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Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers

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Another ticking time bomb in the realm of real estate bad behavior is bound to go off sooner rather than later, and it is likely to impede normalization of values of residential property.

As readers no doubt know, there is a lot of actual and shadow residential real estate inventory in the US. The time from serious delinquency to foreclosure has lengthened considerably, due not just to crowded court dockets, but also bank/servicer disinclination to take possession (reasons include that investors take a dim view of bank real estate holdings; the bank is liable for expenses, most important real estate taxes, once it takes possession; more foreclosures would lead banks to have to write down clearly overvalued second mortgages, leading to losses and lowering bank capital levels).

Most analysts have argued that it would be preferable to accelerate the process of clearing the overhang of housing inventory, since prices need ultimately to return to price level in relationship to incomes and rent rates more in line with long standing historical norms. And the officialdom seems to accept this view, since Fannie and Freddie are pressuring servicers to move faster on foreclosures.

But what if this resolution process has new land mines planted in it? What if there are not widely understood impediement to foreclosed properties ending up with new owners? If there are good reasons buyers will have reason to be leery of buying houses out of foreclosure, we could have a lot of homes sitting vacant, a blight on neighborhoods and a source of even greater losses to banks and investors.

Yet it appears that the very same sort of corners-cutting that led financial firms to shovel money to weak borrowers could impede working through the inventory of seized residential real estate. An article discusses an analysis by AFX Title, a title search company, that shows problems with title on foreclosed properties to be widespread:

As the number of real estate foreclosures skyrockets, the odds are higher that a home you live in today, or at some point in the future may have had a foreclosure in its history. Even if the foreclosure has long since passed, a loophole in the way mortgages are recorded can create a serious title defect for future owners. Title analysis performed this month by AFX Title has detected this error to be common in random samples of properties it reviewed. “This could affect the property ownership of millions of homes nationwide” said David Pelligrinelli, of AFX Title. “The mortgage recording method which created this title flaw did not exist until recently. As title abstractors are just seeing this problem emerge now but a wave of title claims is coming over the next year or so.”….

The problem is created through a break in the chain of mortgage ownership. Until the 1980’s, most mortgages were loans between the homeowner and a bank, who lent the money directly. More recently, the mortgage financing system transformed into an international system of securitization, with mortgage lenders packaging their loans into securities, bought and sold by investors like stocks. These transactions even split individual mortgages into sections, where each loan could have parts owned by different investment banks.

The transfer of ownership in these mortgage backed securities (MBS) was done with contracts on the balance sheets of Wall Street investment banks, such as Morgan Stanley and Goldman Sachs. The company who originally appeared to make the loan was normally a retail lending company such as Countrywide or Lending Tree, who typically acted as a sales company, and sometimes remained contracted to service the loan.

In the event that the loan goes into foreclosure at a later date, the then-current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The land records would show a deed of transfer from the investment bank to the new owner. This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place

There are reports that some title insurers are indicating that they will not insure for this title defect.

Yves here. Some readers may take this all to be unduly alarmist. But confirmation that this problem is real and potentially serious comes via a new “gotcha” practice by Wells Fargo on foreclosure sales. Wells is sufficiently concerned about the risks of selling properties out of foreclosure that it is springing an addendum on buyers, shortly before closing, which effectively shifts all risk for any title deficiency on to the buyer.

Now why is this a big deal? Go reread the boldfaced sentence above. If a bank like Wells does not have the right to foreclose, it cannot have clean title to the property. So the bank could conceivably be selling something it does not own.

Let’s say you buy a vase from a store. You open the box when you get home and find out the box is empty. You’d clearly be within your rights to get your money back.

With the Wells Fargo addendum, even if the bank has sold you the equivalent of an empty box, you have no recourse to Wells. Zero. Zip. Nada.

Let’s go back and give a bit of context. Wells is encouraging buyers in foreclosures to use its attorney and title insurers and reportedly offers to split fees. So the bank is taking steps to steer buyers not to get legal advice. This matters because the problems in this document would not be evident to a layperson. And it’s not even evident to lawyers not expert in real estate; I learned about this situation because a lawyer I know who does a fair bit of real estate work had been contacted by a friend of his, a lawyer looking to buy a house over foreclosure. Wells had presented the prospective buyer with this supposed “standard” addendum on the day of closing and said they would not negotiate it (you can read it in full at ScribD). The buyer was advised not to sign it.

On the surface, this document may not seem all that troubling. But what it does, in effect, is say “Warning, warning, you are buying a property out of foreclosure, there is risk here, and you can’t hold us responsible for anything we told you in the sale process.” (see paragraphs 1 and 2). Now the not-trivial problem with that is: how can you possibly evaluate the risk of buying a property out of foreclosure without asking the current owner? And if the current owner isn’t legally responsible for what they say, or more important, what they deny is a problem, they buyer cannot perform effective due diligence. This vitiates a principle that is well embodied in most areas of consumer and business law, that a seller is liable for the representations he makes about his wares.

Now specifically, the potential problem with the deal is the bank in many states will at best be giving the buyer a “quitclaim” deed (the addendum finesses this in paragraph 18, that the buyer only gets a “special/limited warranty deed. As the lawyer who took a dim view of this addendum put it, “This is like the ‘Special Olympics,’ not like ‘You are my special someone’.” That means the bank is merely transferring whatever it interest it has.

But per the AFX article above, the bank may own nothing. It may have foreclosed without having a clear enforceable right to the property (this is the basis of the burgeoning number of cases where borrowers are successfully challenging the bank/servicer’s right to foreclose, because it cannot prove it actually owns the note, which is the IOU between the borrower and the lender; if you don’t own the note, in 45 states, you have no right to enforce the lien on the property).

Now this little problem can be solved by title insurance, right? Well, guess what, some title insurers have exited the business, some others are starting to write policies with meaningful exceptions when they can’t go to the courthouse and find a clear chain of title. Oh, and Wells is trying to steer you towards their title insurer. What do you think the odds are that their title insurance policy doesn’t have exceptions?

So what is the risk? The lawyer explains:

The typical (unsophisticated) buyer thinks that because they have a lawyer at closing (no matter whose lawyer it is), a title policy, etc…….that they are all safe and sound. They struggle through one of these REO transactions for a month or two, finally get in the house, something bad goes wrong, and they find out that 1) the title policy won’t cover them and 2) the land isn’t unique (see the nasty provision in paragraph 27 on “specific performance”), so a refund is all you get – and you are out on your ear. Hopefully, with a refund – and that may be the best outcome. But if somebody comes in, and voids a foreclosure, your title policy doesn’t pay – Wells Fargo has clearly disclosed that this was a foreclosure, so you only got what they had (nothing), and you have no recourse, no insurance, and guess what, an unsecured loan for half a million bucks.

Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.

Think the risk isn’t real? Then why has Wells bothered to insist that REO buyers sign a new type of addendum, when it has been selling REO for decades? This effort to shift all title risks on to the buyer is a tacit admission of problems. And look at the document itself. The buyer has to initial it in eight places as well as sign it. That’s a clear statement of Wells’ intent to shift the risk to the buyer.

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118 comments

  1. psychohistorian

    Thanks for the posting. I am one of the crazy folks intent on selling my existing house and buying something else with the remainder in this market. I have had my house on the market for 2 months and it feels like I am chasing a crashing market. I just received an offer for 50K less than the current asking price which would also be close to 1/3 of the tax valuation…..gag.

    I have been nervous about what I might find during my purchase side of this transaction given the securitization nightmares one reads about and now this. Oh well, it should be educational.

  2. attempter

    Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.

    Hopefully once those stories get out there (assuming they get the press they deserve, a big If given this meretricious media) it’ll help toward weaning people from the “ownership society” scam.

    Here’s what I’d like to see: Debtors jubilate, prospective buyers refuse to buy. Meanwhile, as part of a general people’s movement, organized squatters come to an understanding with bankrupt communities filled with vacant properties. That it’s better for the people (the unemployed, the poor, the foreclosed upon; it’s going to be more and more of us) to take possession of those vagrant “properties” (which, if anyone’s still squeamish about bourgeois norms, we can call abandoned by the banks), tend and maintain them, cultivate the land, have their own stake in the community, than to leave the land empty, rotting, and wasted, which will only cause the further degradation of the community. Then the community as a whole must be ready to repel any bank thugs who come along.

    1. craazyman

      I like that scenario. When I read Cormac McCarthy’s THE ROAD I sort of hoped it would have a happy ending, but instead the father dies on the road and the kid gets to tag alone with some new father-figure that somehow appears on the horizon like a Messiah and then the story ends.

      It would have been good if somehow he had the good guys get together and take possession of the looted, wasted and burned out houses — restarting the cycle of death and resurrection. Instead, the good guys were solo, faceless nameless and utterly alone. And all that continued was death enobled by suffering. I’d rather have the absinthe bar — which for me is a metaphor for fertile imagination and the procession of living forms.

      I actually found the whole book to be a bit odd. It was very flat, in a way, although parts were magnificent solar flares of evocative, descriptive and lyrical language.

      People need ideas they can organize their minds around, or else they wander like ants across a brick patio, just meandering senselessly everywhere at once. I always resist the urge to step on these ants, and I watch them instead, trying to intuit some systematic approach to their ambulation. I can’t find any. But maybe that’s because I just can’t relate.

      It would be curious to see what sort of leadership would emerge to guide such a reposession, and what philosophies they would hold forth as their justification. It would likely be some form of utilitarianism, which would at least be somewhat American, instead of a rebellious denial of property rights, which would be running head first against the tide. If these communities could somehow work out, it would be a marvel and quite an example. Although I wonder if they did work, how long it would take before the participants would start selling off their work, house by house, into a rising market — resuming their karmic role as “consumers” having made it to the small version of the big time. LOL.

      It would be a tough choice for many, I think.

      1. attempter

        I haven’t read The Road, but I hope we never reach that level of post-apocalypse. Constructive action now can help avert that.

        I think the ideals of a redeemed society need to be cooperation, fairness, and freedom. By freedom I mean real freedom, including self-ownership and self-management. The only way to achieve that is through a society based on voluntary cooperation, useful possession (usufruct) rights, worker self-management, and political self-determination, direct democracy.

        People who came together to try to redeem their humanity and communities and resist tyranny, but who wanted to replicate the exact sins and crimes which have reduced us to this state, would be directly contradicting their ostensible endeavor. That would be the case with the kind of betrayal you describe.

      2. donna

        I really like your ant analogy. I find myself watching my ant highway. To explain, I take my smoke break at specific times in the day and the highway is there in the morning but gone in the afternoon..I know this does not equate to what you are talking about…other than your reference to “the road” which I read as well and found disturbing in the sense is “this is how we end?” Just, I guess I responded to finding someone that had read a book I read with an actual opinion…geezz I sound lonely, guess I am …..

    2. i on the ball patriot

      Well intentioned Attempter, but ‘jubilating’ as you suggest only plays into the hands of those gangster wealthy elite at the top who create the debilitating, well orchestrated, and adroitly metered out intentional perpetual conflict that we are all sinking into. [Those at the top at Wells fully understand fully what ‘poisoning the well’ will do to the real estate market.]

      Your plan will further pit the prudent against the not so prudent and add to the intentional chaos.

      Better to ‘jubilate’ against the corruption in government with election boycotts — a plan all can get behind — and demand the prudent be as well compensated as the not so prudent that got sucked in. A first platform of the boycotts will be the creation of a new interest free monetary system that will provide interest free loans to ALL who want home ownership, making the jubilee against the corrupt government even more inclusive. A second platform of the election boycotts will be to democratically set reasonable limits for private property ownership and yearly earnings. A third platform of the election boycotts will be to set new mechanisms of transparency in government with swift and harsh punishment for violators of the public trust.

      The participants will then have no reason to sell off their work as craazyman laments.

      Deception is the strongest political force on the planet.

      1. attempter

        If by “prudent” you mean those who are sore about having been made suckers by the elites, that’s unfortunate, but there’s nothing prudent about remaining childishly mired in that mentality rather than turning in thought and action against those same scammers.

        What plays into their hands is that mentality, not the call to break free of their framework completely. What plays into their hands is any reactionary clinging to any aspect of their frauds and lies, including any manifestation of their bank- and loan- dominated propertarian framework.

