This Week's Weird One

"It just goes to show you, it's always something

— if it ain't one thing, it's another."

                                                  - Roseanne Roseannadanna

 

 

We had a deal die yesterday. Unfortunate, but it happens. What has us shaking our heads and mumbling to ourselves is that we'd never run into a problem like this before, nor had anyone else we talked to about it.

 

This was a title issue, which is itself unusual. In over 20 years of doing real estate, we've only ever had 2-3 title issues to deal with, and none that had derailed a deal. But Colorado relies on the principle of subjective discretion for contract objections from buyers - for inspection, loan and title items, if the buyer isn't comfortable for whatever reason, they can object and terminate the contract. And given that title issues leave little room for redress aside from throwing money at the problem, they can be a serious obstacle to moving forward.

 

Many of you will recognize the acronym MERS from the 2008 market crash and its aftermath. MERS - Mortgage Electronic Registration System - was at the center of the foreclosure crisis and featured in many lawsuits. As the named, but not actual, lien holder for over 65 million mortgages, it's right to foreclose on behalf of its clients was at the center of a long and convoluted legal controversy, and, unless you read title commitments carefully, that's probably where you heard about MERS.

 

But this isn't about that issue.

 

While real estate transactions in Colorado rarely involve attorneys, the state-mandated purchase contracts used by real estate agents highlight, in very bold print and in several locations, the parties' rights to have an attorney review all contracts and documents. So the buyer of a home we recently listed decided to do exactly that, and it shouldn't have been a big deal. But within the title commitment, the identification of MERS as the lien holder for the mortgage became the basis for the buyer terminating the contract.

 

Here's an excerpt, provided to us by the buyer's agent, from Joshua J. Card, writing in the Brooklyn Law Review in 2012 in an article titled "Homebuyer Beware: MERS and the Law of Subsequent Purchasers", identifying the nightmare scenario that was at the center of the buyer's termination:

 

Imagine you are in the market for a new home. You scour local real estate listings, you vet real estate agents, and you canvas neighborhoods until finally a property grabs your attention. You know this is where you will spend the rest of your life. So you make the home owner an offer, he accepts, and you proceed to the closing. Lawyers, real estate agents, and title insurers all gather around a table. Everything appears to be going smoothly: you distribute your purchase funds to the seller, he pays his remaining balance on the mortgage, and the owner of his mortgage—a company named Mortgage Electronic Registration Systems, Inc. (MERS)—discharges the mortgage and removes its lien on the property. Because your title search revealed that MERS possessed the only outstanding interest against the property, you are satisfied that the title is free from adverse claims. Accordingly, you close the deal.

Six months pass. You have finally finished moving into your new home. You have met your new neighbors, found a new favorite restaurant, and enrolled your children into a new school. Moreover, your finances have remained stable, and you are current on your mortgage payments. As a result, you are perplexed when you return home one day to an unwelcome surprise: a foreclosure notice. You immediately call your bank in protest, but the bank actually confirms its receipt of your mortgage payments. In fact, the foreclosure notice is not even from your lender.

You hire a lawyer to represent you, but to no avail. The law is not on your side. Although you performed a title search and found only MERS’s name in the land records, another unrecorded claim existed. As it turns out, MERS held only “legal title” to the property, while another party actually owned the right to the mortgage payments. Accordingly, after the seller tendered the remaining balance to MERS, the company encountered a problem when it could not determine who was entitled to the funds. MERS later distributed the funds to the wrong individual. As a result, the true owner retains a claim against the underlying property. You lose your dream home. Worse still, you may not be alone.

 

Scary, isn't it? But there are just a couple of inconvenient items about this scenario that are problematic. First, this has literally nothing to do with MERS. Every transaction which requires a mortgage payoff faces the same risk of an error. It's not unique to MERS.

 

And second? Isn't this why we have title insurance? I'm assured by our title company, as well as what I have been taught and experienced, that a standard title policy protects the buyer against exactly this kind of situation.

 

So, what if maybe the buyer was simply using this as an excuse to terminate? That's certainly a possibility, but we don't think that's likely - the buyer also still had in hand their right to terminate on inspection - a much less problematic and easier out if they wanted it, given the right of subjective discretion.

 

What are we left with then? Well, I'm not an attorney, and I'm certainly not qualified to take a position on an opinion provided by an attorney on a legal matter for a party that isn't even my client. But we don't have mind control yet, so I can certainly think what I want about the competence of the various actors in this latest episode of Real Estate Oddities.

Mary & Dick Greenberg New Paradigm Partners LLC 2601 S. Lemay Ave. #41 Fort Collins, CO 80525 970-689-4663 www.maryanddick.com

 

Data Source: IRES MLS