The general population and even some market pundits are telling potential buyers they should worry about getting clean title to a foreclosure.
Irvine Home Address … 183 GROVELAND Irvine, CA 92620
Resale Home Price …… $499,000
well baby, listen baby, don't ya treat me this-a way
Cause I'll be back on my feet some day.
(Don't care if you do 'cause it's understood)
(you ain't got no money you just ain't no good.)
Well, I guess if you say so
I'd have to pack my things and go. (That's right)
(Hit the road Jack and don't you come back no more, no more, no more, no more.)
(Hit the road Jack and don't you come back no more.)
Ray Charles — Hit the Road Jack!
This ain't your house. Hit the road, Jack!
Last week we looked at Evicted HELOC Abusers who Break In and Squat in Foreclosed Homes. The fear embodied in those deranged fools is that anyone who buys a foreclosure may come face-to-face with the evicted family who claims they still own the property. Is this a rational fear? The author of today's featured article thinks buyers should be afraid. I think he is a fool.
By RON LIEBER — Published: October 8, 2010
When home buyers and people refinancing their mortgages first see the itemized estimate for all the closing costs and fees, the largest number is often for title insurance.
This moment is often profoundly irritating, mysterious and rushed — just like so much of the home-buying process. Lenders require buyers to have title insurance, but buyers are often not sure who picked the insurance company. And the buyers are so exhausted by the gauntlet they’ve already run that they’re not interested in spending any time learning more about the policies and shopping around for a better one.
Besides, does anyone actually know people who have had to collect on title insurance? It ultimately feels like a tax — an extortionate one at that — and not a protective measure.
The nature of all insurance is that you overpay for it until the day you need it, then you don't have enough.
But all of a sudden, the importance of title insurance is becoming crystal-clear. In recent weeks, big lenders like GMAC Mortgage, JPMorgan Chase and Bank of America have halted many or all of their foreclosure proceedings in the wake of allegations of sloppiness, shortcuts or worse. And a potential nightmare situation has emerged that has spooked not only homeowners but lawyers, title insurance companies and their investors.
The only people who are spooked are those that do not understand foreclosure and clean title. The whole point of a foreclosure is to clean the encumbrances from title. Very few claims against real estate survive the foreclosure process. A trustee's deed is the cleanest title possible.
When this story broke out, I talked with several title insurance reps about getting title insurance for the properties I purchase at trustee sale. Dumbfounded by my request, one of them asked, "What do you want to be insured against?" As far as the title industry is concerned, title insurance on a trustee's deed is unnecessary as their is no protection they could give you that you don't already have.
What would happen if scores of people who had lost their homes to foreclosure somehow persuaded a judge to overturn the proceedings? Could they somehow win back the rights to their homes, free and clear of any mortgage?
If that were permitted to occur, we would see the complete collapse of mortgage lending in this country. Title insurers would stop offering insurance on purchases of trustee deeds. Basically, every bank and third-party investor that bought at foreclosure would be unable to sell to a buyer that needs financing. The REO held by banks would plummet in value, and third parties would stop buying all auction properties. The resulting losses would cause our banks to collapse, and TARP II would be required to save the banking industry.
But they may not be able to simply move back into their home at that point. Banks, after all, have turned around and sold some of those foreclosed homes to nice young families reaching out for a bit of the American dream. Would they simply be put out on the street? And then what?
The answer to that last question may depend on whether those new homeowners have title insurance, because people who buy a home without a mortgage can choose to go without a policy.
This whole idea is crazy. If title insurers thought this risk was real, can you imagine what would happen to the cost of title insurance?
Title insurance covers you in case people turn up months or years after you buy your home saying that they, in fact, are the rightful owners of the house or the land, or at least had a stake in the transaction. (The insurance may cover you in other instances as well, relating to easements and other matters, but we’ll leave those aside for now.)
The insurance companies or their agents begin any transaction by running a title search, sifting through government filings related to the property. They do this before you buy a home or refinance your mortgage to help sort out any problems ahead of time and to reduce the risk of your filing a claim later.
But sometimes they miss things, and new issues can arise later.
That is the whole point of title insurance. Everyone after the auction purchaser needs to get title insurance for the reasons described above. Everyone other than auction purchasers needs title insurance because anyone on title after the auction and re-encumber the property.