        That’s the real scam, and your “prudent” people are just proposing to be liquidated a little later on, if they cling to this distribution, when we could all liberate ourselves starting now. There’s nothing prudent about that kind of self-destructive inertia.

        1. i on the ball patriot

          By prudent I mean those who have not allowed themselves to be made direct suckers of the elite. Those who have not spent beyond their means, paid as they go, and now own their own homes or have significant equity.

          These prudent now become indirect suckers, or victims, of this intentional crisis as they are the ones who will be required to pick up the tab. It is a burden shift by the wealthy ruling elite. Your plan does not punish those who created the burden — the wealthy ruling elite — it continues the burden shift and creates more conflict that deflects from the machinations of the wealthy and aids and abets them.

          Your plan of asking “the unemployed, the poor, the foreclosed upon” to squat next door to these prudent folks is sure to create conditions that will piss the prudent off because it still asks them to pick up the tab but in a way that does not focus on the primary problem that will still remain if indeed you could convince any “bankrupt communities filled with vacant properties” to come to an understanding with “organized squatters”.

          In addition, it does not fit your espoused ideals of “cooperation, fairness, and freedom” to ask those who have been better stewards of their lives to pick up the tab for those who have been screwed by the machinations of the wealthy ruling elite and not go directly against those wealthy ruling elite who are responsible for the primary problem — hijacking the government and the financial system. Where the fuck is the fairness in that?

          That is the primary problem. We have an illegally empowered by corruption rogue gangster government that is calling the shots. They are gangster scum.

          Many of those who have been prudent realize that, and will stand with you in an effort that works to eliminate that corrupt government and build a better government through election boycotts. They will not stand with you if you encourage “the unemployed, the poor, the foreclosed upon” to squat next to them, especially without the resources necessary to “tend and maintain them” and “cultivate the land.”

          Deception is the strongest political force on the planet.

          1. donna

            Yes, I can see the scenario that you forecast. I played by all the rules and purposely acquired an affordable mortgage and I will be very angry if we start bailing out the foolish or allowing homes to be taken over by people that invested nothing. However, our current system does not work with or benefit people that need shelter and that would be good stewards of the land. I have reached the point of questioning our current capitalist system that is not actually a free market but socialism for the rich and hell for the rest of us.

          2. attempter

            So your measure of prudence is that you’d rather have the property next door fall into dilapidation and be used in an ad hoc manner, e.g. by junkies to shoot up, than be tended by organized people devoted to reclaiming community?

            You’re acting as if the people you describe have any good option here, assuming I granted your premise that my idea is in any way unpleasant. But what alternative do you propose? Permanent unemployment will keep rising, and people will be less and less able to service the debt system for which you’re suddenly so solicitous. Nor will there be any new horde of housedebtors. I kind of thought some of us broadly agreed that the system is dedicated to reflating the bubble, which it forever do. That’s why we say the banks are and will be insolvent. So how do you now think that nevertheless the existing system will find a way to prop up the existing property dispensation? Meanwhile we know the banks aren’t going to tend the vagrant property.

            It’s the criminal system which has created and is continuing to create this situation. I understand where you’re coming from as an emotion, but it’s still the same emotion that lets itself be astroturfed for racism, immigrant-bashing, etc. It’s the same counterproductive blaming one’s fellow victim rather than the common enemy.

            As for my idea not being direct enough in punishing the elites, well how on earth are we supposed to directly do that for now? Hopefully that can happen later, but for now we have to look at what we can do, and it looks to me like all the opportunities involve indirect, non-violent resistance and assertion.

          3. i on the ball patriot

            Attempter said; “So your measure of prudence is that you’d rather have the property next door fall into dilapidation and be used in an ad hoc manner, e.g. by junkies to shoot up, than be tended by organized people devoted to reclaiming community?”

            No Attempter, that is you putting words in my mouth to support your well meaning but unworkable idea. And that idea is unworkable because it pits the prudent — as I have described them above, go back and read my comment — against the not so prudent who have been sucked into the debt traps.

            Donna’s comment above attests to what I am saying, she does not want to “start bailing out the foolish”, or “allowing homes to be taken over by people that invested nothing.”, but she is aware that the present government (which she believes to be a capitalist system, it is not, it is a hijacked from the people gangster government) is unworkable and crooked, and she is, I am sure, open for a plan to change that gangster government. The best plan would be one that unites ALL against the common enemy — the wealthy ruling elite — and not one that plays into their hands by escalating the perpetual conflict as yours does where we continue to beat on one another. Make no bones about it, this is an intentionally created conflict. It is by design.

            And here a very realistic word about the closing window of resources available to stop the wealthy ruling elite is in order. You will be hard pressed getting funds from Donna, or anyone else, to execute your plan that sets; “the unemployed, the poor, the foreclosed upon”, “the foolish”, “people that invested nothing”, etc., next door to them.

            Attempter said further; “You’re acting as if the people you describe have any good option here, assuming I granted your premise that my idea is in any way unpleasant. But what alternative do you propose? Permanent unemployment will keep rising, and people will be less and less able to service the debt system for which you’re suddenly so solicitous. Nor will there be any new horde of housedebtors. I kind of thought some of us broadly agreed that the system is dedicated to reflating the bubble, which it forever do. That’s why we say the banks are and will be insolvent. So how do you now think that nevertheless the existing system will find a way to prop up the existing property dispensation? Meanwhile we know the banks aren’t going to tend the vagrant property.”

            Again you put words in my mouth, where the fuck did I ever say I was solicitous of — or for, in any way — the debt system? Are you intentionally trying to piss me off? I believe that the system is broadly dedicated to a well orchestrated long slow deflationary spiral, an intentional herd thinning spiral that promotes a perpetual conflict in the masses so as to ultimately arrive at a two tier world of ruler and ruled. Debt trapping and creation of counterfeit derivative products has been the means. The high resource consuming middle class and under classes are being intentionally strangled economically, and eliminated, and being replaced with a streamlined, less costly, law enforcement class to act as the new overseers. And it is being done by the same pricks that profited from and orchestrated the gross over consumption in the first place.

            Attempter said further; “It’s the criminal system which has created and is continuing to create this situation. I understand where you’re coming from as an emotion, but it’s still the same emotion that lets itself be astroturfed for racism, immigrant-bashing, etc. It’s the same counterproductive blaming one’s fellow victim rather than the common enemy.”

            Again you put words in my mouth, and further, you despicably color me as; racist, immigrant-bashing, etc. I am not blaming one’s fellow victim. I am explaining the EXISTING dynamic at play here and I am clearly focusing on the common enemy that created that dynamic — the gangster scum wealthy ruling elite! Go back and read my comments.

            Attempter said further; “As for my idea not being direct enough in punishing the elites, well how on earth are we supposed to directly do that for now? Hopefully that can happen later, but for now we have to look at what we can do, and it looks to me like all the opportunities involve indirect, non-violent resistance and assertion.”

            Again go back and read my comments. The best, “indirect, non-violent resistance and assertion”(s) will be those that ALL of us — UNITED — can get behind; both those that have been prudent, like Donna, and those who have been foolishly conned into getting in way over their heads, and all others who have been excluded from any opportunity of which there are many. Pro active election boycotts as a ‘Vote Of No Confidence” in this crooked government are a very assertive and non violent resistance that ALL could unite behind.

            The first step in punishing the wealthy ruling elite is to regain control of our totally non responsive to the will of the people, hijacked government(s) (yes this is a global problem). The best way is to stop validating and empowering those gangster governments, and their crooked law enforcement, with your vote. When you sit at a rigged table you deserve to lose. Every time you vote your vote legitimizes and validates that crooked government.

            The best way to regain control is by not continuing your participation in a now disgustingly rigged electoral process. It is a sewer of corruption and stands as a mockery to fairness and democracy. Stop voting and stop putting those silly ass little stickers that say “I Voted! I Made Freedom Count!” on your puffed out little do gooder chests. Drop the brainwashing! Cleanse your minds! You are being bent right over and fucked! Hard! Its not a FAIR electoral process! It is an open cancerous wound of crony corruption that enslaves us all. It is the KEY! The GATE that all of these useless sell out scum bag politicians get stamped for approval and pass through! Close that gate with election boycotts! Burn your useless as teats on a bull voter registration cards! Send pro active letters of boycott to your supervisors of elections demanding that your letter be counted as a ‘Vote of no Confidence’ in this crooked government! Open a new electoral gate that empowers all! Don’t fight each other within the existing system by home squatting and pissing each other off. Use those combative energies and what few resources you do have to craft a new system, a new electoral gate and a new government. A government that WILL give equal opportunity to all, by not only removing the tilted playing field, but also erasing all of the debts incurred on that tilted playing field. Go for the Gold! And go UNITED, as one!

            Go back and READ what I said above.

            No balls! No brains! No freedom!

            Deception is the strongest political force on the planet.

          4. attempter

            Again you put words in my mouth, where the fuck did I ever say I was solicitous of — or for, in any way — the debt system? Are you intentionally trying to piss me off?

            No, I was responding to this:

            A first platform of the boycotts will be the creation of a new interest free monetary system that will provide interest free loans to ALL who want home ownership, making the jubilee against the corrupt government even more inclusive. A second platform of the election boycotts will be to democratically set reasonable limits for private property ownership and yearly earnings.

            You didn’t write that?

            Either we want to destroy all usury or we don’t. If we had the power to demand and get interest free loans, we’d have the power to just redeem the land directly. (A version of which is what I was trying to brainstorm in my original comment.)

            It’s not that I disagree with that as a demand so long as we’re under a usury-based system at all. But coupling it with your citation of the “prudent” bourgeois, I found it questionable.

            You said above my idea would somehow place a “burden” on someone who owns a house outright. How would it do that? How would it do anything but help that person? (And you also won’t tell me what your alternative is for those abandoned houses. As I said, the banks are increasingly refusing to tend them. I gave the most likely alternative. You waved your hand at it and refused to answer.)

            I didn’t call you a racist, as you read perfectly well. I said that for somebody who played by the rules to respond to the collapse of the middle class by getting pissed off at peasants who are trying to find ways to redeem the land against the will of the banks, is getting caught up in the same kind of pro-bank misdirection as stuff like that. It’s tea party behavior. (And no, I’m not calling you a tea partier, but pointing out a parallel.)

            You keep saying I’m not understanding who you’re talking about. I’ll say one more time who I’m picturing: somebody underwater or close to it, who has always paid and continues to pay even though his own finances are getting more and more precarious, who sees how there are more and more vagrant properties, left by the banks to fall into desuetude (to the detriment of his own property value, for the sake of which he’s praying the government can get the bubble reflated), who deplores all this for obvious reasons, but who would get angry if he read about a community group dedicated to taking back that abandoned land, tending and maintaining it, no matter how good that was for the community and everyone in it, because darn it he paid his dues and at least some of them allegedly didn’t. So who cares that they’re trying to build a better world. He just wants his bank-driven housing bubble back.

            That’s what I thought you (and Donna) meant the first time and that’s still what I think you mean. I know you specified someone who’s just fine financially but not rich; but I’m afraid I’ll have to discount that as an extremely rare species by now. I know there’s lots of delusional people who think they’re fine but aren’t. I’m related to quite a few of them. They’d probably share your opinion of my ideas, if I were to talk about this stuff with them. If I’m wrong can you explain who you mean the way I just described my example?

            I guess I’m not understanding you at all. How are those still committed to their debts and “property” (not the land, but the mystical astroturfed We’re #1! “ownership society” crap) supposed to “unite” with the growing ranks of the dispossessed if they’re going to demand the latter still be reverent toward the propertarian regime?

            You keep calling me “divisive”? WTF is that crap? I’m calling upon everyone to join at the bottom and fight upward. Mine is the message of unity. You’re the one saying we need to do everything according to the whim of the pseudo-prudent with their whining about how they “played by the [banksters'] rules.”

            Wow, it’s weird how much antagonism I’m getting as soon as I actually start proposing things that might be done completely outside the system, instead of just hating on the system.

            Oh well, I guess it’s like how I was premature months ago in my Warren skepticism. Now it’s a common opinion.

            No I’m not trying to piss you off, but I confess surprise at this argument. I guess I’m a filthier peasant than I thought. All I’m trying to do is figure out how to restitute the land from the banks. That’s no threat to anyone but the banks.

