foreclosure error discovered before closing brings transaction to a halt

Diane,

I have begun to do some research in regards to a delay in my house closing because of an error from the sellers title company. Here is the scenario:

I am purchasing a home that is bank owned and was listed under a real estate company.  I went thru my agent who I have been dealing with for the past 7 years.  We looked at the house 1 day after it was listed, liked it and made an offer which was held for 7 days  to see if there where other offers.  We got the house.  we began the purchasing process.  Had all documents necessary to close on the date of 6-20 including financing in 17 days.  The day before the close the title company states they do not have record of the mortgage holder being served to sign the deed over.  What there is record of is the sheriffs office served papers to a tenant that was living there and not the mortgage holder. 

The issue now is finding the owner.  My agent is telling me they may need to do a quiet title and that could take additional month or two.  I want to know if I seek compensation from the title company for there mistakes.  In the contract from the selling agency. It states that if I am unable to close on the date noted that for each additional day after that they would collect $50 per day. 

I have several appliance that are to be delivered and they will not hold any longer after this week. I am looking to get into the house as we have just added a new baby to our home.

Let me know your thoughts.

S

Hi, S:  This is unfortunately not so uncommon.  Title examinations performed on behalf of a buyer and.or their lender for properties sold after foreclosure often find foreclosure errors.  This is why it is so important to use your own title agent, not the one being used by the REO seller.

The problem in this scenario is the expectation of timing.  Think of the title examination as you would a home inspection.  You want the results before you make definite plans because any big problem discovered in the process might cause a delay or even a desire to get out of the contract.

Most buyers and real estate agents have not experienced the finding of serious title problems and so they ignore the risks of moving forward with plans before the result of the title examination is revealed.

On the seller side, expect them to agree to an extension but don't expect them to cover any damages you may have due to the delay.  Your choice at this stage is to wait it out or get out of the contract and look for a different house.

Sorry for the bad news but the title examiner did what they were hired to do and that is to vet the title.

Diane

too bad the seller did not have title insurance

We have a title insurance order in process and our examination revealed that the seller bought the property from a bank who had foreclosed.  As usual, the our title examination included a review of the foreclosure to make certain that the bank had done everything correctly.  They did not.  Crap.  The bank's attorney had failed to give good service to a lien holder.  Crap.

The prior owner had a 2nd mortgage with Beneficial Consumer Discount Company. For some crazy reason the bank's attorney gave service to Household Realty Corp.  Now these two entities were under the same corporate family at the time, however, they are still two different entities.

Our seller is an estate. The deceased purchased the property from the bank for cash and did not opt to purchase title insurance.  Too bad.  If he had, someone might have noticed the flaw and fixed it a long time ago.  The estate attorney says his client probably thought the bank knew what they were doing and opted to forego any title examination - with or without title insurance.  Not a smart move. A buyer must always be savvy and have title examined and covered by a competent title insurer - even when paying cash for real estate. The first and primary purpose of title insurance is RISK AVOIDANCE. Look for problems and fix them before you buy.

Let's say the seller had purchased title insurance and his title insurer had missed the error in the foreclosure.  That's certainly possible.  A secondary - and just as important - reason for title insurance is that HUMANS MAKE MISTAKES.  The bank's attorney made a mistake and it's possible that a title examiner could miss it.  You could have a situation in which you are trying to sell real property and a problem isn't discovered until your buyer has a title insurance examination performed.

If our seller had an owner policy, we could have asked for indemnification and closed.  This is a reasonable circumstance for indemnification.  The error involved an entity under the same corporate umbrella.  Several years have passed and there has been no collection effort on the Beneficial mortgage.  It is reasonable to presume that Beneficial thought they had been served and were divested.  This is a technical flaw in title but a flaw none the less.  Indemnification coverage from a prior owner policy would have done the trick, but we have no title insurance to fall back on in our transaction, so what do we do?

In this case we offered our buyer - who is also paying cash - an option to allow us to put an exception in their owner coverage.  We did this with a suggestion that they negotiate with the seller for an escrow to be held pending the attorney obtaining acknowledgement of good service from Beneficial.  I don't want to insure over this because I'm not certain that the attorney will be successful.  Our buyer, however, is free to assume the risk.  The buyer decided to go for the escrow. They asked the seller to put $6000 aside for a few months during which the seller's attorney would attempt to get the acknowledgement.  If at the end of the period, the attorney could not, the buyer would get to keep the money.

