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News Link • Housing

Title Ins. Woes Illustrate Liabilities of Foreclosure Mess For TBTF Banks

This is a big deal for several reasons: 1. The liability in case of a wrongful foreclosure is large. There is no way for the wronged borrower to get his house back, so title insurance is the only recourse. As Bob Lawless explained in Credit Slips: …most every (or maybe even every–I’ll let someone else do the 50-state survey) state provides the strongest possible finality protections for deeds obtained through foreclosure sales. We also see similar rules for other judicially supervised sales in other contexts such as sales of personal property subject to a security interest or bankruptcy sales…. Suppose Henry and Helen Homeowner lost their home in foreclosure proceeding, and it has since been purchased by Bill and Betty Buyer. Now, Henry and Helen discover the affidavits in their foreclosure proceeding had some of the very same apparently fraudulent signatures reported in the media. When Henry and Helen complain to the court, the answer should be: “Your complaint is against Deutsche Bank (or whoever foreclosed) and not against Bill and Betty. You can recover damages from Deutsche Bank but not eject Henry and Helen from possession.” In turn, this will mean that that Bill and Betty (or their lender) will not have to look to the title insurer for recovery. 2. This means the large banks now effectively have direct exposure to borrowers for screw ups in foreclosures (note that they did earlier, in theory, but this move shortens the process of the money coming from the bank). 3. The liability is via the bank servicer. Note the Bank of American is now the largest servicer in the US (Wells is a close second) by virtue of having bought Countrywide. 4. Some contend that the risk of clouded title means that title insurers may come to require warranties from banks for all properties sold that has securitized mortgages. As Adam Levitin indicated in a Citigroup report, documentation lapses could “cloud title on not just foreclosed mortgages but on performing mortgages.”

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