    3. anon

      Sorry, off topic, but it needs to be said,

      Attempter and pals, its time to get a room (oops I see you already have a room, er site of your own).

      You often raise interesting points, it’s just that lately I’ve noticed your comments are first out of the post, and they seem to get off topic quickly, and I find myself scrolling through an increasing volume of comments till I find a fresh comment that refocuses on Yves (the host of THIS blog) post.

      FWIW it seems a little , I don’t know how to phrase it, opportunistic (?) to hijack eyeballs. I’m sure I’d read your comments and the resposes more thoroughly if you simply posted something like “attempter expands on this more thoroughly here”

      http://attempter.wordpress.com/

      I love the comment policy here, since my comments are treated with as much respect as yours, but I don’t have another vehicle for my rants, so I’m thinking the comment rules apply a little differently to each of us. As a “non-professional”, I don’t think I need to weigh “professional courtesy” when I rant here. Perhaps you should.

      Just saying, brave new journalistic world and everything, something to consider.

      1. i on the ball patriot

        Off topic? By what standards? Maybe you are having problems with title to property because you are having problems with title to your government?

        All of life is politics. The little boxes are dead, get over it.

        Deception is the strongest political force on the planet.

        1. anon

          Off topic was meant to be ironic.

          Deception, in this case, offering apparenttly genuine rebuttal, while promoting one’s own site, should be obviously suspect to you,of all people.

          After all. deception is the greatest blah blah blah…..
          Silly msn, choose your allies more dispassionately. Or at least drop the tagline, since you usually have somthing worth hearing,’till that tagline voids everything you’ve said till then.

          1. i on the ball patriot

            Gee! Sorry!

            I TOTALLY missed the irony and instead focused on the THREAD WARDEN nature of your comments which you seem to continue, or is that just more irony?

            If my tag line ”voids everything you’ve said till then.” perhaps you need to ponder the meaning of it a bit longer … when the student is ready the master will appear …

            Deception is the strongest political force on the planet.

          2. attempter

            The only liar here is you, “anonymous”. My comments are as genuine as anyone’s, whatever your opinion of them.

            And you still haven’t addressed my diagnosis of your argument’s inner contradiction. If my comments suck, then they must be a pretty poor advertisement for my blog. So what’s the problem? The free market will rule, hallelujah!

      2. attempter

        Thanks for the link.

        I don’t see what’s “off-topic” about responding to a presentation of an aspect of the problem with thoughts on what in theory could be done, focusing on the aspect discussed in the post. (What I personally consider non-responsive is a comment which pretends the subject matter of a post is an isolated technical glitch which can be solved with a tweak, since everything else is fine. But I don’t make a habit of criticizing such comments.)

        Maybe it’s just my way of looking at things, but I regard the MERS-related posts as an ongoing series, and the issue as a large-scale one, and I’m prone to reply as the latest in an ongoing series of comments.

        As for “hijacking eyeballs”, I suppose that’s flattering, the way you imply that even though you find my presence objectionable you still can’t help but read my comments. But the fact is that I can’t hijack anything even if I wanted to.

        (BTW, the reason my comments are often “first out of the post” is because my most intensive online activity tends to be at the same time the posts are coming online.)

        And I do think that in a modest way I contribute something here. (BTW I started commenting here before I had my own blog. So contrary to your implication, I didn’t come here looking for a place to advertise. I’m indigenous.) I didn’t see a statement of principles that this blog is looking only for reform-within-the-system-which-somehow-must-be-propped-up comments. On the contrary I think the sum total of this blog is a long evidence record which can serve as both an indictment as well as proof that reformism will not work. (Not that I think Yves necessarily has that intent.)

        So I reply to installments of an evidence record with continuing thoughts on how to break free of the situation. Not that I’m claiming my ideas are necessarily always good, but you’re not attacking the quality of the ideas (like the way i ball just did), but the very endeavor.

  3. Siggy

    In the dust of this little oversight of failing to record the passing of title to a note which has an imbeded lien on a piece of real estate comes now the ghost of escheat.

    As it cannot be readily demonstrated that a failed note has been assigned, that is the door thru which the demon of state control may enter. So I propose that all those clouded title REO sales be funneled thru Fannie and Freddie by selling the REO to them and then to the new buyer. In that funneling Fannie and Freddie would merely exercise escheat and then pass full title to the new buyer.

    Lovely business for Fannie and Freddie, why you could even lend money against projected transfer fees. Golly Mom, aint life grand.

  4. anon48

    “But if somebody comes in, and voids a foreclosure, your title policy doesn’t pay – Wells Fargo has clearly disclosed that this was a foreclosure, so you only got what they had (nothing), and you have no recourse, no insurance, and guess what, an unsecured loan for half a million bucks.”

    I hear everything you’re saying, and it’s an astute observation and something of which foreclosure buyers should be aware. But maybe the risk still isn’t all that great.

    If I purchase a foreclosed property and am living there for six months and now someone comes out of left field and voids the foreclosure? What party would be interested in pursuing that avenue-the former occupant who was foreclosed? What benefit would that provide them? Seems any benefit only had value if it enabled them to remain in the home rent free while fighting the foreclosure. They were probably underwater. They’re already out and would have moved on. I’m not an attorney but I’d think that person would also have the same problem, they would be unable to produce a clean title that would negate the opportunity for any benefits to accrue to them.

    If not the person who was foreclosed upon, who else would want to pursue this costly course of action? Who would stand to gain? What third party? Are class actions a possibility? Seems if they were underwater the injured class(foreclosed occupants) didn’t experience any damages.

    The problem that still remains, if not corrected by a new law, is that there will be a permanently impaired title, and that will impact the value of the property. So you’re right, buyers should be aware when pursuing a foreclosed property, and at the very least adjust thir purchase price accordingly if they see evidence of this exposure in the purchase/recording/title documents. It’s also why one should always hire their own title company, and if buying forclosed property a good real estate attorney.

    1. Midwest CPA

      Actually, something that just occurred to my devious mind was that someone could go to the foreclosed former owner, contract with them to “buy” the property from them contingent on the success of a suit to reclaim the property, and pay their legal bills in the mean time. Provided that the costs to litigate and purchase would be smaller than the potential sale price, this could be a profitable venture for the “buyer”.

      So if you have a foreclosed house in L.A. sold off to someone for $300,000 and a former buyer with a potential claim, that might be incentive enough to try something like this.

        1. anon48

          Assume one day the previously foreclosed occupant comes a knockin’ on the door of his former residence and lays claim to the place. It seems the following would be the most likely scenario to play out if the claim is successful:

          Foreclosed occupant wins claim and gets house. Current owner goes after title company and prevails. Title company goes after foreclosing bank and prevails. Foreclosing bank realizes what started the process and realizes who now has the home and goes after the former foreclosed occupant for his unpaid debt. So ultimately, there’s potentially no benefit to the former occupant to pursue this course of action(unless the house has wildly appreciated in the meantime and the appreciated value exceeds the loan balance, accrued and unpaid interest, penalties and additional add-on fees). in addition, the upfront legal costs on behalf of the former occupant to start the process (and uncertain outcome) seems to make it an unlikely choice.

          This presumes that if the original foreclosure transaction was invalidated all of the follow on transactions would also be invalidated.

          1. anon48

            Actually you may be right. With a defective title, when the foreclosing bank comes back for a second bite of the apple with the same deadbeat they won’t have the capacity to foreclose. The question becomes- does the original note (separate from the mortgage docs) they held still allow them to pursue the former occupant and collect or does the note also become worthless? I seem to recall reading somewhere that lenders in some states only have recourse with the property. Maybe someone else knows the answer to that one.

          2. Yves Smith Post author

            In some states (IIRC, 31, but California is one of them) purchase money mortgages are non-recourse. My understanding is that refis are always recourse.

          3. anon48

            Thanks. Gotta believe the market will eventually wise up to the last minute “springing addendum” move that you referenced in the article. When that happens, the value of the foreclosed homes in the banks’ REO inventories may start to drop precipitously for those properties located in states that have the nonrecourse rule. Maybe not a bad thing. When potential buyer’s realize en masse that the threat of zombie former borrowers coming back to haunt the house are a significant risk, the required price drop that follows may help out as a market clearing mechanism. And I assume the foreclosing bank, who would be the same one that created the SIV or other CDO entity that originally held the mortgage in question, and winds up taking those obligations back onto its balance sheet. IMO that bank deserves to get stuck holding the bag.

            In addition, it also seems that the states with the nonrecourse rule should be deemed higher risk lending environments. Don’t know if that’s already being reflected in market lending rates. If not, it should be.

            Good job pointing it out!

          4. anon

            I’m not a real estate lawyer but a friend is so I’m answering based on my understanding of our discussions of this issue.

            In California, the one action rule would prevent that if the lender had used a non-judicial foreclosure. (Unless there’s a big pot of gold beyond the foreclosed-upon house, they almost always use a non-judicial foreclosure since a judicial foreclosure takes longer, is more expensive, gives the borrower the right to redeem the property for a year, and requires a “fair value hearing” which credits the borrower with the “fair value” of the property sold via judicial sale and makes the lender’s recovery more uncertain.) If the lender elects non-judicial foreclosure, it has had its “one action” and can’t come after you for the balance of the loan. This rule applies whether the loan is recourse or non-recourse. Some other states (e.g., AZ and IIRC NV) have similar rules. In CA it applies to all real property but in some states it’s more restricted. As far as I know, it applies to first homes in all states that have it.

            The recourse vs. non-recourse rules also vary from state-to-state, as Yves noted in her reply. As far as I know, if you take money out during a refi and don’t spend it on improving the property securing the note being refinanced, the loan will become a recourse loan (i.e., the lender can come after you personally for the debt, subject to the one-action rule above). If you refi and don’t pull money out, the answer is less clear (though from the few cases I’ve seen, AZ seems to lean toward not allowing the lender to come after you).

          5. anon

            “If the lender elects non-judicial foreclosure, it has had its “one action” and can’t come after you for the balance of the loan.”

            Sorry, I forgot to add that they also could not come after you if a final judgment had been entered in a judicial foreclosure (and probably if their time to appeal that judgment had expired).

            Again, I’m not a real estate attorney but that’s my understanding of the law.

          6. Foghorn Leghorn

            anon48,

            The failure in your assumption is that if this whole thing was to get rewound – after the former borrower/owner comes a knocking, then ultimately, the mortgage companies comes back at them for the mortgage.

            IF, the mortgage is found VOID, it was VOID because the bank/trust who foreclosed had no standing. If they had no standing, they damn sure won’t have the ability to go after anyone – in fact, they will now be a defendant in most states for wrongful foreclosure.

          7. anon48

            Foghorn,
            Beg to differ. Re-read the above article, especially where Yves points out:

            “…If a bank like Wells does not have the right to foreclose, it cannot have clean title to the property. So the bank could conceivably be selling something it does not own.”

            The problem is that the bank didn’t have clean title. Therefore they could not foreclose. So the mortgage may not be valid. But it DOES NOT imply that the separate note that a borrower always has to sign is voided. The borrower did get the money from the foreclosing bank (or alternatively the foreclosing bank stepped into the shoes of the original lender). So if the sale was invalidated, it seems the note payoff would have also been invalidated. And I don’t believe there’s a requirement for those to be recorded. The bank may still be able to pursue the borrower(short of foreclosure) unless, as others have stated above, if the property is located in one of those states with a non-recourse rule in place, and it wasn’t a refi. Then in those cases it appears that the former foreclosed occupant may have an opportunity to get it back.

            I’m not an attorney and there are a number of assumptions being made. However, IMO, there should be a law that would prevent this. I don’t see the fairness of a current owner who unknowingly took on this problem, while potentially doing everything else right, is penalized while the former occupant is enabled to get something for nothing. I’m no fan of the banks. They deserve to lose out big time. But it took two to tango, and they weren’t called “liars loans” for nothing.

    2. skymutt

      Excellent post anon48. It boils down to this: Nobody should buy a foreclosure property without an experienced real estate lawyer.

      Agreed that the risk of these title defects is somewhat attenuated because usually nobody has much of a natural motive to expose them after a sale. And I would add that the majority of the risk will likely be borne by future lenders on the property and the title insurer (and will probably be caused by their own lax title search standards). This is because the most likely person to bring to light these title defects is an owner/borrower who is trying to get out from under their mortgage at some point in the future.

