As banks lift their foreclosure freezes, many people may
assume that the banks have solved their problems in documenting foreclosures. I
suggest this is not the case.
To understand this, keep in mind one of the problems. This is that an
electronic package of mortgages owned by Bank A might list a property X as
being a part of the package but the paperwork, the mortgage and note signed by
the owner of property X which gives rise to the liability to Bank A, is not
located where Bank A can find it. During the limited time during which the
banks froze foreclosure sales, it would have been impossible to insure that all
the paperwork is in place.
So what is going on. The banks are rolling the dice. They are making a
calculated decisions to lift their freezes because they do not believe enough
people will contest their foreclosures to adversely effect them compared to the
effect the freeze is presently having on their bottom lines. The banks realize
that a prolonged freeze will severely degrade the housing and the foreclosure
resale markets. It will significantly slow down any recovery in the housing
industry because houses will sit unsold, many unoccupied. The longer the freeze
continues the more people will hesitate to buy houses at foreclosure because of
the uncertainties involved and their potential inability to get title insurance
once they agree to make a purchase. Banks will then own more and more houses
and find themselves deeply involved in the marketing and sale of homes.
So the banks have studied the historical data and determined the risk is worth
while. They believe any problems that may arise they can handle without
adversely affecting their bottom lines. For the banks it is a sound decision to
go forward, the risks of not doing it are greater than doing it.
But the banks are shifting the risks from themselves to the buyers of
foreclosed properties. Remember what is good for the banks is not good for the
buyers. If the paperwork is not in order, then the title the bank will pass on
will not be in order leaving the buyer open to claims that his or her title is
not good. This may not be discovered until years after the sale when the buyer
attempts to resell the foreclosed property. Or, it may be sooner than that.
There is no guarantee that the paperwork is not being used to support more than
one manufactured electronic package or that the bank is following the terms of
the paperwork as it relates to foreclosures.
So what should the buyers of foreclosed property do.
(1) First, make sure to obtain title insurance that protects not only the
lending institution but the buyer.
(2) Next, require the bank to produce the original note and mortgage and the
documentation that shows it has proper possession of the title
(3) In lieu of the latter, secure an affidavit from the bank wherein the
banking entity guarantees the title to the property and assumes strict
liability for any loss caused the buyer and that will reimburse the buyer for
any loss including all costs he or she incurs should the title be defective.
We have heard the allegations of false affidavits and people signing the names
of other peoples during foreclosure proceedings. All buyers of foreclosed properties
must at a minimum demand the banks stand behind their claims of ownership. If
the banks are confident that they have solved the problem, let them back their
confidence with guarantees and strict liability guarantees.
articles about consumer debt by Ted Connolly, co-author of The Road Out of Debt