U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership.
“Defective documentation has created millions of blighted titles that will plague the nation for the next decade,” said Richard Kessler, an attorney in Sarasota, Florida, who conducted a study that found errors in about three-fourths of court filings related to home repossessions.
Attorneys general in at least six states are investigating borrowers’ claims that some of the nation’s largest home lenders and loan servicers are making misstatements in foreclosures. JPMorgan Chase & Co. is asking judges to postpone foreclosure rulings, while Ally Financial Inc. said Sept. 21 its GMAC Mortgage unit would halt evictions. The companies said employees may have completed affidavits without confirming their accuracy.
Such mistakes may allow former owners to challenge the repossession of homes long after the properties are resold, according to Kessler. Ownership questions may not arise until a home is under contract and the potential purchaser applies for title insurance or even decades later as one deed researcher catches errors overlooked by another. A so-called defective title means the person who paid for and moved into a house may not be the legal owner.
“It’s a nightmare scenario,” said John Vogel, a professor at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire. “There are lots of land mines related to title issues that may come to light long after we think we’ve solved the housing problem.”
The costs for title insurers to defend customers and reimburse for lost properties rose 14 percent to $480.5 million in 2010’s first half from a year earlier, according to American Land Title Association, a Washington-based industry group.
Fidelity National Financial Inc. of Jacksonville, Florida, is the largest insurer, with 38 percent of the market in the second quarter, the association said. First American Title Insurance Co., a unit of Santa Ana, California-based First American Financial Corp., is No. 2, with a 27 percent share.
Fidelity National said today that any documentation flaws “will not have a material impact on its title business.” Even if a court stops a foreclosure because of title problems, “the foreclosing lender would be required to return to our insureds all funds obtained from them, resulting in no loss under the title insurance policy,” the company said in a statement.
Fidelity National shares fell 4.3 percent to $15.04 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest decline in 11 months. First American Financial sank 3.1 percent to $14.48, the most since Sept. 7.
Title insurers use their records and public documents to verify a seller is the home’s true owner and that the property is free from liens. They collect a one-time premium and pay costs that may arise if someone challenges a new owner’s right to the property. To obtain a mortgage, buyers are required to purchase a policy to protect the lender. Many people also get a so-called owners policy to protect themselves.
“Title is everything,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. “There’s no collateral without possession, and that is title.”
‘Little Adverse Impact’
The American Land Title Association said in a statement today that documentation problems “will ultimately have little adverse impact on the new owners” of foreclosed properties. The group represents more than 3,800 title-insurance companies.
“It is unlikely that a court will take property from an innocent current homeowner and return it to a previous homeowner who failed to make payments on the loan subject to the foreclosure,” Kurt Pfotenhauer, the association’s chief executive officer, said in the statement.
Almost one-fourth of U.S. home sales in the second quarter involved properties in some stage of mortgage distress, RealtyTrac Inc. said yesterday. In August, lenders took possession of record 95,364 homes and issued foreclosure filings to 338,836 homeowners, or one out of every 381 U.S. households, according to the Irvine, California-based data seller.
The biggest deficiency in foreclosure suits is missing or improperly handled documents, Kessler found in his study of court filings in Florida’s Sarasota County. When home loans are granted, borrowers sign a promissory note outlining payment obligations and a separate mortgage that puts an encumbrance on the property in the lender’s name. If mortgages are resold, both documents must be properly conveyed to prevent competing claims.
Bundled Into Securities
Most of the document errors involved mortgages that had been bundled into securities sold to investors, Kessler said. At the end of the U.S. real estate boom in 2005 and 2006, about 70 percent of the $6.1 trillion in mortgage lending was packaged into bonds, according to the Securities Industry and Financial Markets Association in New York.
Typically, bundling a mortgage involved three transactions: originators sold loans to companies that packaged them, those firms sold the loans to interim trusts, and then they were put into bonds, Kessler said.
“A mortgage has to follow the proper trail every step of the way, or you have title problems,” he said.
In some cases, mortgages were conveyed using the Reston, Virginia-based Mortgage Electronic Registration System, or MERS, designed to cover transfers among system members. Promissory notes also often were endorsed as payable to the bearer to avoid the need for multiple transfers. Both practices have been challenged in court.
Copies of Documents
Copies of documents aren’t enough to establish rights, just as copies of dollar bills wouldn’t be honored by a bank, said Geoff Walsh, an attorney with the National Consumer Law Center in Boston. In cases of lost or mishandled paperwork, attorneys may file affidavits and other evidence to correct omissions and establish a claim, Walsh said.
Given the volume of mortgage securitization, it was easy for paperwork to get lost, said Kathleen Engel, a financial services law professor at Suffolk University in Boston.
“Wall Street was very good at packaging loans and making sure the money flowed to the right people, but not so good at keeping track of mortgage documents,” Engel said. As a result, “we have a growing number of toxic titles,” she said.
GMAC, based in Detroit, said in a Sept. 20 statement that it had told its brokers and agents there might be issues with “judicially required forms” tied to home repossessions. An employee said in a December 2009 deposition that he signed thousands of documents without verifying their accuracy.
“If I were in the title industry, or a mortgage holder, or someone who bought a foreclosed property, this is something I would be very worried about,” said Michael Carliner, a Potomac, Maryland-based economic consultant specializing in housing.
Attorneys general in Florida, Texas, Iowa, Illinois, North Carolina and Connecticut have started their own investigations into GMAC. In addition, Florida investigators have issued subpoenas to three law firms after homeowners facing eviction said the firms pursued foreclosures without following proper procedure.
JPMorgan must prove its home foreclosures are legal, and if it can’t, must stop the practice, California Attorney General Jerry Brown said today. He made a similar demand on Sept. 24 of GMAC.
“This is the most important issue of the whole mortgage mess because families are being thrown out of their homes by people who may not have the right to do that,” said Glenn Russell, a Fall River, Massachusetts, real estate attorney who won a case last year that reversed a foreclosure because of faulty paperwork.
Mark and Tammy LaRace, his clients, were able to move back into their Cape Cod-style house in Springfield, Massachusetts, more than two years after they were evicted.
In February, Judge Keith Long of the Massachusetts Land Court reaffirmed his 2009 decision to return the house to the LaRaces. San Francisco-based Wells Fargo & Co., which initiated the suit in an attempt to clear the property’s title after it foreclosed on it, has appealed the decision. The case now is under consideration by the state’s Supreme Judicial Court.
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