Massachusetts title insurance foreclosure

Breaking News (10/18/11): The Court has issued its opinion, affirming the Land Court’s dismissal. For a full analysis, click here.

The Massachusetts Supreme Judicial Court has taken up an appeal about whether a home buyer can rightfully own a property if the bank that sold it to him didn’t have the right to foreclose on the original owner, after the U.S. Bank v. Ibanez landmark ruling a few weeks ago. This case may determine the rights of potentially thousands of innocent purchasers who bought property at foreclosure sales that have been rendered invalid after the Ibanez ruling.

The case is Bevilacqua v. Rodriguez, and can be read here. In Bevilacqua, Land Court Judge Keith Long (ironically the same judge who originally decided the Ibanez case) ruled that the buyer of property out of an invalid foreclosure has no right to bring a “quiet title” action to establish his ownership rights because he never had good title in the first place. “I have great sympathy for Mr. Bevilacqua’s situation — he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied,” Long wrote. The net effect of the ruling is that the innocent buyer’s only remedy is to sue the foreclosing lender for damages–not a great option–or force the lender to fix the deficiencies with the original foreclosure–if that’s possible at all.

Estimating how many purchasers have been affected by Ibanez defects is difficult. There have been over 40,000 foreclosures in Massachusetts in the last 5 years, and over 12,000 last year alone, up 32% from the year before. A Boston Globe columnist recently performed a rudimentary analysis of foreclosed properties in Chelsea, and found that about 33% may have been afflicted with Ibanez-type deficiencies.

Many people who purchased homes at foreclosure sales may not even know their titles are problematic–until they try to refinance or sell. So this problem will likely take years to ultimately resolve, unless the legislature comes up with some type of solution. And these problems may go back a very long way–5 or even 10 years in the past.

Bloomberg News has a great write up about the case here. I was quoted in the Bloomberg piece about the significance of the problem:

The third-party issue has become a major one for title insurers in the state, said Richard D. Vetstein, a real-estate lawyer in Framingham, Massachusetts.

“What’s going to happen to all these people?” Vetstein said. “The people who don’t have title insurance are really in big trouble.”

The court may have left the issue of third-party buyers unaddressed in Ibanez anticipating a ruling in the Bevilacqua case, said Thomas Adams, a partner at New York law firm Paykin Krieg & Adams LLP.

“That’s a big issue to leave outstanding,” said Adams, a former analyst at bond insurer Ambac Financial Group Inc. “If Judge Long’s decision holds, then that’s a big deal.”

If you purchased property out of a foreclosure sale within the last 10 years, you should have a title examination performed to assess whether you have defective title. Needless to say, if you are considering buying property out of foreclosure (or not), these cases are the very reason why you must obtain an owner’s title insurance policy! Contact us for more information.

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Two good questions came from my Boston.com real estate blog readers about the recent foreclosure mess.

“Are title insurance companies still insuring foreclosure properties?”– James In Cambridge

Answer: Yes, they are. Initially, the press reported that some major title insurers had temporarily stopped insuring foreclosure titles from JP Morgan Chase, Ally Financial, and Bank of America. However, my understanding is that all title insurers have resumed insuring all foreclosure properties in the wake of several major agreements between national title insurance companies and lenders. These warranty and indemnification agreements would essentially shift the risk of loss from irregular/defective foreclosures back onto the foreclosing lenders.

From the conveyancing side, I can definitely tell you that title insurers have advised their attorney agents to go through foreclosure titles with a fine tooth comb and to be especially diligent in examining and certifying foreclosure titles. Buyers of foreclosure properties should be prepared for delays in getting their transactions closed.

“How is robo-signing different from the Ibanez case situation”?–Scott

Answer:  ”Robo-signing” and the Massachusetts Ibanez foreclosure case are two different situations, but the root of the problem — the complexity of the securitized mortgage industry and the sheer volume of foreclosure paperwork to be processed — remains a contributing cause of both problems.

“Robo-signing,” as one of the leading foreclosure defense attorneys has claimed to the Huffington Post, refers to how financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in “foreclosure expert” jobs with no formal training to sign sworn documents submitted to courts. According to depositions released in Florida and the Post, many of those workers testified that they barely knew what a mortgage was. Some couldn’t define the word “affidavit.” Others didn’t know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits, and that they agreed with the defense lawyers’ accusations about document fraud.

This is obviously a major problem in states such as Florida which require a judge’s approval of a foreclosure based on sworn documents. However, Massachusetts is not such a state. Other than verifying the borrower is not in the military, Massachusetts state law doesn’t require any sworn verification that the foreclosure is kosher (if you will). That may change after lawmakers and the Attorney General’s office react this foreclosure mess. In fact, the AG announced this week she is investigating on of the largest “foreclosure mills” in the state for alleged non-compliance with the new tenant foreclosure law.

The Ibanez problem occurs when mortgage loan documentation recorded with the Registry of Deeds lagged far behind the actual ownership of the loan, due to complex mortgage securitization agreements and sloppy follow up. Land Court Judge Keith Long’s ruling effectively invalidated thousands of foreclosures which suffered from this newly recognized “defect.” The Ibanez situation is not a product of fraud, like robo-signing, in my opinion. In fact, the practice of recording mortgage assignments “late” was long accepted by the title examination community prior to the Ibanez ruling. So it caught a lot of folks off-guard.Getting title insurance on an Ibanez-afflicted property is near impossible these days, and the robo-signing controversy certainly doesn’t help alleviate  the risk tolerance of anxious title insurance underwriters.

To be sure, both Ibanez and the robo-signing controversy have reverberated through the real estate community, and have impacted foreclosure sales on a number of levels. If you are considering purchasing a foreclosed property, please contact us so we can guide you through the complicated process and protect your interests.

If you need assistance with foreclosure defense, I recommend Liss Law–Massachusetts foreclosure defense (www.lisslawboston.com) based in Brookline, MA

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