Title Cloud Over REO Properties?
Tuesday, May 3, 2011 at 5:29PM A Massachusetts court considers whether an owner of property who purchased an REO has good title to the property
May 4, 2011
Nash Law Firm, PLLC
By: Stephen J. Nash
nash@nash-law.com
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For years we have heard arguments about whether various practices by lenders and servicers have invalidated foreclosures but we have heard very little about how these court decisions will impact purchasers of past foreclosures. The Supreme Judicial Court of Massachusetts is considering just such a situation.
The Massachusetts Supreme Court was one of the first to consider the validity of foreclosures done without proper documentation when they voided foreclosures done by Wells Fargo and US Bancorp on January 7th. In the present case, Bevilacqua v. Rodriguez, a local developer purchased a property from US Bancorp and turned the property into four condominium units for re-sale. US Bancorp had previously foreclosed the property but a lower court determined that the bank did not have the proper documentation necessary to foreclose the mortgage.
The developer, Bevilacqua, sued the previous property owner to clear title. The lower court; however, found that Bevilacqua did not have title to the property and that a better target for the developer would be the lender who sold him the property.
While this case legally would only apply to Massachusetts, it certainly will have a broader overall impact. The mortgage industry argues that such a ruling would create title opinions for thousands of good faith purchasers of REO properties and would create uncertainty and delays in the real estate marketplace. On the other side, one of the justices said that to rule in favor of the lenders could give rise to what he called the “Brooklyn Bridge” problem, where lenders could foreclose and sell properties they don’t properly own.
What furthers the impact of the rulings on this issue is that most lenders sell REO’s in an “as-is” condition with respect to the condition of the property and the condition of the title. A buyer without title insurance is totally at risk. A buyer who obtains an owners title policy that does not cover title issues relating to the foreclosure are totally at risk. Most buyers do not truly understand the legal implications of their purchase and simply assume that the bank must have good title or that the title insurance that they purchased must cover all title problems. If buyers failed to properly protect themselves in their REO purchase, they may find that their assumptions were wrong and will come back to haunt them.