That dream home you bought in foreclosure might not be yours

Realtor Teresa Sciubba, left, talks with real estate investor Kristin Gragg outside a foreclosed property, in Chandler, Ariz. (AP Photo/Matt York)

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.

Copyright © 2010 The Associated Press

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9 Responses to "That dream home you bought in foreclosure might not be yours"

  1. Carl Nemo  October 16, 2010 at 12:58 pm

    The entire housing debacle was driven with the complicity of banks, mortgage insurers, appraisers and the real estate industry who knowingly were all cutting a fat hog by engaging in a frenzy of stellar greed. “Flippers” multiplied like rats in a grain elevator.

    These complicit players need to be stuck bigtime with legislation that rolls back all mortgage’s that have rolled over to lets say 33 to 50 cents on the dollar along with mortgages renegotiated predicated on current market appraisals post the collapse starting back in 2006 and beyond. The entire housing ‘debt’ is a synthetic bubble with no absolute meaning due to the repackaging of these puffed mortgages into CDO’s with all the terminally greedy mega sharks at the top wallowing in their ill-gotten largesse. The losses really have no meaning once it moves into the trillions of dollars other than figures pulled out of thin air predicated on the aforementioned repackaging of these “puffed”, unsecured instruments.

    What are the banks going to do with millions of empty homes that will suffer the ravages of being uninhabited; ie., mold, mildew, vandalism and outright theft of the furnishings such as sinks, toilets, cabinets, carpeting and even the pipe and wiring in the walls. Houses are being stripped regularly by this new class of ‘miners’.

    If some folks can’t handle the mortgage then let them stay even as renters to the banks. Vacant houses are non-performing assets. Then banks must also pay the property taxes and utilites to keep some amount of heat in the houses to prevent the aforementioned deterioration and rupturing of the pipes in cold climates. It simply makes zero financial sense to me.

    Seemingly the banking industry is being run by terminally greedy crazies no different the crazies we now have running our government. We’re all going to hell in a handbasket unless this is somehow solved in a constructive, citizen friendly manner.

    Carl Nemo **==

  2. Guardhouse Lawyer  October 16, 2010 at 5:59 pm

    You should be very careful about title insurance. Mortgagors require title insurance, certainly, but only to protect their interests. You need to make sure you have a title insurance policy that protects your interest in the property in addition to the one required by the lender.

  3. woody188  October 21, 2010 at 12:43 pm

    What most media isn’t reporting is that the banks re-sold those mortgage assets into multiple CDO’s or MBS, up to 20 times or more. Meaning the bank sold the debt to more than one entity, committing out right fraud. They had to crash the market and foreclose to make good on the debt and cover their tracks. But the government and media is concentrating on the small document signing fish, leaving the biggest housing fraud of our lives to continue unabated.

    Of note, Countrywide, the poster company for mortgage fraud, was fined $61 million to “settle” with the government, or roughly half of their profit from the fraud. So the message is, crime doesn’t pay, but you can get rich off of white collar fraud.

    • Guardhouse Lawyer  October 21, 2010 at 4:04 pm

      Woody, you need to put some proof behind those allegations. I do not believe you can show me any creditable source that says mortgage companies sold the same mortgage assets “up to 20 times or more.” The notes may have changed hands 20 times, but that is not the same as selling the same mortgage asset to two or more different companies. This sounds like yet another one of those loads of bollocks that is floating around the internet without any foundation in reality.

      If Countrywide had sold its mortgage assets 20 or more times they would have made huge piles more than $120 or so million. The “profits” would have been in the multiple billions.

      This past week this was reported:

      “U.S. regulators fined former Countrywide head Angelo Mozilo $22.5 million — the biggest penalty ever imposed on a senior executive of a public company.

      “The Securities and Exchange Commission also permanently barred the former Countrywide Financial chief executive officer from ever again serving on the board of a publicly traded company.

      “Mozilo and two other executives were accused of misleading investors as the subprime mortgage crisis developed. He was fined $22.5 million for misleading investors and also agreed to pay back $45 million in “ill-gotten gains” to settle SEC insider-trading charges, the SEC said.”

      http://www.upi.com/Business_News/2010/10/15/Countrywide-exec-gets-biggest-SEC-fine/UPI-24411287181590/

      Was this what you were referring to with the $61 million? Those fines and restitution did not come out of the pockets of the company (which is now part of BofA, IIRC) but directly out of the pockets of the miscreants.

      • Carl Nemo  October 21, 2010 at 6:16 pm

        Yep they really punished “Angie” & Co”for their crooked dealings at Countrywide. / : |

        Except the fact that Angie’s net worth is estimated at $600 million dollars…! : O

        How about twenty years in a 9 foot square “Super Max” cell with no chance of parole, no different than John Gotti with him stripped of all his assets and distributed among the mortgage holders that were screwed by him and his multiple dealing shadetree company…!?

        http://www.celebritynetworth.com/richest-businessmen/ceos/angelo-mozilo-net-worth/

        Carl Nemo **==

      • Guardhouse Lawyer  October 24, 2010 at 3:10 am

        Hey, Woody! Woody? Are you out there? Are you going to provide substantiation or not?

        Do none of you care anything about the truth?

  4. eve  October 23, 2010 at 8:50 pm

    Carl, your “punishment” would be justice.

    I agree it would be fitting for all Wall St. execs, bankers and (so-called) professionals who ere complicit in this fraud.

    That being said, we are a nation of laws, not a nation of justice (sadly).
    Justice and law are two completely different things and you and I both understand this fact.

    The greedy get away every time because the apathetic populace believe the criminals will actually prosecute and imprison themselves for their complicity in the corruption.

    We also both know that it is laughable to believe they will.

  5. Carl Nemo  October 23, 2010 at 11:24 pm

    I must say Eve your thought processes and writing style are quite refreshing and always “spot-on”. : )

    Thanks for concurrence concerning “justice” for Angio. Look up a photo of him on the web and although it’s a function of genetics, he’s one scary looking guy that I’d expect to find as a “capo” for a New York/New Jersey Crime family…not joking either. Although related to the mortgage industry this seeming ‘mafia scam’ all with the complicity of banks and insurers and their legal consiglieres also indemnified by our crimpol Congressional reps seems to be a “gangsters dream come true” until things went “bust” all too quickly for their smoothe extrication from the scene of the crime.

    Carl Nemo **==

  6. Carl Nemo  October 24, 2010 at 12:07 am

    To save effort concerning some photo’s of Angelo Mozilo, I thought I’d provide a link. Don’t forget to enlarge them when prompted to do so. Connotation of Images: Yes, Angio…no…nu…uh no…. no…yes Sir, I understand…! / : |

    http://www.google.com/search?q=Angelo+Mozilo+photo&rls=com.microsoft:en-us:IE-SearchBox&ie=UTF-8&oe=UTF-8&sourceid=ie7&rlz=1I7ADRA_en

    Carl Nemo **==

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