Bank of America announced today that it has expanded its halt of foreclosures and sale of foreclosed properties from 23 states to include all 50. Other large institutions such as JP Morgan Chase and Ally Financial (formerly GMAC) are expected to follow suit and will probably happen before I can finish this post. One article from My Fox Atlanta titled Foreclosure Halt Creates 40K Zombie Homeowners in NY speaks of the many borrowers now in limbo somewhere in the foreclosure process. This fiasco will pose additional challenges and heartburn for our already suffering housing economy. Until this is resolved, many buyers with contracts on foreclosed properties of BofA, JP Morgan Chase, Ally/GMAC and probably others to come, will be unable to complete the purchase of the property. This is no small change in events.
A few weeks ago, news began to surface of the “Robo Signer” scandal at some of the larger financial institutions, where bank officials are alleged to have signed foreclosure documents at an impossible rate. According to one article a Bank of America official has admitted in a deposition that she signed 7,000 to 8,000 foreclosure documents in one month. The bank official stated, “I typically don’t read them because of the volume that we sign.” Similar accounts have arisen with regard to Ally Financial Inc/GMAC and JP Morgan Chase. These incidents were the primary driver of the initial halt in 23 states.
Why halt in only 23 states? When it comes to property ownership and lending, each state falls into the category of either Lien Theory or Title Theory, some call it judicial or non-judicial. In a Lien theory state the lender is required to get a judgment in order to foreclose. In Title theory states, the borrower signs over the right to the lender to sell the property in the event of non-payment, without the need for a judgment (non-judicial). What began as a moratorium in the judicial states is now reaching nationwide.
Now, let’s tackle the issue of ownership. Clear title is vital to establishing and exercising property ownership rights in this country. Clean and clear title is paramount in gaining title insurance. Title insurance is established to declare that the sellers do in fact have the right to sell the property the buyer wishes to purchase. In the event that it is determined after the sale that the seller did not have the right to sell and the buyer has to surrender ownership of the property, the title insurance is there to pay the amount of purchase and possibly any damages. When property is purchased using financing, the policy is in place to protect the lender. The lender would be compensated for the amount of the mortgage owed on the property. Damages may or may not be paid. For the buyer to have any protection, he or she would need to purchase a buyer’s title protection policy. This would help to protect down payment and possibly other investments in the property, or in the case of a cash sale, would protect the buyer for the amount of purchase.
On September 29th, Old Republic National Title announced that it would not write any new title policies for the purchase of foreclosed JP Morgan Chase properties. This moratorium later extended to foreclosed properties from Ally/GMAC and Bank of America. This is a sensible move on their part, as they would be unable to defend ownership on a clouded title. Without clear title and title insurance, lenders will not write loans, closings will fall apart.
For now, I’m very happy and fortunate that my buyers are currently under contract with a traditional resale “retail” home, or they could be wondering where they’ll call home in a couple of weeks. I’m interested to hear your opinion. Are you under contract or looking to purchase a foreclosed property from any of the institutions mentioned in this article? If so, what has been communicated to you? Are you one of the many borrowers in limbo? Or, are you a property owner wondering what is going to happen to the foreclosed properties in your neighborhood? Post your comments. Let’s chat.