By Stacey Moncrieff, Editor in Chief, REALTOR® Magazine
Nearly 800 people attended REALTOR® Magazine’s October 28 webinar regarding recent foreclosure freezes by several national lenders. Since that session, media attention on the freeze has waned a bit. However, delays and buyer concerns continue. We didn’t have time— or answers—for all the questions posed during the 60-minute webinar. So senior editor Rob Freedman and I followed up with our speakers:
· NAR Associate General Counsel Ralph Holmen
· American Land Title Association Counsel Steve Gottheim
· NAR Managing Director of Regulatory Policy Jeff Lischer
They provided critical answers on liability, title insurance, disclosure to buyers, and more. When an answer was provided by a single speaker, we noted it.
What’s the problem?
Many major lenders in late September and early October froze their foreclosure processing while they reviewed their procedures to determine if the staff handling the foreclosures used improper procedures. Among other things, the lenders were exploring concerns that processors signed affidavits attesting to their having reviewed the documents in the foreclosure files without having actually reviewed all the files. The concern was that the servicers, to make quick work of tens of thousands of foreclosure files, used “robo-signers” to sign documents in bulk. When home owners and others brought the problem to the attention of lenders, attorneys, and the media, the major lenders initiated their foreclosure freezes while they determined to what extent problems had occurred. Since then, some of the banks have begun to process foreclosures again, at least in some states.
What is meant by the term “robo-signers”?
“Robo-signers” is the term the media have picked up on to label the folks who were apparently signing off on foreclosure affidavits without reviewing them. In some cases, these so-called robo-signers were employees of the bank. In other cases, they were contracted through an attorney or another outside firm.
How does MERS fit into this problem?
Steve: Questions raised about MERS likely will not directly affect consumers and foreclosure sales but may affect mortgage investors.
Mortgage lenders, title companies, Fannie Mae, and Freddie Mac created the Mortgage Electronic Recording System (MERS) in the late 1990s to bring efficiency into the tracking of the beneficial ownership of mortgage rights. Before MERS, many counties were seriously behind in recording transactions, including mortgage assignments. This gap period created significant risks for lenders and title companies, especially risk related to fraud. To reduce the volume of documents being recorded and increase transaction speeds while decreasing costs, lender began recording MERS mortgages, naming MERS as the nominee (a form of agent) for the mortgagee (the lender or servicer). Since MERS would remain the nominee forever, there was no need to record assignments as people traded mortgages on the MERS electronic platform.
When a servicer forecloses on a borrower, the foreclosure is brought in the current owner’s name and not MERS. Thus chain of title should be complete and there should be no grounds challenging a foreclosure.
Some critics believe that the process of recording a MERS mortgage may not be legal, and may in fact muddy chain of title. This problem is not related to the foreclosure issue but rather to the creation of the mortgage and sale of those mortgages to investors. While most courts have weighed in and found MERS mortgages to be legal, that may change.
DEALING WITH BUYERS
During the webinar, you suggested adding a warning to the sales contract. Can you give us the right verbiage for the “warning” that can be added to the sales contract?
Ralph: As in any situation involving contracts, counsel should be involved in preparing, reviewing and advising about specific language, but “warning” or “notice” might be of the following form: “Be advised that this property was (or some properties may have been) subject to prior foreclosures where the process may not have vested “good title” in the present owner. If that is the case, closing on such a property may be difficult, delayed, or in some caseS precluded completely. Purchasers interested in properties known to have been the subject of foreclosure in the past should be aware of such concerns, and may find it prudent to review the facts and circumstances about the title of any property of interest, including the availability of a commitment for owners’ title insurance, before engaging in transactions involving such properties, or transactions involving properties that may have been the subject of prior foreclosure.”
In Illinois, adding language to contracts or riders is considered “practicing law.” Therefore, practitioners who are not attorneys are prohibited from doing that. Could it be done as a separate disclosure document?
Ralph: The language could probably be added to a separate document, but practice of law issues may be raised nevertheless. Brokers and agents in Illinois or elsewhere where this may be an issue should consult with counsel.
What does this all mean for a buyer who is under contract with a foreclosed property? I’m in Massachusetts and have clients who are under contract, did their inspections and appraisal, and received a commitment from their lender. The transaction was scheduled to close on 10/15.