    3. valkyrie

      They say possestion is 9/10 of the law…in some states it really is, through adverse possession laws.

      I see many people talking about how these recent developments could certainly speed our transition to a squatter society – well, I may have justalittle bit o experience in how squatting works.

      In Denver, a group of squatters (maybe including myself) gained possetion of a an abandoned building and a space under a bridge, by keeping people living in places for over 10 years THAT DID NOT HAVE A CLEAR CHAIN OF TITLE and that had been improved (note: not much improvements, stealing electricity, spray paint, tarps, boards over windows and a hole dug as a toilet – this actually did count as improvements, also note: the city later did retake the bridge through eminent domain laws).

      Other groups have gained title of properties I know of in Ashville, Morgantown, Denton, Tulsa, Syracuse, and many other towns I know of.

      By the principle of this law, if a person stopped making payments to the bank that could not prove a clear chain of title, they would be able to claim adverse possesion of the property if they had occupied it for so many years (varies by state and at times improvements are also necessary). The person who had been living in the home would get to keep the property free and clear, although in some states the bank could sue for a default judgement, which would allow them to collect payment from other assets the person might have(if applicable), and in just a few states, their primary residence (the home in question in the first place). But in many areas, they would get the home and their is little the bank could do.

      This would work simularly for a person occupying a home that they had purchased from a bank with no clear chain of title. They could claim adverse possetion after paying a mortgage only for as many years as their state requires before they could claim this right. The person who had been foreclosed on would not have a title either – obviously they had never paid off their mortage in time to get a title with a clear chain of ownership – so they would have no rights to take the home from its’ current occupant.

      Interested in others’ opinions on this…. from my experience, if you can’t prove a clear title, the property goes to the occupant, irregardless of them actually legally – or otherwise – ever purchasing it.

  5. rd

    Once I read the Boyko decision and saw that some other states were starting to go along with his reasoning, I was wondering how long it would take for the brown stuff to go through multiple fans.

    I am not a real estate expert but have bought and sold several houses over the years and have dealt with property surveys and title searches on industrial and commercial properties. For example, I know of a site where there is a little odd piece of land sitting in the middle of a wetland on a large industrial tract that was developed decades ago that has a different owner showing up on a very detailed title search that took months to compile. Nobody knows who this person was or who their “successors” are. Presumably somebody could show up tomorrow and claim title to this few thousand square feet of wetland.

    That is how many title searches read when they show up: “Joe Smith or their successors.” Presumably the successors could show up almost into infinity as long as the real estate legal system stays consistent and challenge title.

    Presumably down the road, some enterprising real estate investor could simply track down the people who were foreclosed on, buy the rights to their old home for, say $1,000, file that title claim in the county clerks office and then simply move to take the land back as the “successor.” If his paperwork and recording history is better than the current “owner” then he very well could win.

    Title insurance is really just insurance written against the potential for a significant title error. That used to be rarely rare. This may change now. I doubt if the title insurance companies are capitailzed to look after title errors on,say 10%, of the US housing stock. I don’t think that I would be willing to bet my house on the capitalization of a title insurance company down the road if it had a foreclosure in its history that had any questions at all in the title history.

    In particular, there are going to ba a lot of 3,500 sf McMansions in this foreclosure mix that were previously owned by professionals (maybe even lawyers) that could figure out down the road that they could get their house back sans mortgage by evicting the current “owner” (who could really end up being a tenant). This could get very ugly down the road with a new wave of mortgage losses if banks wrote mortgages on houses without clear title for foreclosure.

    The banks let the genie out fo the bottle with MERS. It will be interesting to see how they arrange for the genie to get stuffed back in, especially since most real estate law is state and local. Could there be Supreme Court decisions down the road to allow for the finance industry owned Congress to write sweeping changes to real estate law across the country using the “commerce clause” to argue that mortgage securitization crosses state boundaries so all title law should be federal?

    1. jake chase

      Yes, the feds could do that, but it is hard to imagine them doing it retroactively to eliminate previously vested rights.

      A better solution would be a supreme court decision upholding title to a foreclosed property despite defects in the state foreclosure proceeding. The idea would be that the foreclosure process is final, that failure to raise this defence during the foreclosure proceeding itself permits holder of the MBS to convey good title to a subsequent purchaser.

      As for the title companies, most of them are incompetent and a good many are all but insolvent. Title insurance has always been a racket. I have long made it a practice to search the title myself when buying a property. On one occasion I discovered the title company had offered me a policy on a different property than the one I had under contract!

      Until the foreclosure problem is resolved judicially, only an idiot would buy out of foreclosure because he will be unable to sell except to another idiot who agrees to accept a title blighted by title company exceptions. Meanwhile, what we need is legislation requiring warranty deeds from banks selling foreclosed properties.

      1. Yves Smith Post author

        Real estate is very well settled state law. Having the Supreme Court intervene is a huge state v. federal law issue.

        1. Francois T

          Furthermore, I doubt the SCOTUS would be eager to step into a case of that kind, given the mighty surge in popularity (I love the smell of sarcasm in the morning) they experienced after their most recent eminent domain decision.

    2. Lyle

      Does the state in question have a adverse possession law? For example in Texas if you don’t exercise your rights to a piece of property for 25 years the person who has acted like they own it owns it. In many states there are shorter periods if you pay the taxes and act in total as if you own it. The 25 year period means that claims from long ago that have not been exercised are void. Yes you have to go to court, but if in this case the notice is published according to legal theory it will be a default judgment since on one will contest. In some states at least paying the taxes for 5 years with color of title is sufficient.

  6. Ina Deaver

    I would pay the prior occupant for a quit claim. That won’t help you with the intermediate parts of the title chain – and they might decide later that was a beneficial revenue stream. But it is a good start.

    All of this is recorded in the chain of title, so it is open and obvious. You are living in the house and — this part is critical — paying the property taxes on the house. It’s not that difficult to extinguish the claims of a prior owner, unless I am missing something. I truly may be missing something. The caveat, as always of course, is fraud. But as against the rights of a bona fide purchaser for value, even that has its limits.

    Where you run into problems is two places: title insurance and other rights against the seller (in this case, the bank). I would look very, very carefully at what the title insurance that THEY steer you to is insuring. Second, if they are really inserting a clause in the closing documents that strips your otherwise statutory (and common law) rights against the seller, that would be illegal in some places. A lot of states allow you to sign away any rights at all, but some do not — and even the ones that do recognize that there can be fraud, and fraud trumps the waiver. If they knowingly lie and hide defects, it might not matter what they made you sign. But if they laid it all out in fine print and you just didn’t know what you were losing. . . . . .

    This is not a legal or expert opinion, mind you. This is just my two cents. Some of this I just can’t get – which could be a product of the state that I am from. I realize that every state in the nation handles these things somewhat differently. Which is why I never understood either exactly how they could profess to handle the law of every state with the MERS scheme: it’s such a thicket, it had to have problems somewhere.

    1. Yves Smith Post author

      You don’t have a clean chain of title . This is the problem. For instance, mortgage is recorded in the name of Countrywide, but it was discharged at the courthouse by, say, a particular trust, or Citigroup’s mortgage servicer. The chain ot title is broken. Or the other way is the mortgage was recorded in the name of MERS and discharged by MERS or a servicer. The little problem with MERS is MERS cannot and does not own the note, hence is not a party that can enforce the lien in 45 states.

      The issue is the trust not having its rights “perfected” hence not being in a position to foreclose legally. The lack of perfected rights means the buyer is also in a questionable position.

      While the odds of problems arguably are low, the consequences of a screw up are catastrophic. And look what that Wells addendum does:

      1. If someone at Wells told you everything was fine (ie you were smart to ask about the status of the note) and they said it was OK and it wasn’t, you can’t hold then responsible for the misrepresentation

      2. You can’t seek any recourse from Wells; your only hope is the title insurance, which they are trying to steer you to get from their source.

      1. Ina Deaver

        I understand that — in fact, they are probably steering you because they found one title insurance company that will write a policy on the property, with restrictions. If you just chose one, you would hear from them that there were problems and you might understand what was going on.

        I’m from Texas. The law there is very, very favorable to the person who has purchased the property and used it productively as intended. The wrongful foreclosure bit I’m not sure about – I believe that there are equitable remedies, depending on when you file (because remember, after some time even equity won’t assist you if you sleep on your rights). We also have legal ways of clearing up a chain of title that has flaws (I call it the Bubba rule: if you bury Dad out back and continue working the ranch, then need to sell 40 acres 30 years down the road and realize you never transferred title from Dad to you — YEP. We’ve got a way to fix that.).

        So I would guess that my failure to see the dark apocalyptic import of some of this is almost certainly a state thing. But I do definitely understand that the mortgage company is, in all ways that matter, committing fraud if they foreclose on the property because they can neither prove that they own it, nor can they produce the physical note (probably they have knowledge that it was shredded or lost). I understand that none of the steps in the chain of title were recorded. It is just that the law where I come from is especially loathe to open huge chasms of eternal cloudiness. I probably need to just quit commenting on these issues!

  7. John Maynard Keynes

    Anyone who accepts a quitclaim deed for title on a house that they have purchased from a stranger is a fool….but can you show that banks are selling REOs and using quitclaim deeds as the vehicle for title? Really? In what states?

    I think the addendum’s denial of responsibility for representations applies not to title, but to representations about the physical property itself. Unlike an owner occupier, the bank has no knowledge of historical problems in the property.

    As for responsibility for title in a bad foreclosure, the bank would be the ultimate target of any lawsuit from a former debtor/owner/defaulter.

    The title problems in foreclosure are quite real, and anyone buying any property should research title carefully. But I think you are exaggerating.

  8. MinnItMan

    There are two main types of title insurance coverage: lender’s and owner’s. Lender’s is nearly always mandatory If you are using a purchase mortgage – the loan is unsellable on the secondary market without it, but that policy does not cover the buyer. Owner’s is optional and you will pay extra for it. The two types of coverage are significantly different.

    Historically, title insurance was a unique type of insurance. The idea was to eliminate or prevent identified and known risk, as opposed to assuming future risk for the insured. Unlike risk assumptive insurance which insures and assumes risk for a future act, title insurance “insures the past,” namely that existing circumstances (particualrly current possession), past records (chain of title, additions to, or subtractions from which determine the parcel of land) can be identified and an insurance contract can be written saying that “A owns Blackacre, subject to the following interests …. If A mortgages Blackacre to Stagecoach Lending, then as long as the property taxes get paid, and J. Walter Weatherman Bank is paid off in full and its lien released, and A isn’t doing any other simultaneous transaction that Stagecoach knows about, we’ll insure it’s first lien position.” This is the reason why (in the title insurance industry’s defense) insurers ideally should never pay a claim if they’ve done their job right. Note: Title insurers are requently criticized for paying out a very small percentage of premiums in claims, but again what makes them different is that a large portion of that premium goes to pay for risk elimination (preventing claims), not risk assumption (paying claims). Or, at least that’s the argument, as you will see.

    Particularly in purchase transactions, there would first be a determination of what was intended to be sold and bought to make sure there was agreement on that. Real estate is unlike a vase in that, over time, things like boundaries can change in numerous ways. Surveying isn’t the science that surveyors claim – although a survey usually isn’t a bad idea (but not cheap). An owner might acquire a piece next door, and after a while, treat both parcels as one. Waterfront property, in particular, can change shape. The point is, while a Ming vase is still pretty much what it was centuries ago, the “Jone’s place” can change pretty significantly in ways that are only faintly remembered, and may not be fully documented, or documented at all. While this may not be a problem in cookie-cutter developments, they have their own problems.

    Note this is all prior to the title search itself. After determining what is actually the subject real estate (subject property), title is then searched. This is far more complicated than the WSJ or Forbes, two notorious enemies of the industry, would have you believe, even in the digital era (which did make certain aspects of it easier). The searcher needs to determine the basic chain-of-title, but also determine judgment liens, tax liens, bankruptcy dispositions, divorce dispositions, validity of prior foreclosures, etc., which, depending on the state or county, may not be (usually are not) part of the actual real estate records, but in other departments, or in the case of bankruptcy and federal judgments in entirely different branches of government. The digital era has made a lot of this easier, but in some ways harder because not all of the relevant information is equally or adequately available digitally.

