Bankruptcy

Wrongful Foreclosures and Clouded Title

By Adam Levitin

I think there's a much bigger problem lurking in the shadows behind the GMAC/JPMChase foreclosures freezes due to concerns about faulty foreclosures:  clouded title.  

There's a lot of wonderful technical stuff involved with wrongful foreclosure claims, but the basic problem is pretty easy to understand:  you have to own a mortgage in order to bring a foreclosure action.  If you don't own the mortgage, you don't have any right to kick someone out of his/her house, even if that person has defaulted on his/her mortgage.  And GMAC/JPMChase are sufficiently worried that the trusts they service might not own the mortgages they are foreclosing on that they have put a halt to their foreclosure actions.  

Consider, though, what it means if there have been widescale wrongful foreclosures.  If these foreclosures were nonjudicial foreclosures (and maybe even for judicial foreclosures), it means that the foreclosure sale purchasers have clouded title.  The homeowner still has claim to the property and there might still be a valid mortgage on it.  And as many foreclosure sales end up with the lender buying the property and reselling it, what does that mean for the eventual end-buyer?   What does that mean for their title insurer?   This raises all of the classic bona fide purchaser protection issues, but as the linked article reports, at least one title insurer has gotten spooked.

Consider also what this means for homeowners who are current on their mortgages and want to sell their house.  Are we sure who actually owns their mortgage?  If not, there's a problem.  If it is owned by A, it doesn't do any good for B to release the mortgage upon the sale.  I think the title insurers' potential problem goes much further--it's not just title to foreclosed mortgages that are in question, it's potentially all private-label securitized mortgages.  Once the title insurers recognize the potential danger here, how willing will they be to write new policies?  And without those policies, how many folks will be able to get mortgages to buy houses?   (And without new business, the title insurers are themselves going to be a bind).  I'm very curious to see how the title insurance industry handles this problem.  

Full post as published by Credit Slips on September 30, 2010 (boomark / email).