Buying Foreclosures: Do You Own the Title?
In at least one case, a single bank official signed as many as 8,000 foreclosures a month, falsely claiming to have "personal knowledge" of each bad loan. Thousands of people who lost their homes through foreclosure now plan to sue, claiming their home were seized illegally.
What does this mean for you?
First the Good News
"People who bought foreclosed homes are unlikely to lose them because of a challenge to the foreclosure," says Kurt Pfotenhauer, CEO of the American Land Title Association (ALTA), the national trade organization of title insurance companies. "We think you are going to keep your home."
It's nice that he thinks that -- but what does "unlikely" mean?
A foreclosure sale can indeed be reversed by a state court, but to provoke such a judgement, the foreclosure typically must be outrageously unjust, Pfotenhauer says. For example, a court may reverse the sale if: The bank mixed up an address and seized and sold the wrong home, kicking an entirely innocent family onto the street, and the innocent family then filed to regain possession of their home before the local statute of limitations ran out.
"The court has to weigh the balance of competing rights," says Pfotenhauer. In this balance, the rights of a legitimate new homebuyer will often outweigh the rights of person who fell behind in their mortgage payments, even if that person was rushed through foreclosure.
In legal terms, most states protect the rights of "bona fide purchasers for
Who Pays the Court Costs?
Thousands of foreclosure sales are still likely to be challenged in court, though. "Any property in which a new owner sits, that was an REO property, runs the risk of being pulled back into court and having the title questioned," says Pfotenhauer.
Title insurance companies are likely to pay the cost of these court challenges. Any home with a mortgage will have a form of title insurance called a "lender's policy." That policy protects the mortgage lender from any ownership challenge that could cause the bank to lose money -- including any challenge to the foreclosure that caused the home to be sold.
"We are going to incur the litigation costs while we sort it out," says Pfotenhauer. He predicts that the situation is likely to be resolved in massive class-action lawsuits that will eventually be settled by the banks who foreclosed on the homes in the first place, with some kind of cash reparations made to people who lost homes.
If you want more reassurance about your home, contact an expert about your particular situation. Start with your title insurance company. You may also get helpful advice on the laws in your state by calling a local real estate lawyer. Many will answer a few general questions for free, especially if they believe you might potentially turn into a paying client.
What if you paid for your home in cash? A cash buyer won't have a lender's title insurance policy, but is likely to have an owner's title insurance policy instead, that would guard against a challenge.
To buy a new owner's title insurance policy for your home would probably cost between $400 and $1,400, depending on the area and the value of the home, according to ALTA. However, this policy not only protects homeowners from the latest crisis in questionable foreclosures. It also protects against property-line disputes and smaller liens on the property that wouldn't be covered by a lender's title insurance policy.
If you're now considering buying a foreclosed property, title insurance companies already are negotiating with lenders to insure new homebuyers against any uncertainty relating to the ownership of their properties, says Pfotenhauer.
An owner's title insurance policy is often much cheaper if you're buying a home, because the owner's policy can use the same title search used by the lender's title insurance policy. The extra cost of the owner's policy is usually a few hundred dollars -- a small price to pay for some piece of mind, Pfotenhauer says.
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