For instance, the person doing the title search may not notice that a home equity loan is still outstanding or that a contracting firm filed a lien against the owner years ago. That could create problems for you later, when you try to sell the home.
Then there are the psychodramas that can ensue. The previous owner’s long-lost heirs or a previously unknown love child could show up, saying that they never agreed to the sale of the property. Or perhaps there was fraud against a seller who was elderly or had a mental disability, or forgery of an estranged spouse’s signature. It’s rare, but it happens, and when it does, your title insurance company is supposed to provide legal counsel or settle with whomever is making a claim.
Title insurance companies would like you believe that they are the good guys standing behind you. After all, you are the customer who owns the policy.
Title companies are the insurers backing your claim to title. They are the good guys.
… While the banks were pressing the pause button on many foreclosures, some title insurers were growing concerned as well.
On Oct. 1, Old Republic National Title Insurance Company released a notice forbidding any agents or employees to issue new policies on homes that had been recently foreclosed by GMAC Mortgage or Chase.
Clearly, the title insurer was also worried about a situation in which untold numbers of former homeowners have their foreclosures overturned. At that point, those individuals might claim the right to take back their old homes, but they’d also be responsible for, say, a $400,000 loan on a home that is worth half that.
If more mortgage insurers stop offering title insurance on foreclosed properties, the edge of the market abyss is very near.
So what would happen next? The banks that foreclosed might start the process over again. At that point, lawyers for the people who had been foreclosed upon might take the next logical step and try to show that the banks never had the documents to prove ownership of the mortgage in the first place. The banks might settle at that point, writing checks to everyone who had gone through a disputed foreclosure in exchange for each of them giving up the title.
But if banks did not settle, or the evicted homeowners refused to settle and fought on and won, they might end up owning their homes once again and not owing the bank either.
He must be joking. How does the delinquent borrower end up owning the home and not having any debt? Does this guy really think a judge is going to dismiss the debt as well as all claims against title that debt had? I imagine that idea is very appealing to loan owners who are facing foreclosure, but it isn't going to happen.
Or banks might agree to slice a big chunk off the remaining balance in exchange for a release from any liability for the errors it made.
At that point — and again, this is what Old Republic and investors in other title insurers fear — those homeowners might actually want to move back in. But some foreclosed homes were sold by the banks to others who now live there. And those new residents would have big, fat title insurance claims if their predecessors ever turned up at their doorsteps, proclaimed them trespassers and told them to leave.
If you bought a foreclosure, and someone showed up at your door and told you they owned your house and you needed to leave, what would you do? Unless they were accompanied by armed Sheriff's deputies, i know what I would do….
“All of these Joe Schmos who did everything legally would then be in the middle of it, too,” said Mr. Kovalick, who manages an auto repair shop and is now hoping not to be one of those Schmos.
“Now, you’d have two total disasters,” he said. “How would you like to be the judge to get that first case?”
It shouldn't be a difficult case to solve. The foreclosure removes any previous claims against title. Unless their was a procedural error in the foreclosure proceedings, the foreclosure cannot be reversed. Arguing the foreclosure should not have gone forward will not stand up. it's too late for that argument once the foreclosure has happened. Arguing wrongful foreclosure must occur before the auction.
While homeowners like Mr. Kovalick may have title insurance, it generally covers them only for the purchase price of the home. When you buy a home out of foreclosure, however, it often needs a lot of work. “If I bought it at $200,000 and it’s a steal but I had to gut it and sink $100,000 more in, my recovery is limited if there is a problem,” said Matthew Weidner, a lawyer in St. Petersburg, Fla.
Indeed, this possibility has occurred to Mr. Kovalick, who has plans to put an addition on his home and is asking how he could extract that investment if someone ever turned up on his doorstep and asked him to leave. “What do I do, take the paint off the walls and the custom blinds off the windows?”
Chances are, it will not come to that. After all, title insurers could settle with the previous residents, allowing them to walk away with a big check to restart their lives elsewhere.
