The Foreclosure Mess Explained – Part II
Craig on 10 26, 2010
I planned on waiting a couple of days before moving onto the practical implications — from a national perspective — but darn it if I wasn’t scooped by the NY Times! So onward I forge.
The Foreclosure Mess is going to worsen three inter-related problems. First, it’s going to significantly gum up the foreclosure process. The legal system simply cannot tolerate systemic lying, otherwise the system itself loses legitimacy. Clearly that is not acceptable — a properly functioning legal system is a veritable bedrock of a healthy society. Accordingly, the legal system will no longer accept at face value a foreclosing lender’s assertion that it is the holder of the note and has the right to foreclose. Given the “tidal wave” of foreclosures that is still cresting, this will further slow down the “working through excess inventory” process that is necessary to restore a healthy, value-sustaining balance to the housing market. So problem 1: Further delay in working through this lousy housing market. Ouch.
Second, the questionable legality of foreclosures to date puts a cloud on the title of each of the hundreds of thousands of homes that have been foreclosed. At this early juncture, it is too early to determine whether any prior foreclosures will be “undone” because of irregularities in the foreclosure process. Nonetheles, buyers of foreclosed properties cannot be certain that they will retain ownership of the homes. Think this will cool the passion of buyers of these properties? Today’s Seattle P-I reports that 23% of agents have a client who is no longer interested in buying a foreclosed home because of this uncertainty (in addition to reporting a .8% month-over month and 2.6% year-over-year drop in Seattle prices). So problem 2: further downward pressure on prices. Double ouch.
And third, this is going to further stress our banking system. When each promissory note was sold by the lender to the trust (which then repackaged and resold pooled mortgages as mortgage-backed securities), the lender essentially guaranteed that the loan was properly underwritten and otherwise a sound loan. We all know now (and many of us knew back then!) that many, many loans were NOT properly underwritten. If the lender lost the note, thus jeopardizing the holder’s ability to foreclose to preserve principal, then that too breaches the lender’s promises at the time of sale. The purchasers of these securities are beginning to demand that the original lender repurchase the loans given these breaches. And since we’re talking tens and possibly hundreds of billions of dollars, these legitimate and legal demands to repurchase loans — that are worth MUCH lesss than as sold — are going to cause further stress on our banking system. And that’s problem 3.
Not pretty, to say the least. Time will tell whether we can weather this latest development, or whether it’s going to kick us in the teeth circa 2008. My final post on the issue will look at the implications for our beloved Evergreen State.
About the Author: Craig Blackmon
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8 Responses to “The Foreclosure Mess Explained – Part II”
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Craig- Writing these great posts is like playing tennis- you have to be ready to play the ball when and where it comes back from. Good second article covering quite a lot of the remaining ground. Jerry-
Is there a Part III? I call those “push backs” and yes…I am seeing the ownership being pushed back to the loan originator. Confusing, as in some cases the originator is out of business and the successor of the originator is left holding the bag.
Have one “going” now that got pushed back to Long Beach…successor WAMU…successor Chase investor likely Deutsche Bank. Cloud on Title, but not sure if that cloud is due to the homeowner who was foreclosed on OR the bank that the note holder pushed back to or the underlying investor. Offers are stagnating with none accepted during this confusion, so access to info is limited, given no one is officially in escrow. Offers are just on hold, which BTW is against mls rules. A house that cannot be sold is not supposed to BE in the mls at all.
Interesting times. To some extent we have to rely on the fact that IF it closes, the new owner is protected by the Title Insurance from future claims. Isn’t that what Title Insurance is for? Your thoughts?
You’re absolutely right about title insurance, Ardell. Unless the title policy calls out the trustee’s deed that conveyed the property at the foreclosure, then the title policy should insure over the risk of any divestment of ownership arising out of an improper foreclosure. That said, it would still be a very sticky and time consuming problem, even if the buyer is eventually made whole under the policy. Also, if the title policy DOES call out the trustee’s deed as being excluded from coverage, then the buyer would be INSANE to complete the purchase (or at a minimum extremely risk tolerant, presumably with the benefit of a grossly undervalued price).
Part III is pending…..
…agreed…and to some extent rely on the buyer’s lender not going forward if the policy called out the trustee deed as being excluded from coverage. Somewhat. But a double check on that is clearly in order. In fact I have been leaning toward getting a written statement, or at least an email, from the Title Company that the buyer is covered. That only works when I have a reliable source at the Title Company. When that source is on vacation…I wait for them to come back vs “anyone will do in a pinch”.
It is definitely not a good time to be a cash buyer buying without Title Insurance and buying AT foreclosure. My $.02
Ardell, here is another perspective from a widely respected title insurance attorney. Nothing unusual, but certainly additional interesting insight.
Great link, Craig. Thanks!
My biggest beef on these is that I have to find these clouds on Title, and the listing does not disclose these problems. I think there are some new considerations requiring banks to tell what they know on the Form 17…and not simply waive the Form 17 or say “don’t know”, when they in fact DO know.
That came up on my last closing, and the bank’s attorney(s) scrambling at the last minute on that issue. It was irrelevant in that case, as we had throughly reviewed and unearthed pretty much every possible issue. But it was darned annoying that we had to “discover” these things, when the seller clearly knew everything we unearthed and simply did not tell us.
I have been expanding the discovery period on bank owned property to 2X to 4X the normal time frame. If they won’t tell us what they know…then they have to give us a lot more time to bring out the dogs to sniff out the info. But I’m pretty sure the laws in WA are…or already have…changed in that regard as to the Bank’s responsibility to disclose on the Form 17.
You have any links for that?
Your wish is my command…
Here’s the 2010 amendment to RCW Chapter 64.06 Seller Disclosures. Unfortunately, though, I see no reference to any changes to a lender’s disclosure requirements when reselling a foreclosed property.
Thanks Craig. What I do know is a team of lawyers for the bank were holding up closing on the basis that the amendment did heighten the bank’s obligation, and would not let the bank sign the closing documents until they revised the Form 17, and the buyer signed the new one and waived the 5 day right to cancel. This was the day before closing. New construction.
Thanks for the link…I’ll see if I can pick out what they were all concerned about at the last minute. That was a local bank…Frontier bought by Union.