Our seller stands to lose $6000 if this matter is not resolved.  They are lucky that they have a cash buyer willing to assume the risk.  Too bad the seller did not have title insurance.

query: what does it mean "liens to be divested"

Usually when we talk about divesting liens, we are talking about foreclosure. Divesting can also take place in a judicial sale of real estate aka a free and clear tax sale.

What happens is that a court action is used to clean the title.  If proper procedure is followed certain types of liens can be cleaned from the record - or divested.

For instance, if a mortgage lender is in first lien position and they foreclosure, if they gave proper notice to a second mortgage lender, then  the second mortgage lien is divested through the foreclosure action.

Some types of lien are not typically divested such as municipal liens or property taxes.

municipal charges survive foreclosure

We closed a purchase transaction yesterday involving REO property being sold by a lender to a cash buyer.

There was a last minute snafu when the seller paused for several hours to decide if they wanted to pay outstanding water and sewer charges.  These totaled roughly $3000 on a small transaction. They did eventually close, however, we had to adjust the schedule and wait while they faced reality.

We had to wonder how it was that they hadn't understood that municipal charges do survive foreclosure and if they didn't pay them, who would?

consumers - PLEASE - do not invest money into a house before you get the title insurance commitment

We had a title order come in.  The transaction had been moving forward to closing and suddenly they remembered to order title insurance.  The order came in with the request to set up closing as soon as we could.

When the abstract arrived I hoped for a nice clean title so these folks could have a fast closing.  What I saw when I opened the report was a foreclosure in process and numerous state and federal liens and judgments related to a business failure.

What were these folks thinking?  This isn't a title that can be rushed to close.

Wait - I tallied up the liens and even without payoff figures in hand the total was far more than the agreed sale price.

I called the listing agent and found that the seller had no idea that personal judgments and liens would attach. They thought all they had to worry about was the mortgage.

I called the buyer and got a very disappointing report.  The buyer has been living in a mobile home on a rented lot.  They have already sold the mobile home and given notice to vacate the lot by the end of this month.  In addition, they have invested $2000 in this property by making numerous repairs.  They say the sellers wanted a fast closing and the real estate agents had pushed them to make the repairs as quickly as possible to clear municipal hurdles prior to closing.

Neither the real estate agent or the mortgage loan officer suggested to the consumer that they wait for the title insurance commitment.

Why would everyone ASSUME that the title to the property is clear if no one checked?

I had to tell a tearful and angry buyer to make arrangements for another place to live at the end of the month.  It will take time but we'll see how the payoffs come in and whether this transaction can be saved.  In the meantime, the foreclosure process is moving forward quickly.

Our consumers, the buyers, are in a quandary.  Should they just move on and find a different house?  Will they ever recoup the $2000 they sunk into this house? Maybe they should wait for the liens to be divested by foreclosure and buy the house later, eh?  Do they want to live with their parents for all that time?

All of this could have been avoided if the consumers were thinking for themselves and told the real estate agents to back off and wait for the title insurance commitment.

FOLKS.  Please be a savvy consumer.  Don't sell the house you live in before you are sure you have another place to go.  Don't put money into a house you don't own unless ALL contingencies have been eliminated and you have a full disclosure on the situation.

query: can a lender in PA foreclose and divest the PA Department of Revenue of its inheritance tax lien

Yes.  Just give them proper notice.  Check with the Department for the appropriate address.

robo forger is facing 20 years

In addition to the criminal charge brought against Brown, Schuette reached a$2.5 million civil settlement with Lender Processing Services, the parent company of the now defunct DocX, on Jan. 31 to settle claims of unlawful foreclosure practices.

Brown is facing 20-years in prison when she is sentenced in May.

http://www.mortgageservicingnews.com/dailybriefing/former-docx-mortgage-processor-pleads-guilty-to-racketeering-1034505-1.html

interesting twist on a claim

Not long ago I posted about a new owner wanting to make a claim on the policy of the person who sold her the property.

Our insured did call us and we opened a claim for him but informed the new owner that we wouldn't be communicating with her.

The claims attorney noticed that the new owner is the same person who had been foreclosed upon by the lender who sold the property to our insured.

Guess what?  Shortly after our closing he deeded the property to her for a buck.

Well, isn't that interesting.  The claim was denied.

query: what is the liability to a title company if a heloc winds up in a first position through their error

That's easy.  A mortgage lender who is insured in first position but finds that they are in a subordinate position can make a claim against the loan policy.  This type of discovery typically surfaces during a foreclosure action.

