Archive for September 22nd, 2010

Title problems – banks won’t warrant title to their own, foreclosed properties

As I type this, reporters across the country are scrambling to understand why GMAC has stopped all foreclosures in 23 states, including Florida.  The more I think about it, the more I think the answer is clear:

Banks and title insurance companies have realized that title conveyed via foreclosure is unreliable. 

That’s worth repeating. 

Banks and title insurance companies have realized that title conveyed via foreclosure is unreliable.

I’ve been explaining for a long time now, both on this blog and to every judge who will listen – invalid service of process, failure to join all necessary defendants in a foreclosure case (e.g. the mortgage holder of record and junior leinholders), and the bank’s use of fraudulent evidence to obtain a foreclosure judgment have resulted in tens of thousands of foreclosure judgments that are voidable, if not void. 

Let me put it in non-lawyer terms.  Even if a bank wins a foreclosure lawsuit, if service of process on the homeowner was ineffective (and it often is, especially if service was done via publication), or if the bank failed to join all necessary defendants (e.g. junior lien holders or the mortgage holder of record), or if the bank relied on evidence that was fraudulent (like the affidavits of Jeffrey Stephan, described in the blog below), then the Final Judgment may be vacated.  This means, essentially, that even if the bank won a foreclosure lawsuit, was the high bidder at a foreclosure sale, and sold the house to an independent third party, the original homeowner may still ask the Court to vacate the Final Judgment and re-take possession, and ownership, of the home. 

Envision that scenario.  The bank filed a foreclosure suit, won, took title, and sold the property to an independent third party.  Now imagine you’re the indepedent, third party purchaser.  (I know, that may be hard for some of you, but stick with me.)  You bought a home from a bank that obtained title via foreclosure.  You did nothing wrong.  You’re living in a house you purchased from a bank.  Yet suddenly, out of nowhere, the original homeowner, who owned the property before the bank foreclosed, has convinced a court that it still owns the property.  Incredibly, in light of the bank’s failure to prosecute the foreclosure lawsuit the right way, the homeowner is right – it’s still his house.  Hence, you’re being forced to vacate the home that you purchased even though you did nothing wrong. 

If that happened to you, what’s the first thing you’d do?  I know what I’d do – make a claim against the title insurance policy.  That’s what title insurance is for – to protect homeowners in the event of a problem with the title to the property they’ve purchased.  (Title insurance is routine in real estate closings.  The purchaser pays a little extra at closing in exchange for an insurance company agreeing to pay that homeowner the entire sale price in the event the seller does not actually have title to the property.  The way it’s supposed to work, the insurance company collects a little bit at a lot of closings and rarely has to pay anything, so it makes money, and the homeowner has the peace of mind of knowing that if the seller did not have title to the house that the title insurance company will pay.) 

Now imagine this scenario playing out over and over again, thousands of cases at a time.  If you’re the title insurance company, wouldn’t you stop issuing title insurance properties when the bank obtained title by foreclosure?  Absolutely.  It wouldn’t be worth the risk.  You couldn’t possibly afford to stay in business.  As far as I can tell, that’s precisely what is happening right now. 

Title insurance companies have realized that title via foreclosure is unreliable, so they don’t want to write title insurance policies for such properties.

If you’re skeptical, and think I’m being an alarmist, consider this article:

As the article explains, Wells Fargo has stopped warranting title to its own, foreclosured properties.  What does this mean?  Instead of issuing purchasers of bank-owned properties a warranty deed, Wells Fargo is only willing to issue a quit claim deed.  Of course, the difference between a warranty deed and a quit claim deed is huge.  With a warranty deed, Wells Fargo is making an affirmative representation that it owns the property, giving the purchaser legal recourse against Wells Fargo if the bank’s title is defective.  With a quit claim deed, Wells Fargo is making no such representation, giving the purchaser no recourse if the bank did not own the property.  I know that sounds crazy – how can a bank sell a property, pocket the money, not actually own the property, and have no liability?  The absurdity of that proposition is the point of the article.  Essentially, banks are trying to set it up where they can keep the money from the sale of a house (that they did not own) even though the homeowner couldn’t keep the house. 

The question that arises, of course, is this – why would a bank like Wells Fargo be unwilling to warrant title to its own, foreclosed properties?  For me, the answer is clear:

Banks like Wells Fargo realize there are title defects to these properties and they don’t want to face the liability associated with selling properties they don’t actually own. 

