The status of mineral rights ownership (or gas and oil drilling rights) is not commonly apparent on deeds and other documents in the recent transaction history. For example, if oil rights on a particular parcel were sold off by a prior owner 50 years ago, the current deed might have no mention of the rights being owned by someone else. The ownership chain to those rights would run in a separate deed chain specifically referencing the oil rights and would not be part of the land deed documents. But what if the oil rights were not sold off, and remained with the surface rights? Unfortunately, that would not typically be referenced on current deeds either.

In order to accurately determine subsurface rights ownership, a chain of title search would go back to the last mention of any oil or mineral rights, and follow forward from there. This can be a complex search since many times these rights were last active decades prior. An experienced title search professional can improve the efficiency of these searches by using techniques such as locating adjacent rights, or cutting directly to known deeds.

A recent search we performed located an obscure mining claim deeded to a private individual on a proiperty in Alaska which was part of a 10,000 acre national land management area. The Federal government actually owned the land, but the mining rights to a small 10 acre parcel within this area was sectioned off for a private party to mine. The deed to these rights was signed in 1927 by President Calvin Coolidge.

The potential value of oil, gas, and mineral rights make the difficulty of these searches worthwhile in some cases, and the complexity can make for interesting results.

MineralRightsSearch.com

Time Magazine discusses how “there are many reasons why homes that could be for sale aren’t. Some are stalled in the foreclosure process, which can easily take more than a year in some states. Some banks decide against putting certain homes on the market either because they can’t process all their distressed inventory, or because flooding the market would drive prices further down. Technically, shadow inventory also refers to homeowners who would like to sell but are waiting for market conditions to improve.”

While many investors are looking at buying foreclosures, NASDAQ points out that properly researching title before buying a foreclosure is a key step. “Foreclosures sell for about a 20 percent discount compared to conventional sales. But that’s an average – many sell for much bigger discounts, and some sell for close to market value. Expect smaller discounts on homes that are in good condition and have not been on the market long. There’s no title insurance on properties bought at a sheriff’s sale on and tax liens are a common problem with foreclosures.”

Foreclosure properties are also generating dozens of lawsuitsagainst mortgage processors. Two Nevada attorneys announced Monday they’re suing six companies they claim have been processing Nevada home foreclosures without authorization. Attorneys Nicholas Boylan of San Diego and Shawn Christopher of Henderson said they filed suit last month in Clark County District Court and are seeking class-action status on behalf of 16 Nevadans named as plaintiffs and potentially thousands of more plaintiffs as class members. The lawsuit claims the foreclosure processors engaged in debt collection activity even though they were not licensed in Nevada as debt collectors.

Bank of America is reportedly negotiating foreclosure settlements where the borrower is not allowed to badmouth the bank online or on Facebook. CBS reports   ”As a condition for offering mortgage relief to Arizona homeowners, Bank of America (BAC) is allegedly requiring them to refrain from criticizing the company. That includes making borrowers delete any negative comments they may have made about the banking giant online. Arizona legal officials say such agreements are hindering their ongoing investigation into B of A’s loan-modification practices.”

Homeowners have taken to the courts individually, fighting against foreclosures using challenges to records systems and presenting pro se cases such as quiet title and slander of title defenses. Reneé L. Martin (appellant), in pro per, brought an action against Mortgage Electronic Registration Systems, Inc., Bank of America Corp., Bank of New York, ReconTrust Company, and Countrywide Home Loans, Inc. (together, respondents) after she defaulted on a secured real estate loan and foreclosure proceedings were initiated. The trial court sustained respondents’ demurrer without leave to amend and granted their motion to strike appellant’s “request for attorney’s fees, punitive damages and damages for emotional distress.” Appellant contends the trial court erred in sustaining the demurrer without leave to amend because respondents had no legal authority to initiate foreclosure proceedings. She also contends the trial court erred in granting the motion to strike because her complaint “is proper and does not need to be . . . amended;

Whether because of these factors or not, the home market is still struggling according to the Standard & Poor’s Case-Shiller indexes. The sector has remained sluggish despite lower prices and interest rates due to a slowly improving economy, an abundance of foreclosures and tighter mortgage requirements.”Tighter lending standards and widespread expectations of further declines in home values have been depressing home sales on a larger scale,” said economists Ellen Zentner, Aichi Amemiy and Jeffrey Greenberg of Nomura Economics Research in a note to clients. “In addition, a growing share of distressed assets in home sales that are typically sold at a 20% discount are putting downward pressure on house prices.”

David Pelligrinelli

The panel discussion covered a number of important topics including MERS and the nominee trustee system, e-recordings, national lien registries, and notarial processes. NALTEA was represented on the panel by Dave Pelligrinelli. In addition, approximately 200 were in attendance as audience participants, many from county recorders offices across the country. NALTEA members should note that no matter what the format of land records will be, that  the value added by professional title abstractors is not “getting” the records, but it is in the analysis and interpretation of them. The need for highly skilled and certified abstractors continues. My presentation to the panel was that NALTEA wished to support a solutioin to the land records systems in the US which will allow for abstractors to provide search reports to clients will will document title status to a definitive degree. The records should be robust enough to be usable by clients, and eliminate ambiguity for end-users and liability for the searcher. Secure property ownership in the US depends upon this being able to be accomplished.

