REO Investing and the Chain of Title Time Bomb
October 13, 2010 
18 Comments
Ay dios mio.
That’s a new saying I just learned a few weeks ago and I can’t quit saying it. It means OMG in Spanish. I first heard it when I was in a hotel room in Pueblo, Colorado blow drying my hair when the maid unexpectedly walked in.
Two things make this an interesting story: 1) I was naked and 2) the door was about two feet from where I stood so we were pretty much face to … well, you get the idea.
Yes, I am a naked blow dryer and yes, the maid didn’t even knock, she just walked in. She said “Ay dios mio!” and ran out. I’m taking it as a compliment no matter what anyone says.
But…… I digress.
Today I’m saying “ay dios mio” while reading all of the latest articles about the looming foreclosure moratorium. Many readers and REO investors are concerned (as they should be) about what will happen if banks/states/the feds put the kibosh on foreclosures.
Here’s the deal.
If foreclosures are halted in the near term it will mean that REO inventory will be greatly reduced but there’s a bigger problem looming for real estate investors who invest in *previously securitized* REO’s.
The root of the problem is a recently discovered flaw in the mortgage recording system (MERS) that clouds title on previously foreclosed properties.
Until the 1980’s, most mortgages were loans between the homeowner and a bank, who lent the money directly. Today we only see this system with portfolio lenders – lenders that originate a loan, keep it in house and service it themselves.
In recent years, the mortgage financing system turned into a global system of securitization, with all other mortgage lenders packaging their loans into securities, bought and sold by investors like stocks. These transactions even split individual mortgages into sections or “tranches”, where each loan could have parts owned by different investment banks.
The transfer of ownership in these mortgage backed securities (MBS) was done with contracts on the balance sheets of Wall Street investment banks, such as Morgan Stanley and Goldman Sachs. The company who originally appeared to make the loan was normally a retail lending company such as Countrywide or Bank of America, who typically acted as a sales company, and sometimes retained the rights to service the loan.
In the event that the loan goes into foreclosure at a later date, the then current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The records would show a deed of transfer from the investment bank to the new owner.
Here’s the Big Problem
This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place. Owners of the loan normally do not publicly record each of the transfers out of expediency, and cost. Filing a document of transfer (called an assignment) in the land records incurs a fee paid to the county clerk.
Are you still with me? All together now… “ay dios mio!”
AFX Title, a national provider of property title searches, reports an increasing number of files where the chain of title has obvious gaps in the recorded mortgage assignments. According to David Pelligrinelli, of AFX Title, the issue is serious.
“When running searches for clients, we are noticing that a significant number of previously foreclosed properties have unconnected chain of assignments in the mortgage history. This could represent a title defect which could technically affect ownership rights for future owner.”
Pelligrinelli adds that some lenders and government institutions are rushing to repair the titles on REO’s as they discover them in their portfolio. This does not help individual owners who own properties previously foreclosed.
So What’s That Got to Do With You?
Well, if you are an REO investor buying previously securitized properties either individually or in bulk, you better watch out. Since no one really knows what will happen (title insurance invalidation, previous homeowner lawsuit, etc) some banks such as Wells Fargo are springing REO addendums on buyers that essentially say if something happens after you buy it’s on you.
Click here to download and read Wells’ REO addendum.
So What’s the Risk?
A lawyer who has examined the addendum explains…
“The typical (unsophisticated) buyer thinks that because they have a lawyer at closing (no matter whose lawyer it is), a title policy, etc…….that they are all safe and sound. They struggle through one of these REO transactions for a month or two, finally get in the house, something bad goes wrong, and they find out that 1) the title policy won’t cover them and 2) the land isn’t unique (see the nasty provision in paragraph 27 on “specific performance”), so a refund is all you get – and you are out on your ear. Hopefully, with a refund – and that may be the best outcome. But if somebody comes in, and voids a foreclosure, your title policy doesn’t pay – Wells Fargo has clearly disclosed that this was a foreclosure, so you only got what they had (nothing), and you have no recourse, no insurance, and guess what, an unsecured loan for quarter million bucks.”