Ralph: The result in this case will depend on the particular facts involved, but simply put if the property is one where a title insurance policy for the lender and owner are not currently available, there is probably little that can be done unless and until the title issues are sufficiently clarified and resolved to permit title insurance to be issued.
Is there a greater risk for a buyer looking to buy a property from a county public (online) auction than an REO? How can they protect themselves?
Steve: No, there is no greater risk for a buyer looking to purchase a property at county auction rather than as an REO. After a judge issues a final order approving the foreclosure, the property is auctioned by the sheriff. Typically, the foreclosing lender purchases the property and holds it to sell as REO. With this chain of transactions in mind we can see that any risks related to the foreclosure will be present for a buyer who purchases the property at auction or at REO. However, on a side note, bidders at auction have less opportunity to inspect the home and title to the property than they would if they purchased the property as an REO. This limitation may cause additional risks outside of the foreclosure issue.
Is there any liability for an agent assisting a buyer in purchasing a property in foreclosure with some of these issues?
Ralph: There is always concern that difficulties in a transaction may raise liability concerns for brokers and agents, but making disclosure about the any known or possible concerns raised by a prior foreclosure, or possible foreclosure, will likely be the most effective protection against such claims.
Are there any concerns the banks will turn on real estate practitioners or associations who warn that REOs may be problematic? That is, could banks sue, arguing that the warnings stalled sales of REOs not under the robo-signing cloud and cost the bank money?
Ralph: Such claims by lenders cannot be precluded, but it is likely that careful disclosure of verified factual information about the foreclosure status of a property, or the possibility that certain properties, or properties in general, may have been the subject of prior foreclosures, will not likely produce substantive liability claims. Brokers and agents should be careful that their statements are accurate and factual, and not opinion or speculation about foreclosure or the impact of foreclosures generally.
Do I understand correctly, a buyer can purchase owner’s title insurance upfront when purchasing a foreclosed property? This is a concern in my area, as we have many cash buyers for these properties, and the banks want to use their lawyer to close.
Steve: Buyers can purchase an owner’s policy whenever they possess or are in the process of taking possession of real property. When buyers purchase a home—whether from an REO, short sale, or traditional seller—they have the option of ordering a title search and insurance policy from a local title agent. If the buyers are purchasing a property at auction, they likely will not have the time to order a title policy and can always purchase one after the sale.
Under the federal Real Estate Settlement Procedures Act (RESPA), all consumers are entitled to shop and choose their settlement service providers if they are paying the cost for the service. For questions regarding specific transactions contact a local attorney.
What’s the typical cost of an owner’s policy?
Steve: The cost of an owner’s policy varies by state. However, a good rule of thumb is that an owner’s policy costs between $400 and $1,400.
Does $400–$1400 apply even when purchased along with a lender’s policy?
Steve: When purchased alongside a lender’s policy, the cost is closer to 1% of the purchase price for both policies.
Is it advisable to purchase additional title insurance in non-judicial states?
Steve: We advise purchasing title insurance in all states for all sales. While title insurance protects against any problems with the foreclosure (which are going to be more prevalent in judicial states), it also protects the consumer’s ownership of the real property against other competing claims, fraud, forgery, defective notarization, etc. These protections are purchased for a modest one time premium and provide the insured with cost of defending title and loss payments for as long as they possess an interest in the property. To learn more about title insurance go to www.homeclosing101.org to find information and contact information for local title professionals.
Do we expect the cost of title insurance to increase as a result of the foreclosure freeze issues?
Steve: The industry is always working to keep costs down. We believe the costs of this crisis should be borne by the actors who created the problems, and so the lenders are expected to bear the burden and not consumers.
If someone purchases a foreclosure and has owner’s title insurance, what protection, if any, does he or she have to recoup payment over the purchase price for improvements made subsequent to the sale if the property has to be reforeclosed by the lender?
Steve: If a consumer made investments after purchase, he or she can always obtain a new owner’s policy insuring the property for the full value.
