-HAMP loan mod by the banks. Well, I should say it "counts" under the stringent guidelines (**cough** **cough**) of the folks who brought you "Hope Now" and other semi-mythical voluntary "relief" programs. We shall see if someone get wise and start digging into the reality behind some of the mod claims that are being thrown around.

***Laymans opinion***
I always thought that a "Certificate of Title" was issued by a title insurance company after review of the property history and backed by title insurance. An "Opinion of Title" is issued by an attorney and is backed by the attorneys research. No title insurance is included.

Look they've been dancing around this for years. Think their not covering things up? WRONG! The judges have been enabling this nightmare since at least 2004 that I'm aware of!

There is no reasonable person that me or two separate judges can think of that my home wasn't outright stolen due to Judicial and attorney corruption! Trust me two of them recused in the coverup of my case no doubt about it....

Just what does Jesse James and Katie O'hara have in common? Me they've covered up land theft for years now...

That's the truth of it! All of you know of the corruption!I tried to warn everyone knowing 1st hand what the collection agency I worked for encouraged me to do...Then I found out the board of directors for NARS is no other than Shapiro/Kreisman over 24 of the top law firms nationally! The same over the law firm getting nailed in Florida currently. Happens quite a lot with the attorneys they represent....Just how long do they think they can lie to everyone!There's even a MO Supreme court Judge with attorneys putting fraud into the courts!

Don't think you couldn't be next...$150,000 to 50b isn't good enough to get them to do HONEST BUSINESS! If you tell the TRUTH your Frivolous doing things with the intent to harass. When in fact stopping the biggest meltdown since the 1930's depression means something to some of us!

Be dammed if your a banker who caught them in the fraud w/a way to pay your bills yet ALL THE BANKERS ATTORNEYS AND JUDGES ARE CROOKS FOR THE MOST PART! So u can't even get biz done!

Don't think none of them don't know what their doing! My tyrant of a boss Told me by the time I figured it out I wouldn't believe it. He actually predicted how much Shapiro/Kreisman would be protected...Needless to say after the lawsuit I lost my job over they sold the Shapiro Atty network off to First American Title...But still managed it...

I just wonder how much due diligence they did on my family background though...If they knew that my great great grandfather had one of the biggest cattle ranches in tx in the early 1900s. Or that my great grandfather was an original member of Hollywood...Obviously had some pull to get his mothers name used in Gone with The Wind and Comanche Territory...Or that I have relatives with homes paid in full or am close w/different multi millionaires that made money the HONEST WAY! WHICH means u don't lie cheat or steal! And expect to be punished for it as you would us!

Here is an interesting take on this issue presenteded by Prof. Roubini: http://www.roubini.com/us-monitor/259737/foreclosure_fraud_reveals_structural___legal_crisis

This is an exceptional content, and I can agree with what was written here. I will be back to check out more of your articles soon. Thanks

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