The liability of the title insurer is whatever it takes to fix that up to the amount of the loan policy.

Brian says, "what a mess"

hello Diane..just found your blog....wonder if you could take a look at this mess....

1. Nov 2005 Refinanced a property through American Home Mortgage Acceptance

2. Closing Attorney mistakes: Deed of Gift was not signed by Guarantor

3. Date referenced on Note is 10NOV2005 which is not the Date on the Deed of Trust.

4. Deed of Trust: the recorded copy has a date of 12NOV2005, but the one I signed at closing has a date of 11NOV2005.

5. AHM files CH6 in AUG2007 and force places insurance and property taxes along with fees which causes monthly payment to triple (basically manufactures a default)

6. JAN2008 servicing rights sold to CountryWide (they begin foreclosing)

7. JUN2008 CW sends a "Modification" agreement to me while processing a Foreclosure sale (I sign it)

8. CW hires local Foreclosure firm that files a Quiet Title action before I sign the Modification....(the Firm realizes the Guarantor never signed the Deed of Gift/Warranty Deed)

9. BAC Home Loans/BOA now claims they own the Loan and the Servicing rights and want to Foreclose/Short Sale

Question:

1. Negotiated Solution: could BOA be put back into the position it paid off at the time of the Refinance? equitable subbrogation?

2. Does BOA have to prove that they own the Note? holder in due course etc...in order to be allowed a seat at the table?

3. Should a Counter Claim be filed to put AHM/CW/BOA on the defensive to have the "True" Chain of Title" proved prior to any negotiations?

would like to post on your blog....

thanks...Brian 

Hi, Brian:

First, if I were in your position, I'd want an attorney giving me a hand.  That said, there's much in your email that I cannot address, but perhaps we have a reader who will.

I can speak to a few items.  

Bank of America is the owner of the mortgage by succession.  They would not need to file an assignment of mortgage or prove ownership of the note.  When Countrywide was failing, Bank of America stepped up to the plate.  It was a well publicized event and a matter of public record. You can use a search engine to pull information if you'd like to read more about it.

I am curious about the quiet title action.  These procedures require notice to the property owner giving you an opportunity to respond.  I don't see this step as an end run around you but a matter of perfecting the lien position and it should not impact a pending modofication.

If Countrywide offered modification and you accepted and signed a document, I don't understand why it hasn't been filed of record or why BOA wouldn't honor it.  Someone dropped the ball.  You may get help on this item by contacting the Consumer Financial Protection Bureau.  Go to their web site and submit a complaint concerning the modification.

I think it is important to keep the complaint simple.  Too much information - at least at the beginning - could confuse someone at the mortgage servicing department of BOA and also at the CFPB.  Focus on the pending modification.

So, to wrap up.  This is a serious matter and so having legal advice is a good idea.  If the modification is the answer to your problem, I'd concentrate on finding out where the ball was dropped and seek assistance to rectify that matter.

One more thing,  certified mail is a good tool to get attention.  It shows people you are serious and keeping a good record.  Be sure to follow up all phone calls with a certified letter reviewing the status and moving the case forward.  When sending such a letter to BOA, be certain you use the address for "qualified written requests".  It's a special address and you can probably verify it with the state banking regulator or get it in writing from BOA.

Good luck!

Diane

What about those liens discovered after closing?

Hi Diane,

I short sold my house in July 2011 and it was found in the County Tax Bill that the City had a Lien on the property for past due sanitary charges. I was not aware of the charges or lien. Chicago Title was used by the buyer for title search and they did not find any liens on the title either. Now the Title Company has paid the lien in full but are requesting me (Seller) to pay them the lien amount or they will use Attorney and collection and I will incur additional charges. I was always been told that if there are any liens found after the Close of Escrow it is the responsibility of the Title Insurance Company. Are they allowed per Law in the State of California to recover any amounts they paid for failing to find the lien prior to close of escrow. Please let me know what is your recommendation.

Thanks,

Anonymous

Hi, Anon:

From the perspective of the buyer who purchased the insurance, yes, the liens discovered post closing would be the responsibility of the title insurance company, however this insurance does not extend to the seller.

Even if you were unaware of the lien, the responsibility still rests with the owner of the real estate.  If a foreclosure had taken place, depending on the laws of your state this lien may or may not have survived foreclosure.  In Pennsylvania, the mortgage lender who foreclosed would have had to pay it.