    “Risk Elimination” meant that title was very thoroughly searched and if a problem was identified, it need to be resolved prior to closing, and frequently, this was a major pain in the a$$ and expensive. The most common problem is old mortgages that were paid off but never released. And the older they were, the more unlikely it becomes to get an easy resolution. Some resolutions are easy: you can determine who paid it and when, and the borrower’s credit report would confirm it paid, and you could identify who the lender was and track down the release. Next easiest was where you could identify the prior title insurer and they would cover the new insurer for the problem with a “Letter of Indemnity/Hold Hamless Agreement.” In Illinois, the title insurers have departments that do nothing but this back-and-forth amongst themselves for unresolvable old liens. Harder yet, was where “nobody remembers nothing” or where the old mortgage was from a prior owner, or where the prior lender is long gone, and the only remnant is some note in the FDIC’s database. State legislatures have given the insurers some tools to deal with some of these problems, but not all of them, and the problem of defunct lenders, particularly from the earlier days of securitized lending, was a major obstacle to getting deals closed, and more importantly for all the commissioned people (and the title company), to get paid. Example: A mortgages property to NOP S&L. NOP S&L assigns the mortgage to Continental Bank of Illinois. CBI goes under and it loans are taken over by the RTC, and the loan is sold to Banker’s Trust. CBI never recorded its assignment. Banker’s Trust got paid off, but never recorded its release, or maybe sent it to A, the borrower. “A” had a “burning party” with all her neighbors, thinking it was the mortgage. A sells to B and B’s title company get’s a hold harmless from A’s title company. B gets foreclosed. Now, D is trying to buy a bargain from B’s lender’s REO department.

    We know that there is basically no risk in this deal for D. But D’s title company doesn’t, so it says that A’s old mortgage has to be released. D is pissed. B’s lender’s REO department is pissed, but won’t lift a finger to help figure out who B’s title company is. Deal falls apart.

    B’s lender get’s the idea that if it had its own title company, it could prevail on it to be reasonable. In addition, it sees those fat title fees (recently referred to as a “toll”) and sees a new profit center. The title insurers compete for B’s lender’s business and pitch that, if you become our JV partner, you can get 49% of those “fat” title fees, which privately, each one of them think (or know, in the long run) are actually emaciated, but cash flow is cash flow.

    How do you think this ends?

    NB: I’ve simplified this quite a bit. I don’t take any position here, but it is a poorly understood industry with exposure that would seem to exponentially exceed its ability to cover, and it is considered a “monoline.”

  9. Tom Stone

    Thank You Yves. It looks like a lot of “quiet title” actions will be coming down the road. And a lot of lawsuits against Brokers and Agents by the buyers. Wells may have insulated themselves against legal action,but people will be angry and will be filing suit against anyone with deep pockets who is remotely involved. I expect that Wells will be hearing from the national brokerages like Coldwell Banker and mason-macduffie…They may have their own bold faced addendum spelling out the potential problem in buying an REO from Wells. Shitstorm.

  10. Bam_Man

    This sounds like a very positive development for ‘New Home Sales’. Also for those living in a home without a mortgage.

  11. Bam_Man

    This would seem to be a very positive development for ‘new home sales’ and by extension for home builders. Also a plus if you live in a home without a mortgage where there is no question as to the status of title. For all those others, not so much.

    1. Hillary

      Not necessarily. It probably had fewer owners, mortgages, etc. but the land would still be vulnerable. Most of the farmers I knew growing up in the rural Midwest had mortgages, and the ones who didn’t had “sold” the land to the family trust or LLC.

  12. charcad

    Is this really likely to be that big a problem given the persisting TBTF banking and mortgage structure?

    The premise is that Wells Fargo is selling dogs with a high probability of faulty titles and it knows it. Thus the legalistic tap dance. Since Wells Fargo believes these title impaired REOs exist in quantity it will equally refuse to originate or buy new mortgages secured by such properties, at least without quibble proof title insurance. The Word is already getting out fast. BoA, Citi, Fannie, Freddie & the VA will follow suit. Now the conforming and conventional mortgage pools are drained dry.

    The group most likely to be trapped by this are the new generation of small fry Fast Buck Artistes. There’s already another rabble on the streets looking to Get Rich Quick ‘n E-Z by paper flipping REO.

    I think the current publicity means Wells Fargo & Friends are fishing for more free government guarantees and Bailout, this time in the form of government title insurance on titles that they themselves impaired.

  13. armand eddon

    Jubilee is a fantasy peculiar to NC posters. The powers that be will never allow such silliness – it is pure fantasy, but probably feels good to rant about.

    Personally, I believe all posts on strategic default, debt jubilee, etc should be accompanied by a personal DISCLOSURE – how far underwater is the opinionator?

    Disclosure: I bought what I could afford and believed to be reasonable in 1996, paid it off in 2001, then watched for another seven years, all the people making stupid [too much $] and greedy [‘equity’ extract] choices.

    Opinions: (1) There is more moral hazard in the populace than in the financial system. (2) Make EVERYONE – individual and corporation – pay what they are legally obligated to pay.

    1. Francois T

      “Jubilee is a fantasy peculiar to NC posters.”

      Fantasy…hmmm!

      As per the Mirriam-Webster

      1. obsolete : hallucination
      2: fancy; especially : the free play of creative imagination
      3: a creation of the imaginative faculty whether expressed or merely conceived: as a : a fanciful design or invention b : a chimerical or fantastic notion

      However, when I look up “Jubilee”, looks like it has pretty real historic roots:

      The concept of the Jubilee is a special year of remission of sins and universal pardon. In the Biblical Book of Leviticus, a Jubilee year is mentioned to occur every fifty years, in which slaves and prisoners would be freed, debts would be forgiven and the mercies of God would be particularly manifest. In Christianity, the tradition dates to 1300, when Pope Boniface VIII convoked a holy year, following which ordinary jubilees have generally been celebrated every 25 or 50 years; with extraordinary jubilees in addition depending on need.

      “Make EVERYONE – individual and corporation – pay what they are legally obligated to pay.”

      Did I read…corporation? Do you live in the same United States I live? (Note that I’ve avoided the “fantasy” qualifier) Corporations do NOT pay what they’re “legally” obliged to pay, since they practically write the laws, or have lobbyists who make sure said laws does not apply to them.

  14. Bob Notmyrealname

    Article is so rife with misstatements and half truths, I cant cover it all. I’m a recently retired attorney who specialized in real estate and finance, worked for title, cos, lenders, buyers and sellers, for 20 years. I have no axe to grind here. My main point relates to the claim that Wells is forcing people to sign addenda ‘shortly before closing’ that changes the seller’s commitment re quality of title. Simply put, they cant change the deal once the agreement is signed, unless the buyer goes along. Sure, if the buyer has no clue as to their rights they might be dumb enough to sign it, just like they might be dumb enough to agree to a price increase. If the buyer doesn’t know how a real estate deal works (and most dont) then they are nuts not to hire a lawyer before they sign ANYTHING. Closest thing to universally good legal advice you will ever get -dont sign anything in connection with a real estate transaction without hiring an attorney to represent YOU and YOUR rights. Biggest legal error in article is the notion that lack of notation on mortgage, re its assignemnt to subsequent holder, is a title defect that persists beyond entry of judgment in foreclosure. The foreclosure judgment supersedes that. (In Pennsylvania, for example, its because the complaint alleges that the plaintiff owns the mortgage, and the judgment is a conclusive determination of record that the allegation is proven.) If your title company wont give you title insurance that insures against a defective foreclosure, call the title company across the street, they will. Figuring out what your title policy covers is, by the way, another good reason to hire an attorney at the outset unless you are a real estate expert. (Yes, it would be nice if your average Joe could buy real estate without needing a lawyer to protect his rights. It would also be nice if I could give myself medical care, but I’m not dumb enough to think that just because it would be nice, I can do it without running large risks a doctor would avoid.)

    1. charcad

      (In Pennsylvania, for example, its because the complaint alleges that the plaintiff owns the mortgage, and the judgment is a conclusive determination of record that the allegation is proven.)

      What will be the effect in a non-judicial foreclosure state?

      According to this:

      http://www.all-foreclosure.com/procedures.htm

      a vast quantity of REO has been foreclosed via non-judicial processes. California, Nevada, Arizona and Georgia have large pools of REO obtained via non-judicial foreclosure. There will therefore often be no court judgment establishing anything.

    2. Yves Smith Post author

      Bob,

      Given that you did not read this article carefully, I am not clear you are in a position to make the claims you do.

      1. The buyer in this case was an attorney but not a real estate attorney, and did not know how to interpret the addendum. If an attorney can’t evaluate this, how can normal people?

      2. I am told, but there is no way to verify this, that a lot of people do buy REO not using their own counsel or are naive enough that the seller offer to save fees by using the bank’s attorney would entice them. You assume legal sophistication. I’m in NYC, where most people are legally sophisticated (too many people either are subject to litigation or have lawyers as social friends for them not to be). But that is far from universal. In particular, you slip a document in close to closing when most people are psychologically committed to a deal and say the buyer has to go along, very few will have the intestinal fortitude to say, “Bullshit, I’m not signing that.”

  15. bird

    The remedial power of the court in each state will give the original owner the right to return of their property. The reason why WF is doing this now, is because they know they are stealing the property.
    If you sell something that isn’t all there, it is a fraud.
    If you claim to be selling something that isn’t all there, it is a fraud.
    If you foreclose knowing it is an error or a crime, it is fraud.

    Don’t believe any title will ever be clear again if the home was short sold, foreclosed or the keys were left and the owners vacate. These victims still have the best claim of title to their homes. Those of us that work in the business of real estate law will not let the courts forget that they have been defrauded.

    No, there will be no resolution by government, as it would be the destruction of due process that would be required to make it all “right” again for the banks.

  16. bobnot myrealname

    p.s. federal law prohibits a seller from requiring the buyer to use a specific title company. If the agreement of sale says otherwise, the provision is unenforceable. Again, something any decent real estate lawyer knows. I mention this in response to a couple of the other comments I saw posted here. (I’m pretty sure the source of the prohibition is RESPA, but its been a while since I needed to know.)

    1. Yves Smith Post author

      You clearly did not read the addendum, so again, I can’t take your remarks seriously here.

      First, the issue is that a buyer might not have independent representation. Wells (as I indicated in the post) is trying to steer buyers to use its counsel (and they only pay partial fees). Even the addendum CLEARLY indicates Wells is encouraging the buyer to use its counsel and title company and even hints at cost savings to the seller (I’m told Wells splits fees and discussed cost savings verbally).

      I never said that Wells was forcing the buyer to use its title insurer, this is your misrepresentation of the post. The addendum clearly states that the buyer is not required to use the seller’s title insurer. But that does not alter the fact that Wells is strongly encouraging the buyer to use its lawyer and chosen title insurer.

  17. Mbuna

    Here’s what really blows my mind about this article-the gravest point is never addressed- that Wells Fargo is engaged in fraud and thus this article continues to “legitimize” the continuing engaging of fraud by Wells Fargo by not addressing the issue. Wells Fargo (and other banks engaging in the same behavior) should be investigated and prosecuted to the fullest extent of the law. Why do you just presume that this behavior is somehow legitimate and that everyone else has to kowtow to it somewhere further down the line? This behavior must be stopped at its source. Anything less than this is just continuing to feed the problem instead of really addressing it.

  18. AR

    I happened to find this relevant comment appended to another post at 4closurefraud, from December 2009:

    Genevieve says:
    December 18, 2009 at 9:42 AM
    Hi,
    Any advise would be greatly appreciated…we were supposed to sell out house last week and the day before we were to close found out the there is a problem with the title..”Toxic Title” we bought it in foreclosure in 2007 and now we can’t sell it. We also bought out own Tilte insurance which has done nothing for us. It seems like Judge Long made a quick and sloppy decision w/o putting much thought into it. I understand why he made but the wrong people are getting effected by this…It should be the banks paying for their greed and irresponsible actions instead of the Ma. citizens just trying to survive the economy. Please Help!! Anyone now when the second appeal is to take place? This has put us in a horrble place..I have two young girls and stand to now lose my primary residence because I can’t sell my investment property. Thank you for any advise you might have!
    Gen.

    http://4closurefraud.org/2009/12/10/toxic-titles-pretender-lenders-walking-away-from-foreclosures/#comment-105

  19. LillithMc

    California does not involve attorneys in their every day real estate sales. Agents take legal updates before license renewal. I spent 35 years sitting at real estate closings and trying to guide buyers at the signing. I have heard that when Wall Street “guided” Congress to deregulate, they included that mortgages could be created without conforming to state law. State laws are what regulate mortgages. Now Wells Fargo specifically wants a buyer to take at least partial responsibility for a clouded title after Wall Street issued millions of clouded titles. I wanted to ease my old age by selling real estate, but I could not encourage this fraud. This is bigger than even Elizabeth Warren can handle. Too bad organized real estate was quite happy with fraud as long as commissions were good.