Again… “ay dios mio!”
What to Do
If you’re buying previously securitized REO’s individually or in bulk, see if your title company has a foreclosure warranty from the foreclosing bank. If not, consider sourcing REO’s at portfolio lenders instead because they haven’t been previously securitized and you won’t have this issue.
What’s that you ask? What are portfolio lenders and how do you get access to them? I have a course for that! Shameless plug: For info on investing in REO’s with portfolio lenders check out Bulk REO Secrets.
If you’ve already purchased previously securitized REO’s then I will say a little prayer for you. And cross my fingers that this latest “toxic title” issue doesn’t affect you and your REO investing business.
Great info here Susan, but I really struggled to read it considering I was cracking up at the naked blow drying incident.
Ay dios mio (I hear that plenty down here in South Florida!).
Susan:
I am not even going to think what that looks like with the naked blow dryer situation. As always though, your post has very pertinent information and very helpful explanation.
Wow these derivatives caused a real quagmire.
“So much haste in the greed race that they forgot to tie their shoe lace”
Thanks for the info Susan. It’s timely for me since I just recently purchased your course and was wondering how this would affect the whole REO game. Now I know my focus for inventory should be with portfolio lenders. Thanks a bunch. You Rock!
That was Good and Alsom
Susan;
You are so funny (I mean the naked Ay dios mio)I have a lot of spanish friends who use this term often. I appreciate the article. I purchase the Bulk REO and about to close on a deal with a local bank. For those of you, who haven t purchase this course, I strongly recommend it….and please don’t get caught up in the other courses and or boot-camps costing thousands of dollars. This course is straight to the point. Best of Luck.
Makes you wonder..also, what if the Bank who originated the loan went under..did they assign the servicing rights on the loan or the loan itself? Sounds like there could be some possible fallout here as well.
Hello Susan,
Your Bulk REO secrets are fantastic and so are you! Thank you for sharing and caring! I was a little disappointed over this whole chain of title time bomb but I suppose we will always have some obstacles in life. It has been rewarding to read your blog. Thanks again and no more “ay dios mio”…OMG translated.
Si, Si, si! Que pasa, chiquita? Hablo Espanol un poquito, cuando lo necesito, nada mas! (Translation: “Yes, Yes, Yes! How are you, friend? I speak Spanish a little, only when I need it, nothing more!”)
Well, that naked hair dryer part was a great hook, and — you nailed the issue, as usual. The “robo-signing” of documents currently in the news is just the beginning of a HUGE and developing problem. These abuses of homeowners and residential real estate investors have been going on for YEARS. Part of my work includes consumer advocacy for a non-profit corporation for homeowners and investors who believe they may have been scammed or their consumer rights trampled, and who are struggling with upside-down residential properties.
In two short weeks, this “isolated problem” has grown from one lender (GMAC, now “Ally” in 23 states, mostly owned by the U.S. Treasury); to JPMorgan Chase and Bank of America in 23 states; to OneWest Bank; to Bank of America expanding to 50 states; to Old Republic Title refusing to issue title insurance on homes for which REO status was recently achieved; to Houston-based Stewart Title Guaranty Co. issuing guidelines to its agents that make it difficult to write policies on property foreclosed upon by the four banks whose processes are in question – (deep breath) — the hits just keep on comin’!
All this creates even more uncertainty. Expect to see more players rushing for the exits, attempting to cut their losses.
This mess is WAY more than just “sloppy paperwork procedures” that is being reported in the national news. Many consumers and lawyers now believe that both “civil” and “criminal” fraud have been committed routinely for many years, including the origination, servicing, and foreclosure procedures used on mortgages closed from about 2002 – 2007.
This whole mess is just going to get bigger and nastier. Lawyers and clients are now gearing up for class action AND civil “RICO” litigation. (“Racketeer Influenced and Corrupt Organizations” (RICO) Act, Title 18, United States Code, Sections 1961-1968.) This Federal statute was originally passed to take the Mafia down. Section 1964(c) specifically allows CIVIL claims (money damages, no jail time) to be brought by any person injured in his business or property by reason of a RICO violation.
