Concerns for foreclosed-property buyers
It seemed too good to be true: You bought a house in foreclosure at a fraction of the former price. Maybe you even knocked out a wall or two and remodeled with all the money you saved.
But now thousands of foreclosures around the country may be invalid because of bank paperwork problems. Should you worry?
“Anyone who’s purchased a foreclosed property in the last three years should really be concerned,” says George Babcock, a Providence, R.I., attorney who represents homeowners who have been foreclosed on.
“They should call the attorney that did their closing and say, ‘Hey, do I have a problem?’”
Bank of America, JPMorgan Chase and other major lenders have frozen tens of thousands of foreclosures in at least some states while they review the paperwork for errors or mishandling.
For homeowners, there are several questions to ask. But first, experts say, they should check to make sure they have title insurance, which protects the home buyer from any claim on the property that surfaces after the deal has closed.
Those claims can arise from unpaid taxes or legal glitches in the ownership documents. Most people who take out mortgages are required by their lenders to buy a policy. For those paying cash, it’s optional but highly advisable, especially now.
This new twist to the foreclosure crisis is no trivial matter for the large and growing number of people buying homes out of foreclosure.
The foreclosure listing service RealtyTrac Inc. says that nearly 250,000 homes sold from April to June, or 24 percent, were in foreclosure. In Nevada, it was 56 percent. Arizona was next with 47 percent and California third with 43 percent.
The cost of title insurance varies by state and circumstance but is often roughly 0.5 percent of the mortgage — in the neighborhood of $1,000 for a $200,000 loan. Premiums are expected to rise as title companies brace for new claims.
A homeowner with title insurance shouldn’t have to worry if the previous owner stakes a claim to the home. Even a successful claim, experts say, would almost certainly end up with the title company settling with the evicted homeowner — not the new buyer out on the curb.
If they failed to make payments repeatedly, evicted homeowners might not be able to afford their old homes anyway, something a judge would consider. They’re more likely to seek a large check than a return to a house with an outsized debt.
The situation is murkier for people who bought their homes with cash and didn’t bother with title insurance. The issue of who has proper title in that situation could be uncertain.
“It is not clear, which is why the banks have imposed their own moratoriums on foreclosure,” says CEO Tim Dwyer of Entitle Direct Group, the holding company for EnTitle Insurance Co., an Ohio title insurer. “Potentially, you face a legal battle.”
Legal experts concede it’s possible that there may be a judge somewhere who’s disgusted enough with how the banks conducted themselves to throw out foreclosures. So if you’re the new owner of a foreclosed property and worried, what should you do?
First, check to make sure you have a title policy and the title is clear, which means there are no liens against the property and the ownership is clearly established.
If no problems surface, you may still want to run another title search every six months or so if you are interested in selling anytime soon, given the current confusion. If you’ve had the property four years or so, it should be OK, experts say.