  20. Ron

    The time bomb in RE is the poor turnover of short sales particularly those above 400K. How many turn into REO material is speculation but thumbing through page after page of short sales in the Napa points to a dim future for home price appreciation!

  21. Psychoanalystus

    Given how widespread mortgage securitization has become during recent years, this type of problem is not surprizing and it is to be expected. I expect this to be causing problems to real estate ownership for centuries to come.

    Ironically, the greedy European colonists who stole this continent from the Native Americans who have lived here for thousands of years before, have lost their phony ownership claims to the stolen land themselves. If anyone here is Native Ameican, now would be a great time to file a claim to… say, the island of Manhattan…

    Psychoanalystus

  22. U238Willy

    I don’t mean to poo-poo your post, but you do realize that the legalese in the document on Scribd for Wells Fargo is nearly the same language used for every single REO property I’ve seen or seen sold.

    (I work for a RE office in FL)

    Fannie Mae uses it… so if the fish stinks it stinks right to the head of GSEs as well.

    So, if 95% of all REOs tend to have banks that use the same or nearly the same verbiage on their contracts, then what’s the hub-bub?

    I’m sure you can google ‘Real Estate Purchase Addendum’ & ‘Fannie Mae’ and find the addendum.

    1. Yves Smith Post author

      I’ve looked at it, and it is hardly “nearly the same language” (I’ve worked on securities underwritings and M&A deals, where different firms had very similar boilerplate, the level of resemblance is not as close as you imply).

      The “buyer beware” language under the section referring to foreclosed properties in the Fannie document is pretty clearly related to the physical condition of the property (it even includes a mention “um, you might have rent controlled tenants, not our problem”). I don’t see any reference to use of Fannie’s attorneys or title insurer (the tap dance, “we have these great efficient resources, of course you are free to use your own”).

      So the critical risk shifting looks to be much broader in the Wells doc than in the Fannie document. That’s the beef.

      http://www.homesindenverco.com/files/421433/addendum-%20letter.pdf

  23. LillithMc

    We have had securitized mortgages for at least 30 years, but they conformed to state laws and produced “clear” title. The toxic mortgages were the ones tranched and sold around the world by Wall Street. In their ignorance and greed, someone failed to follow a paper-trail that would lead to a clear title. This is not a job for a title company to solve. In a just world, the people who created the “cloud” on the title would need to correct their mistakes. I would not buy a property without a “clear” title no matter who wanted me to sign that I accepted responsibility for the “cloud”. Somehow this “mess” needs to bounce back to its origins.

  24. MinnItMan

    Got to side with Bob Not here.

    RESPA only allows choice when the buyer is paying the fees, not when the seller is. Wells is paying the fees, and thus has an incentive to keep them low, as well as the hidden incentive to stick RELS Title (the company in which it has a JV interest) with the problem. Wells doesn’t pay claims, First American does.

    My prior post was background, but there were a lot of issues left out. Why does Wells require that buyers use RELS? First, you have to answer other questions.

    REO deals typically require cash buyers because they don’t want to have to deal with other lenders (or their own origination underwriters) not being able to close. On cash deals, they can do title “as is” in a way that no other lender would accept for a lender’s policy.

    The more important question is whether the REO cash buyer can get a “clean” commitment from a title company to sell to a buyer who will almost certainly will have financing intended for the secondary (GSE) market. I assure anybody that they can in most places.

    That said, you still want a competent lawyer who knows what is going on – and they are exceedingly hard to find.

    One test is this: how does the attorney interpret this?

    TITLE 12–BANKS AND BANKING

    CHAPTER 27–REAL ESTATE SETTLEMENT PROCEDURES

    Sec. 2608. Title companies; liability of seller
    (a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.
    (b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

    (Pub. L. 93-533, Sec. 9, Dec. 22, 1974, 88 Stat. 1728.)

    If the attorney gets this right, you may have someone competent. I think Bob Not gets this right. So far, I wouldn’t strike him from my list.

    1. Yves Smith Post author

      Again, I am not saying and NEVER said Wells is requiring the buyer to use its counsel or insurer, but doing what it can to steer the buyer to do that.

  25. worm

    What happens in the year 2015 if we go into inflation, Then by 2017 we are having inflation of 20%. Could the foreclose owner come back 8 years later in the picture. Make back payment current because in 2017 the value of the cpi has doubled. So his actual payment would be like .50 on the dollar. Now his property that originally cost $300,000. Foreclose in 2010 and sold for $150,000. It is now value at $600,000. He come back and makes all the montly payment on the original $300,000. Who has title.

  26. StopForeclosureFraud.com

    Oh but it’s a little too late my friends…Wells as a Shareholder of Mortgage Electronic Registration Systems Inc. (MERS)

    http://stopforeclosurefraud.com/mers-101/

    http://stopforeclosurefraud.com/2010/08/26/shapiro-and-fishman-not-admitting-anything-right/

    http://stopforeclosurefraud.com/2010/03/12/topako-love-laura-hescott-christina-allen-eric-tate-officers-of-way-way-too-many-banks-part-deux-the-twilight-zone/

    CALL TO ACTION: MERS ASSIGNMENTS NEEDED

    http://stopforeclosurefraud.com/2010/09/10/call-to-action-mers-assignments/

  27. curiouslurk

    hmm, very interesting read(s), but one thing confuses me:

    Commenters write about potential problems arising from former owners. I would have suspected trouble with the second/third… investment bank if the mortgage was part of one of these infamous sliced-and-diced pools. What did I overlook?

  28. MinnItMan

    Well of course Wells is steering, but it is also paying the fees itself, generally. There may be a legal theory here that is is steering to push crappy title to buyers, but that’s not the standard RESPA theory, which is steering for quasi anti-trust reasons (RESPA has quasi anti-trust aspects that apply in circumstances where anti-trust laws don’t apply).

    I am no supporter of this practice and it does harm the consumer (although they are frequently NOT “consumers” under most consumer protection schemes, that is, not natural persons, but LLCs or S Corps).

    I dealt with this back when I ran a title company and thought it was crooked, particulary because it was clear that RELS (or other JV title ops) were willing to eat title claims for the business, a “thing of value” “given in exchange for business” which was prohibited by RESPA, but the courts held otherwise. The fact that the lenders pay pretty much kills the claim, regardless of the reason.

  29. KoTra

    Hi Yves,

    a really interesting read. It´s amazing to see, that a foreclosure sale does not automatically provide a clean title or at least a title with clearly defined restrictions. In Europe (although I am only be completely sure about Germany), any foreclosure sail provides a clean title. Claims on the property(such as a life long right to abode) are either clearly stated in the title, or have to be made during the proceedings(otherwise becoming nil and void). Fraudulent sales(what WF seems to be doing) obviously offer recourse to seek damages through the legal sytem against the (fraudulent)seller, without however tainting the title claim confered through the forclosure sale(with the only exception of the buyer not acting in good faith).
    The question that would really interest me in however is: What influence do you see these kinds of legal uncertainties having on the overall cometitive position of the US in the financial/professional services(legal/accountingconsulting) industry, given that the legal framework in the US in terms of efficiency, expediency and trustworthiness has in the past been regarded as one of the best and most sophisticated(in a positive sense). To put a differnent way, how significant would you estimate the danger to be, that international counterparties will in the future increasingly demand the application of, lets say, british law. What knock-on effects do you see for the other professional services/the financial industry in the US?

  30. LillithMc

    I have read that some judges have tossed cases out of court due to frustration with a lack of clear title. I never sold a property that was not given “clear” title by the title company which also supplied a “chain” of title showing previous owners and previous lenders. This “cloudy” title could affect any court case such as a divorce settlement, bankruptcy, refinance, foreclosure. I also read that at least one Wall Street firm (the name I can’t remember) had staff working to restore clear title to the mortgages they had tranched.

  31. Nimrod

    It seems to me that this problem is not necessarily confined to foreclosures. If I buy a home from an owner, couldn’t the same title problem crop up if there is a break in the chain of title leading up to the lien holder who is paid off at closing? In other words, a predecessor lien-holder in the unrecorded chain of title could emerge post-closing and claim to be the true lien holder, no?

  32. MinnItMan

    Don’t get me wrong – there is something rotten here, but it takes some explaining. As I said before, this is a poorly understood industry, but like AMBAC and MBIA, understanding its machinations is very helpful.

  33. MichaelC

    Yves,

    You said ,This vitiates a principle that is well embodied in most areas of consumer and business law, that a seller is liable for the representations he makes about his wares.

    Are you trying to gift wrap a nice little present for Ms Warren and her new CFPB team to unwrap.

    If so, Brava!

  34. Karen

    While I agree that this MERS-related clouded-title issue is serious and well worth warning potential buyers about, I’m not so sure the Wells Fargo document on Scribd is as nefarious as assumed here.

    After reading and re-reading item 5 in the document, I’m still scratching my head. It’s obviously the third sentence that’s at issue here – the rest of the verbiage seems to address who will handle the closing, a job that is often performed by title-insurance companies.

    That third sentence has a parallel in normal non-foreclosure, non-short-sale real estate transactions between individuals.

    In such transactions the seller usually pays for the buyer’s title insurance – but only on condition that the same company currently insuring the title for the seller and/or the seller’s mortgage holder is used again. That’s because the title insurers have traditionally given significant discounts in that situation.

    Is everyone sure that’s not all that’s going on here?

    As a separate warning to all in Washington State (and probably other states, too):

    YOU MUST INSIST ON BUYING AN “EXTENDED” TITLE INSURANCE POLICY!!!! Do this right at the beginning (put it in the purchase offer). If you don’t, they will give you a “Standard” policy, which insures ONLY YOUR LENDER, not you!

  35. Karen

    Oh, and item 2 in the document just puts in writing a basic tenet of real estate contract law: everything must be in writing.

    If it’s not in the written contract documents, it is completely unenforceable.

    So if a buyer does want to rely on a representation made to him or her, he or she must write it into the contract that the seller signs.

    1. Yves Smith Post author

      So tell me what the “special/limited warranty deed” in the addendum refers to? It clearly conveys fewer rights than a conventional deed.

      1. John Maynard Keynes

        Ah, so there are no examples of quitclaim deeds being used…

        What does a “special/limited warranty deed” mean? It probably depends upon the state, as the variety of deeds is set by each state.

        In my state, there are various disclosures required by the seller of a house. A lender with an REO property could not know about things like a noisy neighbor or sewer lines that back up or roof leak that was papered over to hide it. The line in the addendum about “seller representations” would apply to such matters, and I suspect the verbiage about “limited warranty” might, too.

        Furthermore, any buyer, as bona fide purchaser for value, would be protected from a foreclosed upon debtor trying to reclaim a house. The debtor’s fight would be against the lender, not the buyer.

        Last, let’s remember, too, that the lenders are being slower than molasses in moving REO to market, let alone foreclosing. This doe snot mean that there is no title risk to a buyer. There always is in any purchase. But it does decrease the odds that the foreclosed upon debtor would suddenly come back with a lawsuit a year after a foreclosure that was concluded only two years after the debtor stopped paying her mortgage (exaggerated scenario? cut it in half, point still applies).

        I am NOT arguing that the housing market is not a mess: 25% mortgages under water, a few million foreclosures, REO’s bottlenecked in the lenders’ phony accounting tricks, and MERs is a problem in judicial foreclosure states whenit comes to foreclosure.

        But you have chased a red herring (on this one).

        98% of the time you are brilliant. Everybody gets a couple wrong.

