Purchasing a bank owned property has long been considered to be one of the best ways to buy real estate. Typically, a below market value price can be obtained and because the foreclosure process wipes out all junior liens on the property, the title to a bank owned property is assumed to be guaranteed clear and marketable. 

But, we’ve all heard the proverb about what happens when we assume, and a recent court decision regarding foreclosed properties may prove to be further support.  On March 26, 2009, the honorable, Judge Keith Long, presided over cases involving three foreclosed properties in Springfield, Massachusetts in which the validity of the foreclosures were being challenged. 

After long, arduous arguments from the three banks, Lasalle Bank, Wells Fargo and U.S. Bank NA, he ruled that 2 out of the 3 foreclosures were in fact invalid.  View the entire court case.

In a nutshell, this case revealed that while Wells Fargo and U.S. Bank NA claimed to have legal mortgage interests in their respective properties by previous assignment, they both had failed to record their assigned interests in the properties before the dates of the foreclosure auctions. Furthermore, they each failed to disclose themselves as the holders of mortgage interest on their properties in the legal notices published prior to the auctions.

The law states unambiguously, that only the recorded owner of a mortgage interest in a property has the legal right to foreclose.  It also explicitly states that the legal owner of a mortgage interest must disclose itself as having such interest in a mortgagee’s sale of real estate legal notice. 

Both Wells Fargo and U.S. Bank NA argued that it is not law that  assigned mortgage interests must be recorded prior to foreclosure auctions.  The judge conceded, but cited that it is the law that the foreclosing entity must at least hold documentable proof of mortgage interest if asked to provide the same prior to the auction.   Only LaSalle Bank was able to offer written proof that it held legally assigned mortgage interest in its property prior to the time of the foreclosure auction and only LaSalle Bank’s foreclosure was found to be valid. 

While Wells Fargo and U.S. Bank NA each claimed they had been assigned their interests well before the foreclosure auctions, neither could produce written documentation, albeit unrecorded, of the same.  Further, neither could explain why they had waited over a year (and after the foreclosure auctions) to record their interests if they in fact held it.  

The judge claimed that each bank had ample time and compelling reasons to record their interests prior to the foreclosure auctions.   He claimed that the carrying costs  for the properties (real estate taxes, maintenance and security) and the declining real estate market, constituted very strong incentives to record their assignment interests if they held them prior to the  auctions.   In the end, it was the inability of Wells Fargo and U.S. Bank NA to prove to the judge they had any legal authority to initiate foreclosure that rendered their foreclosures invalid. 

The facts are very obvious in these two cases and the decision is now raising several questions in the legal community.  First and foremost, is this a result of mistakes being made by these banks or were these calculated acts of fraud?  Second, and so on, are the questions: Will this ruling effect foreclosure sales retroactively and how far back will it reach?  How many other properties have been foreclosed where assignments were recorded after the date of the foreclosure auction?   Are the current recorded owners of foreclosed properties, legally the owners?  Will title insurance companies suffer massive losses as a result of thousands of owners seeking indemnification?  Will all properties found to have similar clouds on their titles need to be “re-foreclosed” to clear them?

The real estate community is anxiously awaiting answers to these questions.   Suffice to say, if you’ve purchased a foreclosure property in the past and still own it,  you’ll either be patting yourself on the back for purchasing an owners title insurance policy, or kicking yourself if you didn’t.

 

Since the purpose of a short sale is for a lender to avoid having to avoid the lofty expense of a foreclosure, one would think that lenders would have a streamlined method for processing a short sale.   And perhaps, if lenders weren’t inundated with short sales from millions of borrowers nationwide, they could process them quickly.  The reality however, is that due to the lack of manpower, every lender’s loss mitigation department is backed up and short sales offers are literally being stockpiled.  The result is that the average time to complete a short sale is running about 4 months and many times longer.

Equally frustrating for real estate agents is that despite the deliberate attempt to forewarn buyers who are pursuing short sales, it seems no amount of verbal preparation for the amount of wait time is enough to curb the inevitable frustration of buyers. 

Buyers are simply not accustomed to waiting months rather than hours to learn if their offers are going to be accepted.  Invariably, as most agents who’ve had the experience of marketing a short sale listing will attest, the typical short sale culminates with a buyer other than the original offering buyer.  In fact, it’s not uncommon for a short sale listing to exhaust the patience of at least 3 to 5 buyers. 

We’ve all heard the axiom, “patience is a virtue”, but because we live in a world of instant gratification we often consider this the lore of people who aren’t motivated or aggressive enough to get what they want now.   A short sale however is one instance where this axiom still holds true.

Essentially, a short sale is when a lender faced with the prospect of having to foreclose on a mortgage for non-payment, instead agrees to accept a payoff that is short of the full mortgage balance owed by the defaulting homeowner.
In doing so, the lender agrees to consider the short amount full satisfaction of the mortgage and releases its lien against the property so it can be sold to a third party in lieu of foreclosure. 

While short sales have always been possible, very few people, including real estate agents knew they were an option a lender would entertain when a homeowner could no longer afford to make their mortgage payments. Prior to their rise in popularity as a result of the declining real estate market and home values, they were isolated incidents occurring quietly behind the scenes. 
Their rise in popularity came about after the real estate bubble burst in 2005 and home prices began to fall sharply. Suddenly, those people who had purchased at the top of the market using sub-prime mortgages requiring little to no money down were in getting into trouble at an alarming rate. Their mortgages, many of which were adjustable rate mortgages (ARMs) were coming due for their first interest rate increase and owners could no longer afford the payments.

Simultaneously, the decline in home prices was creating another disaster situation. These distressed homeowners were suddenly “upside down” on their mortgages. Unable to sell their homes to get out from underneath their mortgage debt, the foreclosure rate across the nation began to spike.

As lenders began to accumulate increasing numbers of foreclosed, non-performing assets, the word began to circulate that lenders would consider “short payoffs” of mortgage balances as an alternative to foreclosure.

The primary beneficiaries of short sales are lenders. However, their rise in popularity are also due to the fact that they are distinctly different than foreclosure and they do offer advantages for homeowners in default and facing foreclosure as well. Foreclosures, destroy a homeowner’s credit for as long as a decade and keeps them legally liable to pay back some, or all of the lender’s loss.

A short sale, by contrast, does not. When a lender accepts a short sale, it is agreeing to report the settled account to the credit bureaus as “paid as agreed” which is much less damaging to a homeowner’s credit. It also releases the homeowner of all past due amounts and future liability to pay back any loss incurred by the lender.

Of course, not all short sale offers are acceptable to lenders. The lender must anticipate that the loss it will suffer from a short sale will be smaller than if they foreclose. But, in most cases, if the offer is within an acceptable range of loss, lenders are quite likely to accept a short sale.