Does the End of the Foreclosure Freeze Mean the Problems are Solved?

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.

Read more articles about consumer debt by Ted Connolly, co-author of The Road Out of Debt