In other words, Wells Fargo undoubtedly realizes that it may not be the owner of that property, so instead of warranting that it owns the property, and facing a potential lawsuit later, Wells Fargo wants to shift the risk that it doesn’t own the property onto the purchaser.  Would this happen in every case?  Certainly not.  But for Wells Fargo, it’s a numbers game.  If they’re selling 500,000 houses, they know this problem is going to arise on a certain percentage of them, so they want to transfer the risk from itself to the purchaser. 

This raises perhaps another significant question – if banks won’t warrant title to foreclosed properties, and title insurance companies won’t issue title insurance policies, then what is going to happen with all of the foreclosure cases that are pending?  And all of the homes for which foreclosure is sought?  Candidly, I’m not sure.  Lest you think that’s a copout, I don’t think I’m alone in that feeling of uncertainty.  In fact, I believe the reason GMAC has halted foreclosures in 23 states is because it doesn’t know the answer to these questions, either.  If you disagree, you tell me –

Why would GMAC suddenly stop all foreclosure cases in 23 states? 

What other explanation could there be?

To illustrate my point, suppose you’re the CEO of GMAC.  Would you want to keep foreclosing on properties for which you cannot obtain title insurance policies?  What are you going to do with all of those properties?  You can’t sell them without title insurance (certainly not for fair market value anyway, as few people will want to buy properties without clear title).  What good is a Final Judgment of Foreclosure if you can’t sell the property you’ve obtained? 

I realize I’m speculating a bit.  But doesn’t it make sense that GMAC is stopping all foreclosures, and Wells Fargo is refusing to warrant title to its properties, because they realize the inherent unreliability of the title they’ve obtained via foreclosure? 

The way out of this quagmire is perhaps scarier than the quagmire itself.  As I see it, every property in which there is a title problem is going to have to have another lawsuit filed, either for another foreclosure or a quiet title lawsuit.  That’s how the law works, at least in Florida – if there’s a title problem, the way to fix it is with a quiet title suit or a foreclosure suit.  This raises perhaps my biggest point of all:

every foreclosure mill and every judge that is rushing to “push through” foreclosure cases may be staring at a second round of these cases, on the exact same properties, because the cases were not done correctly the first time. 

If you think that’s an absurd proposition, remember – that’s precisely how Florida law works with respect to tax deed sales, and, in a lot of ways, tax deed sales are just like foreclosure sales (public auctions at the courthouse, high bidder gets a deed from the clerk).  A key difference, at present, is that when someone purchases a property at a tax deed sale, the deed from the clerk does not convey marketable title. After a tax deed sale, the way for a purchaser to obtain marketable title is to file a suit to quiet title (or wait four years).  Given what’s happening right now in our economy, I don’t think it’s a stretch to say this is where we’re headed with foreclosures.  A scary proposition, yes, but this may be where we’re headed. 

If your head is spinning right now, I don’t blame you.  For the average person, here’s what you should take from all of this:


After all, things are absolutely crazy right now.  If you retain an experienced foreclosure defense attorney, and are able to avoid a final judgment of foreclosure, who knows what the future may bring.  Maybe the government will step in and fix this mess.  Maybe the banks will be forced to negotiate with homeowners (because the foreclosure process isn’t working).  There are a ton of possibilities if you defend yourself.  But if you give up, lose your case, and something changes in the future, it may be too late for you to do anything about it. 

If you’re a judge reading this, ask yourself this.  If/when this all comes crashing down, are you going to be able to look at yourself in the mirror, like Judge Anthony Rondolino in St. Petersburg will, and know that you followed the law and forced the banks to prove their entitlement to foreclosure?  Are you going to feel good about how you handled the foreclosure crisis?  Or are you going to realize that you signed thousands of final judgments of foreclosure without evaluating those files, contributing to the problems we’re now facing? 

I realize you cannot change the past.  But isn’t it time that you start being part of the solution and not part of the problem?  The laws are in place for a reason.  Please.  Force banks to prove their case.  Read their affidavits.  Read their motions.  Give each case an honest assessment.  I know you have a lot of cases, but that’s your job.  If you shirk that responsibility, and just “push through” more foreclosures, you may think you’re removing another case from your docket, but all you’re really doing is contributing to the problem that has brought our economy to its knees. 

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