Not all the fraud comes from Wall Street

I believe some on Wall Street knew very early that they were about to get filthy rich at the expense of the entire planet. They also figured out how to get bailed out for their efforts, and how to keep their bonuses. But that’s only the beginning. Now the rest of the world seems to believe that because they could do that so blissfully, the rest of us should too. Real estate purchasers who borrowed money are being told that it would be unethical if they had to repay it. The same mortgage brokers who hawked 80-20 loans now work down the street, where they can guarantee mortgage modifications if only the public will prepay thousands of dollars for their efforts. Workout specialists advertise that credit card balances don’t matter because if you get far enough behind, they can force banks to take only a fraction of the amount owed to consider the debt paid. This service, again, for some prepaid fee.

I’ve read of third-world countries where the accepted culture is to cheat, steal, and lie. Kidnapping seems more productive than work, the economy operates only by barter, and the whole system seems pretty much dysfunctional. It’s sort of like watching the Casey Anthony child-rearing philosophy applied to real estate. You wonder how something could get so screwed up.

All this to say, this economy is full of offers. They come in the mail, by email, television, and the radio may be worst of all. Everyone wants to sell you a quick fix for prior mistakes, or a way to take advantage of someone else’s. Prepaid instructions about the riches to be had from buying land with no money down is an old one. Anyone who falls for that, with a promise that you can quit your job, stay home on your yacht, and be free of worry without effort and even without knowing what you’re doing, is probably too silly for others to try to protect. Now there is a new promise: Anyone can get rich by buying foreclosed properties. It’s easy, and with a little money and some courage anyone can do it. Here’s the rub: You might get lucky. You might not. There is a reason title underwriters won’t let their agents write title insurance on a foreclosed property. The company knows something.

I have had several people bring their “titles” to my office. They received a Certificate of Title from the clerk’s office that said on its face that title was being conveyed by that document. Because the Clerk had issued the Certificate of Title, and because the Clerk is an officer of the court, they believed surely the title was good. They were right. The title was good. But only as to the people who were a party to the foreclosure.

Title companies deal in the official records of the Clerk’s office, not in the litigation files that accomplish a foreclosure. A search of the Official Records will not include a search of a specific foreclosure file. Here’s an example of what the Official Records will not show:

A condominium unit has an 80-20 loan. That means some mortgage company made a loan (probably for more than the property was worth) for 80% of the “appraised” value of the property. Then its sister company made a loan for 20% of the “value” of the property. After closing, the condominium association assumed control and was given the chore of running and paying expenses for the entire condominium property. The association hasn’t been paid it’s assessments for 2 years, and no mortgage payment has been paid since shortly after closing of the unit to the borrower.

In today’s market, the mortgage company doesn’t want long-term ownership of this unit, because then the company will have to pay assessments as they come due. That would be fair, and would return the property to the market. But the mortgage company is not interested in fair, or in the health of the market. They postpone foreclosing the unit. The association doesn’t have the luxury of waiting until the time seems right to foreclose. It has a fiduciary duty to do whatever is legally necessary to collect its assessments, because it must pay expenses for the entire property, even those expenses attributable to units not paying assessments. The association files a foreclosure of the unit. It can only bring into the lawsuit interests inferior to its own lien. It cannot legally foreclose a superior or prior interest in property. So the 20% loan gets foreclosed, since by statute it’s inferior to an association lien, and the owner is foreclosed. The 80% loan is not, at least as to the part of the loan in excess of 1 year’s assessments.

Now when the judge enters a foreclosure order for the condominium lien, he can only foreclose an interest inferior to that of the association. When my client gets a Certificate of Title from the clerk, he gets title “subject to” the outstanding first mortgage. That fact will never be apparent from the face of the Certificate of Title. Not only will the purchaser get a “tainted” title, but he will also take title subject to the obligation to pay all assessments attributable to that unit, past, present, and future until he no longer owns the unit. While he will have no legal duty to actually pay the mortgage, he can’t keep the unit without paying the outstanding balance, unless the mortgage company never forecloses its mortgage.

The point of the above example is that the first mortgage could never have been foreclosed by one claiming an interest inferior to the first mortgage, such as an HOA lien. But the language of the Certificate of Title looks very much like a document that warrants title. It warrants nothing. It is worth no more than the quality of the foreclosure action out of which it arose.

The example is also simplistic. I have removed from it the possibility that husband and wife were divorced and husband is now deployed, or both had filed bankruptcy during the foreclosure, or a judgment was entered against someone with a similar name and the creditor was not included among the defendants in the foreclosure. Many foreclosures actually have more than one, or even all of these intervening events. And this list of possible problems is itself simplistic. The real life list is endless.

Anyone purchasing a Certificate of Title is buying all the carry-over junk that is not cleared up by the foreclosure action.

There is money to be made in buying foreclosed real estate. But not by those who don’t understand the legal relationships going into and coming out of a foreclosure, not without risk, and certainly not without studying the foreclosure file. All title insurance underwriters will require that a lawyer understand the foreclosure file before a title policy can be written on a certificate of title.

Your real estate broker can be a valuable resource. That person, you, and your lawyer should work as a team when the subject is as treacherous as foreclosure sales.