New Uncertainty About Foreclosure Sales!

By
Title Insurance
https://activerain.com/droplet/5TN

Real estate brokers and recent purchasers are asking a lot of questions about the recent national news about invalid foreclosure sales.   Perhaps I can help to reduce the stress and uncertainty.   The questions are coming from prior purchasers who are now worried about what they should do in response to the news, and from current purchasers who are reasonably concerned about the risk of purchasing property after foreclosure sales.  Should people buy REO listings?

What are the foreclosure sale issues?

Most of the issues of those national news stories should not cause a risk of challenges to the non-judicial type of foreclosure done in Washington.  There are reports of false documentation supporting prior sales.  There are reports that courts are requiring proof of ownership of the notes and invalidating MERS assignments.  Almost all of those issues are involved with judicial foreclosure methods almost never used in Washington residential transactions.   WA purchasers from prior foreclosure sales should not worry much about those national news reports.

However, the news has not yet mentioned a new Court of Appeals decision in Washington published September 28th, that does create new uncertainties about the validity of a Trustee sale.  The opinion of Division II is named Albice v Premier Mortgage Services.  The Court allowed a borrower to set aside the Trustee sale even though purchased by a third party (not the lender doing the foreclosure.)  The opinion has a lot of troubling and often inconsistent statements.  The opinion says the prior sale is void, not voidable.   The opinion says the buyer cannot be a bona fide purchaser relying upon statutory presumptions from the Trustee deed.  The opinion imposes new duties on the Trustee and constructive knowledge of the foreclosure details on the purchaser. 

These foreclosure uncertainties have not been the law in Washington.  The facts of the Albice case are extreme.  The Court was motivated to avoid the loss of significant equity.  This time the Court ruled against the purchaser due to a sympathetic former borrower.  Many prior Washington cases have ruled in favor of the purchasers.  The Washington statutes and prior cases have repeatedly ruled against prior borrowers, stating the primary goal is that a Trustee sale should be final and relied upon.   I believe that remains applicable to most  Trustee sales.

What is the protection of a title insurance policy against these risks?

Almost all the persons who are asking about the risk of their prior purchase received an owner's policy of title insurance.   The usual purchaser of a resale of property after a recent foreclosure sale receives a title insurance policy that will protect them against loss in that event.   The Covered Risks of an owner's policy will insure against loss and attorney fees that would be suffered if the prior owner challenged a prior Trustee sale.  

Other than the coverage of the title insurance, the purchasers from the lender that foreclosed probably have no legal remedy against that seller.   The REO sellers do not provide deeds that warrant that the lender owned the property, nor any other warranty of the condition of title.  You also know that REO sellers usually will not pay the premium for the proper Homeowner's Policy that would insure against a lot of the risks arising from matters that are missing from the usual statutory warranties of title.   These topics are discussed at length in my prior blog articles.

Even the minimum lesser coverage of the standard coverage title insurance policy will insure against the risk of a former owner challenging a prior tax sale.   Some title companies are inserting a special exception of coverage in commitments following a foreclosure sale, such as "Any rights, claims or interest of (the mortgagor) in the land or any claim that the foreclosure by (lender) is invalid."   The resale purchaser usually will require the seller to provide a title policy without such an exception.

There are Exclusions to coverage that would apply in very rare circumstances: (1) if the property was actually occupied by the prior borrower/owner at the time of the resale, (2) if the Insured purchaser was the prior debtor (like reacquiring the property), (3) if the purchaser has actual knowledge of a defect in the foreclosure proceedings that is not disclosed by the recorded documents and not disclosed to the title company, or (4) if the purchaser paid so little of the property's value that a court would say the purchaser is not a bona fide purchaser for value.  If one of those exceptions may apply, you should consult an attorney about your coverage and your risk of a successful foreclosure sale challenge.

How do these issues affect resales of property after the foreclosure?

A resale is from the lender ["REO Sales"] or from the third-party who acquired at the Trustee's auction sale, now reselling to a new purchaser.   The resale is almost always to a genuine, bona fide purchaser for full value.  The courts that might set aside a prior sale are much less willing to affect a genuine resale purchaser. 

Most of the transactions involving real estate brokers are for sellers and purchasers at the resale, not the actual Trustee sale.  I expect all of the transactions being handled through escrow agents also will have title insurance issued to the purchasers.   I predict very little change in the willingness of the title companies to insure the validity of the prior sale for the resale transaction purchaser.  In most transactions, the title companies in Washington are able to issue owner's policies insuring the resale purchaser against loss due to an attack on the prior Trustee's sale.  

Outside the view and involvement of our customers, you can expect all title companies will certainly increase their scrutiny of the prior foreclosure and will increase underwriting approval procedures.   At any closing of a resale, the real estate broker and escrow agent should expect to provide proof to the title company that the former owner/borrower is not occupying the property, regardless of the basis for that party to remain in possession.

Will title insurance be available to the persons who want to buy at the Trustee's sale?

A proposed purchaser might ask for a title report (aka "preliminary" or "commitment") proposing to insure the purchase at the Trustee's sale.  However, you should expect one or more Special Exceptions to coverage will remain in any policy following a foreclosure sale.   The language will vary, but in substance the title company will remove coverage against loss due to an attack by the former owner/borrower on the validity of the prior Trustee's sale.  The limitation on insurance will apply to the lender (or its successor entity) acquiring at its own sale, AND apply to a third-party purchaser acquiring by a bid at the Trustee sale.  The news today suggests that lenders and Fannie Mae may even be willing to offer warranties of their compliance with foreclosure sale proceedings.  I never thought I would see a bank's warranty.   Fascinating!