        1. Grayacre

          @ John Maynard Keynes

          Keynes didn’t get it, you obviously do not either. The point is, the hapless buyer doesn’t know what a “special/limited warranty deed” means, and will not until it is reviewed at closing. There appears to me, after thorough review, to be no provision in the contract to void the transaction if the buyer is not satisfied with the title to be conveyed. Furthermore, the prohibition on arbitration and mediation point to one answer, litigation. Always a great solution – for the lawyers like me. The contract is premised on a vague term, on a similar level, for someone with little comprehension (if the shoe fits) would be a contract to purchase “several” cars. Is that two, five, or fifteen? Or perhaps a lease for “a long time.” How long is a string?

          In some states, mine in particular, a foreclosure deed will ALWAYS be akin to a quit claim deed, because the foreclosing party will only have a title equivalent to the nefarious “quit claim deed” simply due to the fact that we are a non-judicial state. Simply stated, for those with thicker than normal craniums (maybe I should have said if the hat fits) the deed you convey is only what you have. If your non-judicial foreclosure is VOID, then so is your foreclosure deed. Since the “special deed” only conveyed what you had – aka the “quit claim” then you conveyed nothing. Call it what you want, “special/limited” or a “quit claim” the difference is symantics.

          As for your comment as to a bona fide purchaser for value, we are not dealing with UCC problems in most of these REOs, although that is a nice defense, that loses on analysis. If the foreclosure is VOID, from a legal definition, that means it never happened, which means the hapless borrower who was tossed, is now returned, and is also a plaintiff, as one of the earlier posts described. We have yet to see a plaintiff step in front of a jury here, and extoll how the bank perpetrated a fraud in order to steal their house, and that it has already been determined that the bank had no standing, and now we have our house back, and what, kind jury, should we do to banks that perpetrate fraud in order to steal houses? But it is not far away. And boy, everybody knows that juries love banks these days.

          The correct analysis is litigation between Yves’ “hapless” buyer and the seller of the REO property, as they will now have an unsecured debt that was once a mortgage – and no house. Perhaps an interpleader and joinder of necessary parties would be appropriate at this stage, and we could get all three – the original borrower/occupant (that was tossed at foreclosure) the foreclosing entity (see TBTF) and the hapless buyer of the REO property all in the same trial – CONSOLIDATION! – golly gee Wally, wouldn’t that be a fun circus to oversee, and the jury would have to agree that it was one helluva show, and the price of admission, wow, plaintiff’s lawyers everywhere will dream for years. A case everyone can relate too – and a defendant with DEEP pockets, backed by the full faith and credit of Timmy and Barry. Damn, maybe I should have been a plaintiff’s lawyer. Keynes, is that you selling peanuts?

          Unfortunately, I’m not. I’m a boring little small town real estate lawyer with little to do but watch as the mortgage industry and the connected-at-the-hip real estate industry eat themselves. I’m the poor sap that, with little to do these days, attended a national real property CLE this past weekend, and I am sorry I didn’t get to play with this from the get go, but we did a compare and contrast of the actual Fannie addendum and the one Yves posted (I got it by email with questions late last week). The group of real estate people from the entire country had a field day with it. Nobody doubted that it was less than perfectly legal – same as if I sell you cigarettes, so long as I disclose that they will likely kill you on the box – but as Yves said last night, we had a lot of fun with it. The most interesting question, of which I have no way of answering, and no way of discovering, is if the document that was “sprung” on this buyer at the last minute, is particular to a certain state or geographic region, or if it is truly a national addendum, as it had markings that seemed, at least to me, to target a couple of non-judicial foreclosure jurisdictions.

          Based on the links from Fog Horn earlier about Florida – wow! I don’t think anyone who has any knowledge about this industry (and you for one certainly seem to have a large perceived knowledge of real estate) has any doubt that there are forces out there that are combatting the foreclosure mill industry. Perhaps that is your fear – which one do you work for?

      2. Yves Smith Post author

        JMK,

        I find it interesting that you chose to distort what I said. I don’t have access to the deeds in question, so I can’t say how closely in substance they hew to a quitclaim deed. In case you didn’t notice, this is a weekend. I can’t reach the lawyer in question to see if he can get the deed from the lawyer who raised this issue with him until Monday at best.

        1. John Maynard Keynes

          (posted on wrong thread by mistake, copied here)

          Hold on. Did I distort what you said? Here is your sentence, all your words:

          “Now specifically, the potential problem with the deal is the bank in many states will at best be giving the buyer a ‘quitclaim’ deed (the addendum finesses this in paragraph 18, that the buyer only gets a ’special/limited warranty deed’.”

          The lawyer who gave you the story never used the words, “Quitclaim deed.” You introduced the term.

          A quitclaim deed grants to another the designated rights to a property as indicated in the deed. So, by quitclaim deed, I can transfer to you 100% or 5% or any percent of my house, or the White House, or your house, and the quitclaim deed would be legal. In the case my giving you a percentage share of my title to the White House or your house, you would get percentage of zero title, since I have zero title to those properties.

          I do not believe that any lender whose name is not Vinny the Kneecapper uses a quitclaim deed in selling REO property.

          Anyone who knows what a quitclaim deed is would regard that as the scariest part of the story you told . . . and if they also know a bit about real estate and the REO business, then they would strongly suspect that you got this story wrong.

          I am simply saying that you made a mistake.

          1. Yves Smith Post author

            I find it amusing that you presume to be omniscient. You have no idea of the sum total of the correspondence I had with the attorney. And you therefore incorrectly assert that the quitclaim reference was my idea.

            This is what he said in a message with paragraph by paragraph commentary:

            1. Clearly disclosing that this is a foreclosure property
            a. Not disclosing that in states such as Alabama, you get only what the bank had – similar to a “quit-claim” deed

            b. They aren’t telling you that the bank may very well have nothing, and that is what you are buying

            The inquiry to him came from Alabama, so the issue is germane there. That means it is likely operative in other states too.

            This isn’t a mistake, buddy. At best, it’s a difference of legal opinion, assuming you are an attorney. The form may not be the same as a quitclaim deed, but the end result apparently is.

            The attorney in question is pursuing real estate legal actions in quite a few states, so he has a reasonable overview. The only question is how many states would hew to Alabama practice.

            Moreover, I’ve had dealings with him on other issues where securitization and real estate lawyers rejected his interpretation initially (and pretty vociferously, I might add) and eventually came around to his point of view.

          2. John Maynard Keynes

            I was obviously referring to your post, in which you did not attribute the reported use of quitclaim deeds to the attorney, and not to the universe of your conversations.

            However, now that you’ve shared the snippet of e-mail with the attorney, it is quite clear that you distorted what he told you.

            Here is what you quote him as writing:

            “Not disclosing that in states such as Alabama, you get only what the bank had – similar to a “quit-claim” deed.”

            Now in you post, “states such as Alabama” became “many states,” and something unspecified that is “similar to a ‘quit-claim’ deed” became, in your words, “at best . . . a ‘quitclaim deed.’”

            But the larger point is that I think this is all wrong. Banks don’t get something similar to a “quitclaim deed” when they foreclose, especially not in a judicial foreclose state. In judicial foreclosure, they get a court order.

            Another larger point is that every sale of real estate is predicated on the assumption, to be checked, that the seller has title to sell.

            Show me the case law of foreclosed houses gone REO, then purchased, then taken back when the foreclosed debtor brings suit….

            Yes, MERs should give everyone pause. Yes, MERs is tripping up foreclosures, and it could one day trip up an REO sale. But you have blown this out of proportion.

          3. Yves Smith Post author

            Keynes,

            I was able to reach the attorney in question by phone. His comments:

            First, he has read the post and agrees with my representation of what he wrote (and I read him the section in question to boot). He pointed out that few states are judicial foreclosure states, and in addition, each state’s real estate law is substantially different, so in some states, a judicial foreclosure may not wipe the slate clean. He therefore finds “many states” is accurate. He also agreed with the notion I wrote above, that “The form may not be the same as a quitclaim deed, but the end result apparently is.”

            Second, this attorney showed the addendum to a gathering of 90 lawyers in a real estate CLE course over the weekend (the course is oriented towards people already involved in real estate, not newbies and attorneys came from all over the country) and it nearly brought the house down. The addendum is most certainly NOT standard. They were disturbed, among other things, by the disclaimed for all employees at Wells Fargo, the “special limited/ warranty deed” (you need to accept the deed before you’ve seen it!), and the prohibition against mediation and arbitration.

            If there’s nothing to fear from an REO title, why do we need this addendum? US Bank certainly does not use this addendum in every property they finance.

            His final comment: “Time will tell whether this is an exaggeration.” And look at the link from Foghorn Leghorn. One law firm in Florida withdrew 8000 foreclosures on Friday. Doesn’t that tell you something is not exactly kosher here?

          4. Misstrial

            Yves:

            You took the viewpoint of ONE attorney and are now running with it as though this attorney’s solo view is established law upheld by the courts?

            Is this some sort of a joke?

  36. hermanas

    From wikipedia,”MERS claims its process eliminates the need to file assignments in the county land records which lowers costs for lenders and consumers by reducing county recording revenues from real estate transfers[2] and provides a central source of information and tracking for mortgage loans.” Why aren’t they being sued for state law violations?

  37. Paul Repstock

    Well now; Our chickens really come home to roost don’t they??
    Do any of you remember the recent stories about the problems of reconstructing Haiti? How the whole process has been hamstrung by the lack of landownership documantation.
    This mess is partly the fault of governments which for many years have striven to weaken Property and all other individual rights. Without a solid legal framework to define ownership, the future is very bleak. In attempts to remedy this, one of the first responses will possibly see all property revert to the Government in an play to avoid complete chaos. That is because the government relies upon property taxes for social funding and if people come to understand that they have no property rights they will be very reluctant to pay those taxes.

  38. gizzardboy

    Thanks for bringing this up, Yves. You should know that this is not confined to Wells Fargo and their addendum. This summer I was trying to buy a house from Fannie Mae and after agreeing on a price, I was presented with a “standard” addendum from Fannie Mae as long as the original sales agreement and where it differed from the original agreement, its terms would prevail. In the section “Defects in Title”, it included this jem: (and I am reading it with a magnifying glass) “The Purchaser acknowledges that the Seller’s title to the Property may be subject to court approval of forclosure or to mortgager’s right of redemption.” The guy who ran the local title office told me that they could not necessarily determine whether either of these conditions were the case by examining what was recorded. Part of the addendum or counter was we had to use Fannie Mae’s pre-selected title company.

    They were unwilling to budge on this item so I (being a former former real estate person) backed out. I could just see me being half way through a rehab of the property when the former owner shows up to redeem it! I later heard from a former office mate that she ran into a similar addendum with a Bank of America owned property, again passed off as just a standard bit of paperwork.

  39. MinnItMan

    Two things are getting confused here. 1) A special or limited warranty deed is a warranty deed that covers defects created by the seller. It does not warrant prior title, but it does warrant against seller created defects like unexpired redemption rights. Nonetheless, it is 2) the title insurance coverage that is far more important, and that is an entirely differenet matter. Whether the deed is an SWD, LWD or general warranty deed, really doesn’t matter. Your title policy, if you buy one, will cover regardless. Make sure you buy one, that you have proof of payment for the premium, and that you get a copy of the “marked up” owner’s policy commitment and review it prior to closing. You probably will not actually get the final policy for at least a month after closing, until after the deed and purchase mortgage, if any, are recorded and returned to the title company (although, in some places, it may take a lot longer).

    I read this addendum and it really did not alarm me. It is very one-sided, but I’ve never seen one that wasn’t. As I said above, if you want full title covergage, I assure you that it is available, but you have to pay for it. REO sales ops prefer to do their own title, in no small part, because these closings frequently can’t/won’t be completed in a single day, and they want to control the documents in case somewthing falls through (like a buyer being pissed and walking away, or her lender backing out). A seller-controlled title company does make this aspect easier for them. Conflict-of-interest? Ya think? Nonetheless, this is the norm for the industry. YOU CAN PAY YOUR OWN COMPANY IF THIS BOTHERS YOU. If you’re willing to pay your own closing costs, you can close anywhere you want and get maximum coverage.

    Most of the REO deals I see require a cash offer, so the fact that Wells is requiring an inside (or comparable) loan commitment is actually somewhat liberal here. Maybe Wells got sick of “cash” offers that really weren’t (most of them were not bona fide cash offers, but disguised daisy-chained financing that frequently fell apart at closing).

