Monday, March 19, 2012

'Head-In-The-Sand' Approach Prevails With Title Insurers, Agents When Dealing With Foreclosed Properties

The San Francisco Chronicle reports:
  • Chain of title - proof of who really owns a house - underpins the entire U.S. system of real estate. Broken chain of title due to slipshod paperwork was a serious issue uncovered in the nationwide robosigning scandal and again last month in a city report that found San Francisco foreclosure paperwork riddled with errors. Those revelations draw new attention to title companies, which insure a home's clear title for both buyers and lenders.


  • When the robosigning issue first exploded on the scene in October 2010, major title insurers briefly stopped writing policies for some foreclosed properties. That could have stopped foreclosure sales cold: Without title insurance, a bank will not issue a mortgage.


  • But the title insurance industry said its concerns have been addressed and it's not worried about the latest disclosures undercutting the assurances it provides people who buy foreclosed houses from banks.

  • "When robosigning first came to light publicly, it caused the industry to pause, almost hiccup for a second, in that would we be able to meet our obligations and protect homeowners who purchased homes out of foreclosure if these irregularities had occurred in the process," said Steve Gottheim, legislative and regulatory counsel for the American Land Title Association, the industry's trade group. "The whole goal of that small period was to get more information. When we had more information, the industry was able to get back to what it does best, insuring title."

  • That additional information consisted of finding that some of the paperwork defects were not that egregious and of reviewing legal statutes, he said. "Folks who buy (property) and have no knowledge that there may be some defect in the chain of title are protected very strongly by state law," he said. "Every state provides protection to bona fide purchasers of real property for value."(1)

  • It's a high bar for the purchaser to know about a title defect. Media reports, or even government reports like the one produced by Ting, would not be sufficient, he said. Suppose the previous homeowner camps out in front of the house with a sign saying the foreclosure was unjust? "It would take a lot more than picketing the property," he said. "It would take really good evidence and a court order that says it was an illegal foreclosure."

  • Gottheim said title insurers are prepared to step up when issues arise. "At the end of the day we are the folks who are going to be on the front lines protecting the new homeowner," he said. "If a homeowner has purchased a title insurance policy and a defect in the foreclosure comes up after the fact, we will stand there and protect them."

  • However, he said there has not been a wave of lawsuits by foreclosed-upon people seeking to take back their properties. "They don't have the money to bring these lawsuits," he said. "Even if they have a valid lawsuit and a chance to win, which state law would make very difficult for them, if they did win, they get the house back, but also get back the mortgage which they were unable to pay."

For more, see Robosigning focuses attention on title companies.

(1) What this title insurance industry flack fails to mention (either intentionally, or merely ignorantly) is whether or not one qualifies for protection as a bona fide purchaser does not turn merely on the purchaser's lack of knowledge. It turns on the purchaser's lack of notice, which could be actual notice, constructive notice, or implied notice (in some states, implied notice is considered to be a sub-category of actual notice).

In effect, protection as a bona fide purchaser turns on whether the purchaser either knew or should have known about the defects in the title. And there is at least a school of thought that finds great support in the case law that posits that any defect in a foreclosure action that could have been discerned by a purchaser by a careful review of a foreclosure file (in judicial states) and the recorded documents at the county land title registry (in all jurisdictions) that would have either:

  • revealed irregularities in the process, or
  • revealed facts that would lead any reasonably prudent person, using ordinary diligence, to make further inquiries concerning possible irregularities. Such a failure to make further inquiries would leave the negiligent purchaser chargeable with notice of what such inquiries and the exercise of ordinary caution would have disclosed. If all the inquiry which due diligence requires is made, and the irregualrity remains undiscovered, the purchaser is excused and is not deemed to be on notice. But a failure to use due diligence leaves the purchaser chargeable, as a matter of law, with notice of every fact (ie. irregularity) which the inquiry would have disclosed.

See, for example, Kordecki v. Rizzo, 106 Wis.2d 713, 317 NW 2d 479 (Wis. 1982), in which the court stated that had the party claiming bona fide purchaser status at a foreclosure sale examined the record prior to purchase, which he did not, the purchaser would have found the lis pendens recorded against the property being foreclosed. The lis pendens, in turn, would have led the purchaser to the county circuit court file on the foreclosure proceedings (the foreclosure court file number is typically noted on the lis pendens), and more specifically to the documents contained in said foreclosure file that, had they been examined, would have placed the purchaser on notice of defects in the process. Accordingly, the court ruled that the purchaser was not entitled to protection as a bona fide purchaser.

See also, Carnation Co. v. Midstates Marketers, Inc., 2 Kan. App. 2d 236, 577 P. 2d 827 (Kan. Ct. of App. 1978), supporting the proposition that an adequate title search of land requires the inspection/examination of a court file which is referred to in a recorded instrument affecting title to land:

  • [I]t is apparent that the appellant's argument that he had no notice of the lien is without foundation. The entry on the judgment docket is intended to serve as an index which alerts an interested party that judgment has been rendered. Specific and detailed information regarding the action is located in the appearance docket and the court file.

    A reasonably diligent search of the records available to the appellant would have revealed that judgment was entered on September 20, 1973, for that was the date reflected in the appearance docket and the court file containing the journal entry of judgment.