REQUIRED READING: The presence of a foreclosure in the chain of title does not alter the title industry's duty to provide title assurance to parties involved in the transaction. However, the ability of the industry to provide that assurance becomes more challenging when the credibility of the foreclosure process is damaged by process and documentation deficiencies. Allegations of affidavit issues, robo-signing, notary irregularities, or incorrectly endorsed or assigned promissory notes are serious, but stakeholders can work together to resolve any uncertainty and restore credibility to the system equitably. After all, everyone has a stake in the outcome.
Regardless of any deficiency in the foreclosure process, and because it is fundamental to our understanding of how foreclosure affects title, we must remember that foreclosure in a judicial foreclosure process results from a court issuing a binding order allowing the foreclosure sale to proceed. A court order by a judge has the force of law. The judgment can only be vacated or corrected if one of the parties to the proceeding makes an appeal or other motion. It is inappropriate and outside its power for the land title industry to challenge these judgments or act as a check and balance on the court system.
A foreclosure appears in the title search and evidencing process in three ways. First, when the mortgage creditor institutes a foreclosure suit, it files a lis pendens in the public records. This gives the public notice that a foreclosure action is pending against the property. Second, the court docket in the foreclosure action, including the final judgment of foreclosure, is available for examination.
Third, after the foreclosure sale, either the sheriff will issue a sheriff's deed to transfer property to the successful bidder at the foreclosure sale or the court clerk will issue a certificate of title. Whichever form of document the evidence of the foreclosure sale takes, the document is entered into the public record. The aforementioned documents give notice to the world that a foreclosure action was instituted, that a sale was ordered by the court and that the sale occurred. What these documents do not show is any problem with the evidence used to secure that foreclosure order.
As we hear about document irregularities and question the validity and credibility of foreclosures, we need to remember that these are due-process issues. They are fundamentally about the fairness of the process, but also about its outcome. The question raised by recent media reports is whether the foreclosing parties properly evidenced their standing to obtain a foreclosure judgment by a court.
Standing is an important due-process protection akin to proving one's identity, as it ensures that the party asking a court to take away another party's legal rights actually has the legal authority to assert a valid claim. Intrinsic problems with the underlying foreclosure documents, whether they are affidavit issues, robo-signing or notary irregularities, are not themselves a title defect; however, when these issues are not identified during court proceedings, they allow the credibility of a court order to be called into question, and by extension, they become a title defect. Because these problems are part of the court process, they are properly the responsibility of the judicial system to resolve.
The title industry has no way to discover foreclosure irregularities that are not included in court proceedings or documented in the public record. As such, unlike the curative work to correct errors in the public record that occurs before a title insurance policy is issued, the title insurer or agent cannot cure foreclosure defects. Unlike property- and casualty-insurance lines, title insurance protects against risks that exist at the time the policy is issued. The underwriting of title insurance operates almost entirely on the basis of identifying, evaluating and addressing title problems before a policy is issued. It is theoretically possible, through a thorough search and examination of the title, to identify all of the on-record defects (but, of course, not the off-record defects) that may exist and then to address them and either eliminate them, insure over them or exclude them from coverage.
Defects in the foreclosure process, although underpinning the documents that are on the record, are, in fact, similar to other off-record title defects in that they cannot be discerned until someone appears before a court and challenges title after the policy is issued. Therefore, it is impossible to eliminate the defect. Each title insurer must decide whether to exclude foreclosure problems from coverage or insure over them.
Different risk tolerances in the industry will determine how each insurer chooses to handle transactions involving foreclosure. The American Land Title Association believes that an increased risk of losses for title insurers due to litigation or other costs is minimal because 1) Servicers are undertaking appropriate remedial work at the direction of federal and state regulators; 2) To our knowledge, no foreclosure irregularities have resulted in a claim under a title policy; and 3) There are legal protections for purchasers of real estate owned properties (REOs).
Although it is possible that insurer costs could increase through additional litigation costs associated with defending a homeowner's title under the owner's policy, we believe that title insurers will be able to obtain recourse from parties responsible for any deficiency. For these reasons and the strong reserving policies of our prudential regulators and our members, state insurance departments have not required title insurers to take additional steps, and discussion of additional capital reserving is premature.
Legal protections for REO buyers
There are three main protections for consumers who purchase an REO: an owner's title insurance policy, a bona-fide purchaser for value status, and equitable rights, should a court rescind the foreclosure that would likely result in the homeowners' keeping their home and the people who were foreclosed upon being compensated by their lender for their loss.
Under an owner's title insurance policy, a consumer will be protected from challenges against title by a previously foreclosed-upon owner of the property. This protection is twofold. First, the policy covers the cost of defense. Thus, under the terms of the policy, even if a title challenge is meritless, the title company will step in and assume the cost of litigation, protecting the consumer's right to title until the matter is resolved.
Second, if a title challenge is successful, the policy will cover a claim and make the insured whole up to the insured amount, which is typically the purchase price. Consumers can purchase an owner's policy at any time after closing. If consumers make substantial improvements to a property that increase its value (as is frequent when purchasing an REO), they can purchase an updated owner's policy to protect themselves for the new appraised value.
Bona-fide purchaser protection, which is codified in state statutes and common law, allows consumers to take good title, despite competing claims if they record their conveyance first and there is no notice of the claims. The triggers for this protection are recordation and notice. Once consumers purchase a property, their deed is recorded by the settlement agent, meeting the recordation requirement. Under the notice requirement, consumers must have actual or constructive notice of a specific claim. Actual notice is met when purchasers know that the foreclosed-upon owners are planning to sue to re-obtain title. Constructive notice is met when notice of a challenge is filed in the public or court records. Media speculation or newspaper articles about a foreclosure deficiency are not sufficient to defeat bona-fide purchaser protections.
Should a court decide that the circumstances of a particular case require the foreclosed-upon borrower to re-obtain title to the property, the traditional court remedy is rescission of the entire foreclosure. When rescinding the foreclosure, the court seeks to place all the affected parties in the same position they were in before the foreclosure occurred. Thus, in theory, the foreclosed-upon owners would receive title, the mortgage creditors would have their mortgage reinstated and the innocent consumers who purchased the REO property would be refunded all the monies that they put into the property. While innocent homeowners would be harmed by losing title to the property and having to move out of the home, they would not suffer financially because either the title policy or the court would make them whole.
We do not believe that a court would take these steps, as it is likely that the previously foreclosed-upon borrowers, if their title were reinstated, would not be able to meet the obligations of the mortgage and would simply face a second foreclosure proceeding shortly thereafter. Rather, the purchasers would keep the home, and the people who were foreclosed upon would be compensated by their lender for their loss.
Anne Anastasi is president of the American Land Title Association. This article is adapted from testimony she gave before the House Subcommittee on Housing and Community Opportunity on Nov. 18. Her complete testimony can be accessed at financialservices.house.gov.