So, in the short sale, only the mortgage lien was released.  Any other liens, even if found after closing, stay attached to the real estate.  For this reason, title companies insist upon warranty deeds and affidavits.  In these documents you would have given a personal guaranty of title.  It is the warranties in the deed and other affidavits you signed at closing would be the basis for legal action against you.  If you did not sign any affidavits or give a warranty deed, you might have a defense.  In either case, you may wish to talk with an attorney.  Some times the size of the lien determines how much effort the title company wants to expend in collection.  Having an attorney at your side does present a more formidable challenge.  

Good luck and I wish you well.

Diane 

buyer caught up in a bankruptcy/short sale squeeze

We've been working for a homebuyer since June trying to close a purchase.

He thought he did everything right BUT you can't account for "out to lunch" sellers or their "not so helpful" bankruptcy attorney. [I'm being really kind with those quotes cause these folk have made lots of grief for everyone. More appropriately I might have said, "out of touch with reality - perhaps in a drug induced haze and don't give a darn" and "not really that busy but push everything on my paralegal anyway who isn't an attorney and shouldn't be fully managing my caseload but I couldn't care less"]

Okay, our buyer knew the sellers were in trouble and facing foreclosure. The sellers had purportedly discussed a short sale with their lender and so the buyer made an offer and made his plans.

First of all, let's remember that anytime you hear the phrase "short sale", no one should make plans, okay? What everybody should do is dot all the i's and cross all the t's, keep copious notes, plan to have lots of patience, then wait. If the sellers are already in foreclosure your short sale offer will have priority in loss mitigation, however that doesn't mean it will fly or move fast. It simply means that from the mortgage lender's perspective, it's a more important transaction. Everyone else is a lower priority.

In this case, the sellers had NOT disclosed that they were in bankruptcy. We discovered this little helpful piece of information when we did our title examination. It's a Chapter 7 and not yet discharged, SO we ask the attorney to get a court order approving the sale.

Mr. Lazy Bum [being kind] Attorney won't lift a finger because he's been paid and doesn't care to assist anyone. We report this to the real estate agent and word gets back to Mr. LBA and he runs to embrace the broker who is a buddy and say it isn't so, this bankruptcy will discharge in less than 30 days so why force me to do this extra work. We talk with the trustee who says it will discharge in 60 days. Nobody wants to believe us and so they wait.

The 30 day mark passes and now we are believed but still Mr. LBA says not gonna help and sellers can barely hold a conversation so buyer decides to wait for 60 day mark. Rate lock will expire on the 60th day, but we'll make the effort and get everything ready.

In the interim, we have gotten preliminary approval for the short sale.

Yesterday was the 60th day. It didn't close though lots of effort and fancy dancing took place. I must say I was impressed by the patience of the buyer and his ability to jump in and team effort the hurdles we needed to work out.

The lender provided documents and funds. We had a last minute snag on the short sale final letter. The preliminary approval called for final okay on the final HUD and though we submitted it 24 hours in advance, the lender told us at the last minute that their attorney had to bless it and he was "out" and "it ain't gonna happen today" and as you know the rate lock was expiring so....

While we waited for the discharge to show up in Pacer - online access to bankruptcy data - we worked like mad dogs trying to find a friend and a solution. Trying to reach a supervisor in loss mitigation got me a rude hang up by some bloke who said "You have to talk with the attorney." Getting nowhere trying to work up the chain, I decided to go down from the top. I did alittle research on Google and found a contact - EVP and some other folks. Shot off the HUD and a polite e-mail hoping for a reasonable response and WE GOT IT! The EVP impressively cared and put me in touch with a senior officer in collections and interestingly as I was in e-mail chats with him, our buyer had him on the phone. We were both working any angle we could find and we both found the magic guy. He helped but the short sale was of course subject to a court order approving the sale or discharge of bankruptcy.

We kept checking Pacer - nothing. Our buyer had found a contact - the actual person who would type the discharge into the docket. [I'm telling you this buyer is resourceful and a pleasure to work with.] The trustee's office couldn't figure out why the discharge hadn't posted but they really couldn't directly help. Through the trustee, I was able to talk with the case manager. The case manager gave me bad news. Mr. LBA had filed an additional document after the sales agreement for the real estate which bumped the entire discharge process back another 23 days.

Mr. LBA - You stink.