In the event that the court decides to take title from the innocent homeowners and return title to a defaulted borrower, the court will seek to unwind the deal and place all parties in the same shoes they were in before the foreclosure. The borrower will get title back, the lender will get the mortgage back, and the innocent homeowners will get their purchase price back. If the homeowners have made investments in the property after purchase, the court will take this into account. Two potential options are that the court will allow the homeowners to recoup the investment from (1) the lender, who will roll the amount into the mortgage or (2) the defaulted borrower themselves. This scenario is not guaranteed and could be costly and time consuming. Purchasing an updated title policy covering the improvements is the fastest and safest way to protect an investment.
Many banks require you to use their attorney-run title company and the bank’s foreclosure contract dictates that the buyer will receive a minimal form of warranty deed. Does title insurance overcome this limited form of deed transfer?
Title insurance is a stronger protection than a deed warranty. Title insurance covers a wider range of threats against title than a warranty deed. Generally a warrant deed protects a buyer from mistakes caused by the seller or another previous owner. Title insurance however covers mistakes in the public record, mistakes by the mortgage lender, and mistakes by courts. Title insurance also provides both cost of defense and loss payment in the event of a title challenge. Warranty deeds may not cover all these costs. Further, a warranty is only as strong as the person providing the warranty. However, title insurance is provided by highly regulated title companies with strong reserves and years of experience handling these claims.
EXPECTED TIMEFRAME FOR RESOLVING FORECLOSURE FREEZES
Bank of America said it was resuming foreclosures in the 23 judicial process states. What about the states that are nonjudicial?
Jeff: In nonjudicial states, Bank of America is saying it’ll get back to doing foreclosures in “a matter of weeks.” However, bear in mind that lifting the freeze doesn’t mean that foreclosures will resume en masse. It means that individual foreclosures under review may be refiled one at a time and individual foreclosure sales will proceed one at a time. The process won’t happen overnight. This is a situation in which lenders and real estate practitioners share an interest in getting the issues resolved thoroughly but quickly.
Who can answer our questions on specific transactions? I have spent hours on the phone. Freddie Mac says it’s the servicer’s problem. Chase will not give any information. I represent a buyer who went under contract on Sept. 30. The seller wants to extend the closing date an additional 30 days due to this halt, but the buyer doesn’t want to sign the extension.
Jeff: Your frustration is understandable, but there’s not much general guidance that can be offered on specific transactions. If you’re hoping to expedite a sale on a specific property—or even to learn its status—your best bet is to contact the servicer. As you know, it’s often the case that the squeaky wheel gets the grease.
GENERAL FORECLOSURE QUESTIONS
In my area, banks are demanding that listing brokerages not disclose in the MLS that the sale is an REO sale. Is that occurring in other MLS markets?
(Answer provided by NAR’s Board Policy & Programs staff).
MLSs haven’t raised this as an issue, and there’s no NAR policy that would preclude lenders from making such a demand.
NAR policy enables MLSs to require that short sales be disclosed on the MLS. The authority of MLSs to require disclosure of potential short sales is based on the need to let potential cooperating brokers know the sale will be subject to a lender agreeing to settle for less than is owed on the mortgage; that a lengthy lender approval process may be involved; that a lender may insist on a reduction in the listing commission as a condition of agreeing to the sale; and that the reduction in the gross commission may result in a reduction in the compensation paid by the listing broker to the cooperating broker at closing.
Those factors do not necessarily come into play in play when REO is listed, and there’s no basis in NAR policy for MLSs to require listing brokers to disclose, as a condition of filing a listing in MLS, that the seller is institutional (i.e. that the property is REO).
The fact that property is characterized as REO may be read as suggesting that the property can be purchased at a discount, or that the property is distressed, when neither may be true. The purpose of MLS isn’t to advantage buyers to the disadvantage of sellers, or vice versa. It might also be considered that sellers of REO may be reluctant to have their property in MLS knowing it can be searched not only by price, property type, or location, but also by whether the seller is an individual or an institution. To the extent possible, information published in the MLS should be related to the property itself and to the cooperative relationship between the participants.
ACCESSING THE FORECLOSURE FREEZE WEBINAR
Can we get a copy of the recorded webinar?
Yes, you can play back the webinar or download it to play at your convenience.
Where can we get a copy of the PowerPoint slideshow used during the webinar?
A PDF version is posted at REALTOR® Magazine’s webinar page. Scroll down to “On-Demand Webinar Recordings.”