Conclusion:   Business as Usual for Most Residential Transactions!

For all the other usual transactions, past and future, there are more important things to worry about than the risk of a challenge to the prior foreclosure sale. 

 

** DISCLAIMER:  No person should rely upon a blog article as legal advice applicable to their particular circumstances.  Dwight is not acting as the attorney for anyone and no attorney-client relationship exists.  This is only his general opinions about the status of the real estate industry.  **

 

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Re-Blogged 1 time:

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  1. Pamela Seley 08/17/2012 07:22 AM
Topic:
Home Buying
Groups:
Coldwell Banker Group
REO
Foreclosure Talk
Puget Sound - WA Real Estate
John L. Scott | Real Estate - Active Rain Bloggers
Tags:
foreclosure title insurance reo albice homeowners policy

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Rainmaker
908,388
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

Dwight, very infromative article.  Looks like it's going to get more complicated, and take more time to fully complete a REO sale.  Thanks for this post,

Oct 14, 2010 07:38 AM #1
Rainmaker
467,991
Marcy Moyer
eXp Realty of California Silicon Valley Probate, Trust, and Investment Sales - Mountain View, CA
Probate, Trust, and Investment Specialist

Thanks for the info. I think there has always been uncetainty about buying at a trustee sale, but now people are starting to wonder about buying an reo which seems to be very different as far as title risk goes,

Oct 14, 2010 03:41 PM #2
Rainer
9,627
Dwight Bickel
Seattle, WA
Regional Counsel for Fidelity National Title Group

in Washington state, we have had clear prior cases unholding Trustee sales against challenges based on procedural issues.   Purchasers here have enjoyed more certainty than other states, in the past.  That's why my blog alerts that those sales now have more uncertainty.   Clearly a state specific issue.

My hope is that my blog will help REO purchasers feel more comfortable they are protected by their title insurance policy.

Oct 15, 2010 04:27 AM #3
Rainmaker
516,816
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

The chaos continues. Banks should encourage and expedite short sales to avoid the foreclosure morass.

Oct 24, 2010 04:24 PM #4
Rainer
70,432
David North
Coldwell Banker Bain - Duvall, WA
for a rewarding real estate experience

Dwight, thanks for the thorough and detailed coverage of this issue.  It's timely and important for brokers to understand.

Oct 25, 2010 07:14 AM #5
Anonymous
Chavi M. Hohm

Dwight - great article and I'm really happy to see someone cover the issues to Washington state buyers so effectively. The gals here at Team Diva Real Estate in the Capitol Hill Coldwell Banker Bain office have been very careful to send our clients to Rainier Title to have clear title and title insurance to protect them during these uncertain times.

Thanks!

Oct 25, 2010 07:59 AM #6
Anonymous
Jillayne Schlicke

Thanks for laying out the title insurance perspective, Dwight.

Oct 28, 2010 01:12 PM #7
Rainer
125,121
Sandra White
John L Scott Real Estate - Port Townsend, WA
Experienced Residential Resale Broker

Fortunately our little area here around Port Townsend has not had a lot of foreclosure sales, but I imagine that will increase with time.  It is a bit confusing but worth reading up on.  Thanks for the information.

Nov 10, 2010 05:06 AM #8
Rainer
9,067
Jackie Burkett
Kirkland, WA

Dwight, thank you for the information! A client of mine recently found your blog very helpful in his decision to move forward with an REO. He sent me the link to your blog in an email with his findings regarding bargain and sale deeds and title insurance. ActveRain really is a great site for people in the industry and our clients!

Jan 06, 2011 08:39 PM #9
Anonymous
Karen Pooley

Dwight,

I would like to challenge some of the things you claim here.

Firstly, we have proof now that title companies are being indemnified by the banks when they are reconveying property.  Can you speak to this?  I have a document from a local title company which shows that they are not requiring the Original Promissory Note nor the Original Deed of Trust when reconveying even non-default properties.  What is really interesting to me, though, is the entities that are providing the indemnity agreements are the LLC portions of the big banks.  For instance, rather than JPMorgan Chase Bank NA, they are being provided by Chase Home Finance, LLC.  Just wondering if the title companies are noticing this when they accept these indemnity agreements? Why are the banks providing title companies with "Lost Note Affidavits" rather than the Original Promissory Note?  Again, your talking points here???

In addition, new title policies that are "insuring title" to properties are coming back with excemptions to this insurance and are covering themselves by providing these exemptions.  The ALTA policy is clearly the policy that needs to be offered to the client and if they can cover themselves additionally with a Borrower's Policy even better.  Title insurers first and foremost business practice is to NOT pay claims.  I find it interesting that you claim anyone can be covered by title insurance with a Bargain and Sale Deed.

The borrower is taking on huge risk when buying short sales, REOs, or houses at the foreclosure auctions.  It is really bad advice that you are providing here.

 

Jul 10, 2012 10:11 AM #10
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Rainer
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Dwight Bickel

Regional Counsel for Fidelity National Title Group
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