2010-10-16 09:32:23
By DAVE CARPENTER, AP Personal Finance Writer Dave Carpenter, Ap Personal
Finance Writer Fri Oct 15, 5:28 pm ET
It seemed too good to be true: You bought a house in foreclosure at a fraction
of the former price. Maybe you even knocked out a wall or two and remodeled
with all the money you saved.
But now thousands of foreclosures around the country may be invalid because of
bank paperwork problems. Should you worry?
"Anyone who's purchased a foreclosed property in the last three years should
really be concerned," says George Babcock, a Providence, R.I., attorney who
represents homeowners who have been foreclosed on.
"They should call the attorney that did their closing and say, 'Hey, do I have
a problem?'"
Bank of America, JPMorgan Chase and other major lenders have frozen tens of
thousands of foreclosures in at least some states while they review the
paperwork for errors or mishandling.
For homeowners, there are several questions to ask. But first, experts say,
they should check to make sure they have title insurance, which protects the
homebuyer from any claim on the property that surfaces after the deal has
closed.
Those claims can arise from unpaid taxes or legal glitches in the ownership
documents. Most people who take out mortgages are required by their lenders to
buy a policy. For those paying cash, it's optional but highly advisable,
especially now.
"If you're a bona fide purchaser with title insurance and no knowledge of any
irregularities in the transaction, courts are going to be extremely loath to
set aside the sale," says Diane Thompson, an attorney with the National
Consumer Law Center.
This new twist to the foreclosure crisis is no trivial matter for the large and
growing number of people buying homes out of foreclosure.
The foreclosure listing service RealtyTrac Inc. says that nearly 250,000 homes
sold from April to June, or 24 percent, were in foreclosure. In Nevada, it was
56 percent. Arizona was next with 47 percent and California third with 43
percent.
The cost of title insurance varies by state and circumstance but is often
roughly 0.5 percent of the mortgage in the neighborhood of $1,000 for a
$200,000 loan. Premiums are expected to rise as title companies brace for new
claims.
A homeowner with title insurance shouldn't have to worry if the previous owner
stakes a claim to the home. Even a successful claim, experts say, would almost
certainly end up with the title company settling with the evicted homeowner
not the new buyer out on the curb.
If they failed to make payments repeatedly, evicted homeowners might not be
able to afford their old homes anyway, something a judge would consider.
They're more likely to seek a large check than a return to a house with an
outsized debt.
The situation is murkier for people who bought their homes with cash and didn't
bother with title insurance. The issue of who has proper title in that
situation could be uncertain.
"It is not clear, which is why the banks have imposed their own moratoriums on
foreclosure," says CEO Tim Dwyer of Entitle Direct Group, the holding company
for EnTitle Insurance Co., an Ohio title insurer. "Potentially, you face a
legal battle in that situation."
Analysts expect the sudden questions to lead to a flurry of claims on homes now
in the hands of other people, some spurred by lawyers trying to capitalize on
the uncertainty.
"Lawyers who represent homeowners in foreclosure are going to see an explosion
in demand," said Tom Lawler, an independent housing economist in Virginia. In
most cases, he noted, "it's unlikely that the foreclosure will actually be
reversed and the title will revert to the original borrower. But it's
possible."
Babcock, for one, says his phones have been ringing off the hook with calls
from people who were foreclosed on and want to know if he can get their houses
back.
He has sent off dozens of letters to recent buyers of those homes, alleging
that because of defects in the foreclosure process they don't actually own the
property, and suggesting impending legal action.
"I'm not saying that all of the titles are toxic," he says. "But many, many,
many are."
Mark Stopa, a Tampa, Fla., lawyer who represents hundreds of homeowners facing
foreclosure, contends that perhaps a quarter of cases have title problems that
merit challenges.
Legal experts concede it's possible that there may be a judge somewhere who's
disgusted enough with how the banks conducted themselves to throw out
foreclosures. So if you're the new owner of a foreclosed property and worried,
what should you do?
First, check to make sure you have a title policy and the title is clear, which
means there are no liens against the property and the ownership is clearly
established.
The fee to have a title search conducted should be $35 to $100, according to
Jason Biro, a 14-year veteran of the mortgage industry who now runs the
nonprofit consumer advocacy firm Saving Your American Dream.
If no problems surface, you may still want to run another title search every
six months or so if you are interested in selling anytime soon, given the
current confusion, Biro says. If you've had the property four years or so, it
should be OK, Stopa says.
Those who paid cash and without title insurance will not necessarily be forced
to pack up and leave.
That's because many states provide protections for those who bought in good
faith, according to Biro essentially anyone who wasn't trying to exploit a
flaw in the foreclosure system. So the buyer of a foreclosed property should
still be able to fend off a title-related claim. The downside: That fight could
entail significant legal expenses.
In the future, there may be a bigger issue what happens to foreclosure sales
if buyers are concerned that they can't get title insurance. It's rare, but not
unheard of, for a title insurance company to be liquidated.
Yet another risk in the flagging economy is that the title insurance company is
liquidated, leaving you without protection. That's rare, but it does happen.
Credit ratings agency A.M. Best Co. warned buyers as recently as last year of
financial problems among some title insurers.
What about buying right now?
Rick Sharga, a RealtyTrac senior vice president, said buyers who are making a
foreclosure purchase from a bank shouldn't be concerned. He says they should
just double-check to make sure it's possible to get title insurance.
If the title insurance company won't sell a policy on a property, you probably
shouldn't buy it, Stopa says.
___
AP Business Writers David Pitt in Des Moines and Alan Zibel in Washington
contributed to this report. Carpenter reported from Chicago.