Any person who succeeds in establishing a civil RICO claim would automatically receive judgment in the amount of THREE TIMES his actual damages and would be awarded his costs and attorneys’ fees as well! If civil RICO is proven as “systemic” to the way the lenders/servicers/investors/foreclosing lawfirms have conducted their businesses, the damages could be in the many hundreds of $Billions of dollars.
There exist strong Federal consumer statutes (Truth in Lending, RESPA, etc.) plus state statutes that give protection to consumers going through a foreclosure on a residential property, but — almost no consumers know they exist, and very few attorneys went to law school to become a consumer advocate lawyer! So, consumers’ rights are ignored routinely and the foreclosure steamroller just keeps a’rollin’ over families, neighborhoods and communities.
The potential impact: Valuations will likely suffer for the foreseeable future. The further mistrust of an already severely damaged Wall Street, Federal regulators, appraisers, real estate brokers, mortgage brokers, servicers, lenders, etc. will likely result in even more caution among home buyers. Non-REO home prices MAY stabilize as they become more attractive due to fewer potential title problems, while REO homes will sit vacant for even longer periods of time, which will affect home valuations negatively in those neighborhoods, which will likely drag values of nearby non-REO homes down, etc, etc.
Opportunities abound in the chaos, as always. Here’s hoping we all find many, using Susan’s GREAT strategies and resources!
If anyone wants to know more, you may email me at:
byron.aldrich@consumercrime.com
Ay, Dios mio!
Susan, thank you so much for this – ESPECIALLY a hint in the right direction of what to do to protect oneself if you are considering buying previously securitized REOS.(ie. getting a Foreclosure warranty – albeit – I’m guessing that MOST big foreclosing banks will not have this!!). The ONLY comment contrary to what you wrote that I have is when you said “recently discovered” flaw in the mortgage recording system. This actually has been a known flaw for at least a few years – but has be SWEPT under the rug (a few judges “got it” and ruled in the favor of the foreclosed homeowner exactly because of these precise defects in title – but by and large these issues have been looming for a while now and it appears that people now see that the king has no clothes.) The number quoted to me that have these title defects is catastrophic. Ay dios mio indeed!!!
And here is a provocative article about a lawfirm that is suing on behalf of 3,000 homeowners in Florida:
http://www.twincities.com/ci_16323101?IADID=Search-www.twincities.com-www.twincities.com
Thanks Susan. I was really concerned about the REO business I’m launching. Think I’ll just stick to Brokering for now. I’m so glad you posted this great information.
Susan,
Excellent post and very pertinent information. This fiasco has impacted my real estate business very directly as I am a Realtor as well and an investor. Up until this point I have been encouraging my home buyer clients to seriously consider looking at REO homes for sale as this is my specialty as I also list and sell REO properties for banks and have a lot of experience with them. And honestly, I hate to admit this, I was really not very concerned with the Bank addendums that all usually have that clause that is in the WF addendum. My title co felt comfortable with it. I trusted that they legitimately foreclosed, and my clients felt comfortable with it as well and were looking forward getting a good discount on a home.
Now, that has all completely changed in the matter of days. My REO listings have been impacted as showings have fallen off the cliff. I even had one offer withdrawn because of this from another broker, and the bank (asset management company actually) is not contesting it even though the buyer signed the bank addendum (see above).
And I no longer in good conscience present REO properties to my buyers because of this which leaves retail listings which I believe are still overpriced in my market ( CA Bay Area).
And now this whole issue is very important in the world of bulk REO as well where, I think, the majority of tapes out there are securitized assets. Susan, correct me if I am wrong.
So, again my business has to go through some jujitsu and change with the times, which is one reason that I love this business!
Thank you Susan for your continuing blogs and information!
I stopped after the first couple of sentences. Couldnt concentrate.
Thanks, Susan
You’re super!