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(snip)"Oct. 1 (Bloomberg) -- U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership.
“Defective documentation has created millions of blighted titles that will plague the nation for the next decade,” said Richard Kessler, an attorney in Sarasota, Florida, who conducted a study that found errors in about three-fourths of court filings related to home repossessions.
Attorneys general in at least six states are investigating borrowers’ claims that some of the nation’s largest home lenders and loan servicers are making misstatements in foreclosures. JPMorgan Chase & Co. is asking judges to postpone foreclosure rulings, while Ally Financial Inc. said Sept. 21 its GMAC Mortgage unit would halt evictions. The companies said employees may have completed affidavits without confirming their accuracy.
Such mistakes may allow former owners to challenge the repossession of homes long after the properties are resold, according to Kessler. Ownership questions may not arise until a home is under contract and the potential purchaser applies for title insurance or even decades later as one deed researcher catches errors overlooked by another. A so-called defective title means the person who paid for and moved into a house may not be the legal owner.
‘Nightmare Scenario’
“It’s a nightmare scenario,” said John Vogel, a professor at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire. “There are lots of land mines related to title issues that may come to light long after we think we’ve solved the housing problem.”
Almost one-fourth of U.S. home sales in the second quarter involved properties in some stage of mortgage distress, RealtyTrac Inc. said yesterday. In August, lenders took possession of record 95,364 homes and issued foreclosure filings to 338,836 homeowners, or one out of every 381 U.S. households, according to the Irvine, California-based data seller.
The biggest deficiency in foreclosure suits is missing or improperly handled documents, Kessler found in his study of court filings in Florida’s Sarasota County. When home loans are granted, borrowers sign a promissory note outlining payment obligations and a separate mortgage that puts an encumbrance on the property in the lender’s name. If mortgages are resold, both documents must be properly conveyed to prevent competing claims."(snip)
(snip)"“If I were in the title industry, or a mortgage holder, or someone who bought a foreclosed property, this is something I would be very worried about,” said Michael Carliner, a Potomac, Maryland-based economic consultant specializing in housing.
Attorneys general in Florida, Texas, Iowa, Illinois, North Carolina and Connecticut have started their own investigations into GMAC. In addition, Florida investigators have issued subpoenas to three law firms after homeowners facing eviction said the firms pursued foreclosures without following proper procedure.
“This is the most important issue of the whole mortgage mess because families are being thrown out of their homes by people who may not have the right to do that,” said Glenn Russell, a Fall River, Massachusetts, real estate attorney who won a case last year that reversed a foreclosure because of faulty paperwork.
Mark and Tammy LaRace, his clients, were able to move back into their Cape Cod-style house in Springfield, Massachusetts, more than two years after they were evicted.
Attempts to Clear Title
In February, Judge Keith Long of the Massachusetts Land Court reaffirmed his 2009 decision to return the house to the LaRaces. San Francisco-based Wells Fargo & Co., which initiated the suit in an attempt to clear the property’s title after it foreclosed on it, has appealed the decision. The case now is under consideration by the state’s Supreme Judicial Court.
The costs for title insurers to defend customers and reimburse for lost properties rose 14 percent to $480.5 million in 2010’s first half from a year earlier, according to American Land Title Association, a Washington-based industry group.
Fidelity National Financial Inc. of Jacksonville, Florida, is the largest insurer, with 38 percent of the market in the second quarter, the association said. Santa Ana, California- based First American Title Insurance Co. is No. 2, with a 27 percent share.
Title insurers use their records and public documents to verify a seller is the home’s true owner and that the property is free from liens. They collect a one-time premium and pay costs that may arise if someone challenges a new owner’s right to the property. To obtain a mortgage, buyers are required to purchase a policy to protect the lender. Many people also get a so-called owners policy to protect themselves.
“Title is everything,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. “There’s no collateral without possession, and that is title.”"(snip)
For anybody who has already been 'bargain hunting' for distressed real estate, or who is considering doing so in the near future, this is a major new risk factor i.e. that despite making a down payment and despite making some mortgage payments a judge may now decide that the distressed property was improperly transferred thus you aren't actually the legal owner !
This cloud over titles also creates a major new cost factor for both rising costs for lender title insurance as well as new costs for 'owner's title insurance. Without ponying up for 'owner's title insurance it's certainly possible that the house which you thought you purchased could be 'given back to' the previous owners by court action over 'flawed documents' ... with you then having no place to live and no way to immediately get your down payment / monthly mortgage payment money back from the mortgage lender until all legal appeals are exhausted !!!
To say the least, this is going to cause major liquidity problems for real estate markets. It is also very likely to cause major additional losses for mortgage lenders. However, going forward, it also means that more delinquent subprime homeowners can avoid being foreclosed on and evicted without much higher levels of scrutiny ... which translates into those delinquent subprime homeowners being allowed to live in their houses 'rent free' for extra months or years.
Also, in a larger sense, the US taxpayer is now the 'proud owner' of hundreds of billions of dollars worth of toxic mortgage bonds that were purchased as part of TARP / QE1 / MAIDEN LANE / Fannie & Freddie bailouts. It may turn out that some of the mortgages that were bundled into these mortgage bonds aren't actually valid as well, leaving US taxpayers on the hook for huge future loss risk.
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