More fantasies for the foreclosed. I wonder if this author is trying to solicit work for attorneys. If people who have gone through foreclosure thought there was a chance they could recover their houses or get an enormous cash claim against a title insurance company, the foreclosed previous owners will flock to attorneys to process these claims. A new cottage industry would be born.
Still, for anyone considering buying a bargain home out of foreclosure anytime soon, consider asking your title insurer if any special riders are available that can cover appreciation on your home in the event of a total loss.
That said, if you can possibly help it, stay away from foreclosed homes until the scene shakes out a little bit.
This guy is suggesting buyers stay away for ignorance of the foreclosure process and the nature of title insurance. There are many legitimate reasons not to buy property right now, but this isn't one of them. Prices are too high and beginning to fall again; that is a good reason not to buy. The worry that your title might not be valid is not a good reason.
Some people will undoubtedly make a fortune investing in these properties in the next few months. But if your down payment represents most of what you have in the world, it’s hard to justify betting it all on a situation like this one.
Betting it? What is the buyer's risk of loss? Even if the impossible happened, the buyer would be made whole by the title insurance company. This author has taken ignorance to the workings of title and created a number of fanciful scenarios that simply won't come to pass. I expect better from the New York Times.
She lost a fortune
Gains and losses are all relative. For most middle-class working Americans, losing $130,000 is a big deal. The owner of today's featured property can't be too happy about losing all that money and seeing her credit get trashed.
The property was purchased on 11/10/2005 for $629,000. The owner used a $503,000 first mortgage and a $126,000 down payment. She did manage to open a HELOC on 2/22/2006, but there is no way to know if she extracted half of her equity. For her sake, let's hope she did.
Since our real estate market is a giant Ponzi Scheme, for every winner there is a loser. Mostly it is the banks and ABS investors who are losers, but sometimes it is the homeowner-specuvestor who gets crushed.
Irvine Home Address … 183 GROVELAND Irvine, CA 92620
Resale Home Price … $499,000
Home Purchase Price … $629,000
Home Purchase Date …. 10/10/2005
Net Gain (Loss) ………. $(159,940)
Percent Change ………. -25.4%
Annual Appreciation … -4.4%
Cost of Ownership
$499,000 ………. Asking Price
$17,465 ………. 3.5% Down FHA Financing
4.25% …………… Mortgage Interest Rate
$481,535 ………. 30-Year Mortgage
$94,684 ………. Income Requirement
$2,369 ………. Monthly Mortgage Payment
$432 ………. Property Tax
$267 ………. Special Taxes and Levies (Mello Roos)
$42 ………. Homeowners Insurance
$265 ………. Homeowners Association Fees
$3,375 ………. Monthly Cash Outlays
-$374 ………. Tax Savings (% of Interest and Property Tax)
-$663 ………. Equity Hidden in Payment
$27 ………. Lost Income to Down Payment (net of taxes)
$62 ………. Maintenance and Replacement Reserves
$2,426 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,990 ………. Furnishing and Move In @1%
$4,990 ………. Closing Costs @1%
$4,815 ………… Interest Points @1% of Loan
$17,465 ………. Down Payment
$32,260 ………. Total Cash Costs
$37,100 ………… Emergency Cash Reserves
$69,360 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 1,875 sq ft
($266 / sq ft)
Lot Size: n/a
Year Built: 2006
Days on Market: 145
Listing Updated: 40455
MLS Number: P736567
Property Type: Condominium, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Beautiful, upgraded Irvine home in exclusive Woodbury community. This home features a kitchen with gourmet appliances, granite counters custom window covers and a sliding door to the private and enclosed patio. One of only a few units that has it's own patio with no shared wall to neighbors patio. Carpet is brand new, paint is perfect throughout with designer colors. Crown molding in two rooms, sleek dark wood cabinets throughout entire house, wrought iron stair case railing. Home is perfect and move-in ready! And enjoy all the community amenities too! WE NEED A NEW OFFER TODAY – ALMOST APPROVED!
We need a new offer — almost approved? In other words, this sat on the market forever as a short sale, and when the bank finally got around to approving the old offer price, the buyer had long since moved on. This administrative delay is caused by a combination of administrative incompetence and the desire to avoid taking losses. If prices go up, banks are rewarded for this behavior; however, when prices start going down, these delays cost them a great deal of money.