  40. skippy

    @JMK / Yves thread…

    Seems too me, another case of company / industry *policy* masquerading as law, aided and abetted by friendly judges / courts as a dominance issue (flood the playing field approach, on home ground @ least that’s the hope) there by becoming TBTF as an consumer welfare, economic freedom, political hot potato toss.

    As a parallel I find the discussion of Article 81 / 82 of the EC Treaty relevant, in so far as they are at least questioning the pros and cons. Rather than rubber stamping industry policy dressed up as economic freedom (cough corporate personified entity)…ewww. BTW law is a social contract, abuse it and suffer the consequences

    Skippy…Hell I’ll just go all the way and pin it on article 15 U.S.C. and its tweaking in the mid 70s, with the influence of the Chicago school of economics. Phillip E. Areeda had it right, look what they did to him, E Warren should know better or maybe that was the plan all along IDK.

    PS. the agency *Wells Fargo* in this case should be the bag holder, let them get off their collective ass and do the leg work (clear title) or why should they have right to sell what they them selves allude to re: clouded title and on that note how can a service lay claim to sale provisions w/ out all accompanying paper work? Dysfunctional jurisprudence is a huge indicator to a waxing or collapsing empire…eh?

  41. merawakil

    When we look into certain techniques for investing in foreclosure real estate properties, it is the simplest, uncomplicated methods which are the most preferable. We need to know how to go about dealing in this business in an ethical and profitable manner, with time, effectiveness and simplicity being key points in building wealth. The fact is that acquiring foreclosure real estate, or other properties, and turning them over into wealth need not be complicated at all in the least.

  42. Omerine

    I may have missed this in the thread (as the comments go on and on) but in terms of the title and the loan being sold a gazillion times to other entities and clouding rights, isn’t there really as much risk in buying or selling ANY property, not just foreclosed properties, under this premise? If the “lender” who now “owns” title/lien signs off to release the “lien” when you buy the home or even when refinancing it, aren’t the same risks inherent in that situation? Just what rights to release and convey title does any lienholder on a sold loan have?

  43. chunga

    One particularly disturbing (and Constitutionally questionable) aspect in play here is the state of Florida’s recent implementation of what is called the “Rocket Docket”. In an apparent effort to clear the foreclosure backlog at all costs – retired, unelected “Senior Judges” are hearing cases by the hundreds daily and ruling essentially unilaterally in favor of whoever happens to allege a legal right to foreclose. This is occurring despite the fact that FL’s AG is currently investigating numerous “Foreclosure Mills” for a wide variety of “improprieties”. It has become such a farce that concerned citizens are recommending revisions to FL Civil Rules of Rocket Docket Procedure which can be read at the link below.

    http://www.foreclosurehamlet.org/profiles/blogs/breaking-news-your-input

  44. Jim in MN

    Yves,

    Thanks as always for your diligence and commitment in going behind the headlines and digging deeper.

    It just strikes me as funny that some folks commenting here seem so committed to defending the system, when the overarching point in this story is one that reinforces the supreme point of this blog (at least the supreme point as it strikes me, a mere reader): that unchecked greed and reckless experimentation has ruined much of the financial system.

    Securitization of real estate debt is just part of the globalization, digitization, and disintermediation of economic relationships. If it turns out that state and county and city law requires an old-fashioned, carbon-based life form to commit pen to paper in a chain of legitimate title transfers, is that not both ironically hilarious, and completely inconvenient if not fatal for many ‘clever fixes’ being concocted in lofty NY/DC offices?

    Ha ha. Sez I: Ha…ha.

    Oh but of course all the paperwork is strictly routine…come on. The legal paperwork is just catching up to the disclaimers used in the financial world where the debt is transacted. Shocking only when seen in a new context.

    The point of securitization in real estate was to allow the packaging of complex derivatives and customized risk-reward offerings for buyers who rarely understood even the basics of what they were buying. Now, the entire global economy stands wracked by the debilitating costs of ensuring that these same debts and instruments are NOT honored, i.e. the prevention of real estate bond haircuts AKA zombification.

    It is beyond ridiculous to assert categorically that the originating transactions cannot possibly be fatally compromised. Only an imbicile hopelessly compromised by their own interests could make such claims.

    To make them here, on a blog dedicated to unravelling the intricate entrails of the collapse, is truly to be LOL’d over.

    Keep it up Yves.

    1. John Maynard Keynes

      “It is beyond ridiculous to assert categorically that the originating transactions cannot possibly be fatally compromised. Only an imbicile hopelessly compromised by their own interests could make such claims.”

      Welcome to the US of A, where almost every land title (except guess whose?) has been based on originating transactions that were fatally compromised.

      So the question is, how are these Wells Fargo REO sales different from other REO sales? And how is the legal recourse of a buyer for title defects different than in any other real estate transaction?

      1. skippy

        “So the question is, how are these Wells Fargo REO sales different from other REO sales?”

        ———–

        So the question is, how are these fraudulent Wells Fargo sales different from other fraudulent sales?

        There fixed…

        Skippy…JMK try title searching in south / central America. You be surprised at the date on some deeds used to contest sales, can you say conquistadors and their early ancestors. This state of affairs creates a wonderful bedding ground for fraud, been there, done that and watch many others too.

        PS. securitization is a means to off load risk, is it not[?] aka no finger prints.

  45. REO Broker

    As a REO Broker working with Wells Fargo (among many others), I’d like to point out that the addendum (a portion of which is provided in the Scribd link above) which is “sprung” on the buyers “shortly before closing” is actually their standard addendum which the buyer signs before they ever go into contract on the property. I’d also like to point out it’s not just Wells Fargo that uses special warranty deeds – ALL REOs are sold this way, so far as I know, and it’s been that way for a long time. I’d also like to point out that buyers do have their choice of using any title/closing company they like. Additionally, Wells Fargo and every other lender has no problem loaning on these REOs – they evidently trust that the lender’s title insurance policy is sufficient protection against this and other potential defects in title. To me, this seems like just so much sound and fury, signifying nothing.

    1. grayacre

      @ REO Broker

      So…….. everybody is doing it, must be ok? Seriously, the issue isn’t so much is this legal, like selling cigarettes with a warning, it is just buyer beware.

      What is the old joke……….. Why do realtors make 6% for listing your property in a computer so other realtors can sell it? Because they participate in the fraud.

      Everybody out there, even those that have never purchased property before, know that you can “share closing costs” by using one attorney. Wells generous offer of “free title insurance if you use ours” is an old trick too. All designed to move the buyer away from an independent evaluation by counsel of their choice, and their own title policy.

      There have been lots of posts on here about “do a thorough title review” and “buy your own insurance.” I wish it were that simple. The securitization process left a lot of missing pieces off the property records in this country. The title insurance companies are aware of this. Many title policies now have “exceptions” for those missing pieces. So, do a thorough search, and you still won’t find it – and when the problem rings your door bell, you will then find out that you aren’t covered for it.

  46. SJ

    Yves,
    Can you send a copy of this article to Elizabeth Warren? Isn’t this exactly the kind of “tricks & traps”/legal fineprint nonsense that the new Consumer Protection Agency is trying to clamp down on? If this is really a problem (I’m not a RE lawyer, so not my expertise), I’m sure an issue like this would make for a good “trophy” for the new agency, no?
    Thanks for the article!

  47. Karen

    I googled “special/limited warranty deed”, and there seemed to be a consensus that they protect buyers from defects in the title caused by the seller, but not from defects caused by earlier owners.

    They are apparently mostly used by sellers who did not own or occupy the property for very long, including lenders who have foreclosed on a property and also heirs to a property.

    Seems to me that if Wells Fargo’s right to foreclose on the property were challenged because of MERS-related problems or similar issues, Wells Fargo would probably be on the hook. You’d want to check before actually buying anything, of course – apparently the laws differ somewhat from state to state.

    If on the other hand the previous owner had the house remodeled but didn’t pay the contractor, and the contractor then filed a mechanic’s lien the day after you bought the property, then Wells Fargo would say, so sorry about your problem!

  48. Mark in Scottsdale

    Seems to me that while awaiting legislation requiring warranty deeds on all foreclosed homes when they are sold by the “lender or his agent” to a new owner, there is a way that the title companies could profit handsomely. They could offer a Supplemental Title Policy rider that would take this risk off of the bank (former lender/present owner) and (new borrower/about to become owner) This “addendum” would take the risk, require a warranty deed be issued by the bank, and the title company would knowingly take on this additional risk for a fee of probably twice what the standard title policy would cost. There would be VERY few claims actually paid on this. Perhaps a rash of several filed initially, but with good title lawyers, few would actually require a payoff. You could probably get the previous owner to waive their interests, if any, for $1000 or so most of the time.

    It will be a limited window however, because this will stop the foreclosure market dead in it’s tracks. If you can’t sell it, why go to the expense and hassle of foreclosing on it, only to start paying property taxes, upkeep, security, HO Dues if any, and on and on and on. Smarter to leave the defaulted owner in there and work out some deal with him/her to keep them in the house no matter what! It’s cheaper to write off the whole loan than to go thru the forclosure process and then write off the loan, anyway!

  49. LillithMc

    I got out of real estate in 2007 after 35 years because of the support by organized real estate in the state and my office of fraud, corruption and the GOP. I sold many REO’s as a simple transaction covered by ordinary title insurance. Disclosures by the lenders were on an “as is” physical basis which the buyers could understand. It is not true that an REO is by its nature impossible to understand. In CA only large and unusual residential transactions use a real estate attorney. The California Association of Realtors is excellent. If I were still a member I would contact them for advise with this mortgage problem regarding, I believe, inadequate documentation of tranched mortgages. Securitization is not a problem if done correctly. I think we need to look at Wall Street as the problem and force them to document their faulty mortgages.

  50. Mia

    There are a lot of us who aren’t yet, but someday will be, affected by this. We bought a house a few years ago with an 80/10. The 80 is held by FM so we are confident there. The 10 however has passed through several “servicers”, the most recent of whom has no copy of the original mortgage and persistently calls us trying to get us to “settle” for 75% of the balance. (We have never been late, there is no reason for them to want to settle this, unless they think they won’t get it later?)

    We are getting ready to hire an attorney and a title company – we do want to sell this house in 2018, and quite frankly right now we’re not sure we’ll have clear title to do it. We also want to pay off that 10, and we aren’t sure that if we do that, someone ELSE won’t come along and claim they hold that second note. We are not even sure they have the legal authority to service the loan (but we have, of course, been making payments while we try to figure it out).

    Much to sort out.

  51. valkyrie

    They say possestion is 9/10 of the law…in some states it really is, through adverse possession laws.

    I see many people talking about how these recent developments could certainly speed our transition to a squatter society – well, I may have justalittle bit o experience in how squatting works.

    In Denver, a group of squatters (maybe including myself) gained possetion of a an abandoned building and a space under a bridge, by keeping people living in places for over 10 years THAT DID NOT HAVE A CLEAR CHAIN OF TITLE and that had been improved (note: not much improvements, stealing electricity, spray paint, tarps, boards over windows and a hole dug as a toilet – this actually did count as improvements, also note: the city later did retake the bridge through eminent domain laws).

    Other groups have gained title of properties I know of in Ashville, Morgantown, Denton, Tulsa, Syracuse, and many other towns I know of.

    By the principle of this law, if a person stopped making payments to the bank that could not prove a clear chain of title, they would be able to claim adverse possesion of the property if they had occupied it for so many years (varies by state and at times improvements are also necessary). The person who had been living in the home would get to keep the property free and clear, although in some states the bank could sue for a default judgement, which would allow them to collect payment from other assets the person might have(if applicable), and in just a few states, their primary residence (the home in question in the first place). But in many areas, they would get the home and their is little the bank could do.

    This would work simularly for a person occupying a home that they had purchased from a bank with no clear chain of title. They could claim adverse possetion after paying a mortgage only for as many years as their state requires before they could claim this right. The person who had been foreclosed on would not have a title either – obviously they had never paid off their mortage in time to get a title with a clear chain of ownership – so they would have no rights to take the home from its’ current occupant.

    Interested in others’ opinions on this…. from my experience, if you can’t prove a clear title, the property goes to the occupant, irregardless of them actually legally – or otherwise – ever purchasing it.

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