Mr. LBA - You can't get off your lazy - whatever - to ask the court for approval for the sale.

Mr. LBA - You won't responsibly perform your duties to your clients, you lied to us, you lied to the Realtor and you can't manage the "100 files" I heard you yelling about in the background while your secretary tried to lie for you and say you were with clients.

Mr. LBA - We'll still close this transaction. You are causing hardship to people but I know you don't care.

Mr. LBA - Your demeanor and methods - as a former underwriter and someone who is trained in fraud prevention - smell like trouble to me. Someone ought to visit your office and take a peek at those books.

Anyway, this post turned into a novel - so sorry, but I do think discussing real cases is helpful.

As an aside, I should note that the buyer's new mortgage is VA. The house had the ole "doors to nowhere" problem, you know, sliding glass door in the wall but nothing on the outside of the house. That's a safety concern for the VA and so they require that you either put a porch out there or make the doors unusable.

Early in the transaction I happened to find out that the buyer was moving forward to put a deck up BEFORE closing. I said, look, you have no idea if this transaction will close. As a former VA underwriter, I suggested he ask if a simple railing/bar installed over the door would pass muster. He argued that he wanted to put up the deck and didn't want to spend the extra cash to put up a railing that he would be taking down later. I said suit yourself but putting up a deck is a bunch of money and what if somebody dies or what if the house burns down - you never know what might happen to prevent a closing. In risk management, you must always consider the worst case scenario before making decisions.

He did the railing. ;)

One more thing.

I love my job.

"national" title agent aka chop shop in my backyard

is a walking make work project. I'm sorry, that's unkind, let me rephrase.

The record title agent at a local, formerly "national" - server of sub-prime predators - now local and desperate and trying real hard to take local market share - is ignorant of the most simple title issues.

This company is what we traditional title agents call a chop shop. The company is run by someone with no expertise who purchases title commitments from an underwriter who examines title with as much automation as possible and any human review is done by vendor managed clerks in some remote location.

Last week I received a kinda pompous e-mail from this person demanding that I get a prior owner mortgage satisfied. I jumped right into the file because unsatisfied mortgages are not that unusual and I wanted to help get it squared away as quickly as possible.

I took at look at the file wondered what the heck they were talking about because the transaction had gone through foreclosure. It was a Fannie Mae sale. The mortgage lender in question was not the foreclosing lender, however, they had been given good service and everything was hunky dory.

I sent an e-mail response and kindly suggested that they pull the 3129 Affidavit and take another peek at it. The mortgage was divested in foreclosure.

He responded that he had the affidavit and that was insufficient.

I asked him to please contact his underwriting attorney.

He responded that his underwriter had said the unsatisfied mortgage "might be a problem" if the owner wanted to sell in the future.

I said that's ridiculous, but if he wanted, I would process a request for indemnification through our underwriter, however, I expected that the it would be rejected.

It was.

The entire process took a week, mainly because he couldn't produce his own title commitment, which is required for an indemnification request. He likely had to argue with the vendor managed clerk who probably didn't understand that you are supposed to issue title commitments listing your concerns and requirements in Schedule B 1. It always slays me when title agents have no idea what the title commitment is and don't even prepare it themselves. The entire agency program in Pennsylvania is based upon the idea that the value the agent does title examination and produces the commitment.

Now, the most important person in this transaction was the consumer who called me in frustration. I assured her that her title was fine and that we were doing everything we could to make that clear to the title agent handling her refinance. She said she wished her mortgage broker had sent the order directly to us and of course, I agreed. She was up against a rate lock deadline and this ignorant person with a title license was causing her grief for no good reason.

We really need to fix this system. Can we find some way to restore brains in the biz?

query: how long is mortgage title insurance effective

A loan policy aka mortgage title insurance protects the mortgage lender so long as they have an interest to protect. The interest of the mortgage lender expires when the note is paid in full and the mortgage is satisfied. If, however, the mortgage lender must foreclose, the loan policy converts to an owner policy for the lender and will protect them so long as they have an interest to protect.

So, let's say a mortgage lender forecloses and ends up owning the property, attempts to sell it a new buyer and that buyer's title agent finds a title problem which precedes the issuance of the loan policy. The mortgage lender could make a claim even though their original insured mortgage was divested in the foreclosure.

Consumers should take heed that a loan policy benefits the mortgage lender only. Your interests and the interests of the mortgage lenders are not the same. If you want protection, you must purchase an owner policy.