More details at the NALTEA website link.

- Dave Pelligrinelli

Since 2005 the mechanism for property purchasers to use the Phase 1 ESA process to establish “innocent owner” status has been used to mitigate liability from environmental factors resulting from prior property usage. The ASTM standard E-1527-05 and subsequent modifications allow for a property owner to perform certain due diligence as part of their purchase. Lenders are often a part of this process.

The current problem with Phase 1 ESA’s (and Phase 2 if indicated) is that the current budgets for performing these site assessments are insufficient to perform all of the steps as the standard is strictly interpreted. Mapping, soil sampling, groundwater topography, and records analysis are all expensive engineering projects which do not always fit in the budget set aside for the transaction. This is especially noticeable on small to mid-range properties. For example, a $300,000 commercial property transfer is unlikely to have $5000 available in the closing costs to perform all of the environmental, engineering, and title search due diligence described in the standard.

Environmental engineers are becoming experts at discovering methods to obtaining the necessary information using the limited resources at hand. From what is visible in the title searching industry this is apparent. Part of the problem with the ASTM standard is the idea of an environmental lien. In the land title search industry there are mechanics liens, tax liens, and child support liens, but until the early 2000′s the term “environmental lien” was not something seen in land records. The standard described the types of records which could be considered to be an environmental lien many of which were not a “lien” in the traditional sense of the real estate industry.

Any time there is an official record describing a financial responsibility or limitation attached to a property originating from something relating to the environment or toxicity, that was to be categorized as an environmental lien. Many of these would not be found in the land records office where deeds and liens are filed. They can sometimes be located in records from professional licensing divisions, wildlife agencies, and even law enforcement records.

The ownership history provision of the ASTM standard is also problematic. It could be interpreted in requiring an official chain of title report back to 1940. However on a typical commercial property a “chain of title” report as performed by a certified title abstractor could cost $1000′s. In many cases the same information can be discovered using other methods. We find that less than 30% of Phase 1′s which need an environmental liens search end up needing the chain of title. Most of the this 30% are associated with projects being performed by government agencies or larger corporations where budget is less of an issue which is probably not a coincidence.

We have yet to see a case where innocent owner liability has been challenged due to not meeting the full ASTM standards. Most EE firms we speak with agree that doing as much searching as possible is the best answer. Since the standard itself is ambiguous and is often interpreted in various ways, it is better to do some searching in each area of the requirements rather than to ignore one aspect (such as chain of title) altogether.

Phase 1 ESA providers are in the difficult position of matching project budgets with the reality of the search scope. The most skilled firms have discovered excellent methods for reasonably meeting both.

A neighborhood with foreclosures is already under financial pressure as values drop, and is often under strain by job losses which are behind the foreclosures. The local community will also realize higher costs to its municipal budget. Police calls to these neighborhoods will increase and support programs will realize greater applications for financial assistance. Vacant properties need more outside attention just to keep them viable, whether from neighbors or local government. Some servicers report that between 10 and 20 percent of properties are vacant at the time they initiate foreclosure, and by the completion of a foreclosure sale, about 40 percent to 50 percent are vacant.

Of course all of these costs are hitting at the same time that property tax revenues is declining. County budgets often rely of property taxes for most of their income. “Because of the time it often takes for property assessments to reflect falling home values, the bust that began in 2007 has just begun to ravage tax revenue in communities nationwide. The problem is unlikely to subside soon” the Seattle Times reports. “many local governments weathered the early years of the financial crisis in part because the property-tax revenue they rely upon so heavily held steady or increased as a result of assessments that still reflected inflated prices. Many municipalities now are being forced to recognize the collapse in home prices and the shrinking tax base that comes with it. At the same time, they are seeing state and federal aid dry up.”

I believe that municipal budget problems may be one of the most serious problems to be faced in the coming years. Since 2007 this issue has been a concern in many financial reports but has not been a mainstream issue. Some recent developments have been reported here.

In the commercial property market some building owners have created a mechanism to evade property taxes on expensive properties. One such scheme was discovered almost by accident and has resulted in many counties wondering how many more scenarios are out there. Properties are normally reassessed when there is an ownership change, and taxes go up accordingly. Commercial properties are often owned by a corporation rather than an individual so that the ownership transfer can be concealed by simply changing the shareholders of the corporation rather than titling the property in a new corporate name. This is supposed to be reported to the tax assessor but when millions of dollars are at stake there are sometimes methods to avoid this.

In a San Francisco case, billion-dollar companies conspired to conceal a skyscraper’s change of ownership, depriving the city of millions of dollars in tax payments. The scheme was sniffed out not by proactive city employees but private attorneys litigation the case of a terminated lease between the large complex and a small sandwich shop. The case plodded through court for nearly 18 years, spinning such a convoluted web of litigation that, at one point, the city sued itself. The article is a fascinating story in itself, and the underlying method of tax avoidance is troubling. The story describes how the building was transferred without triggering an ownership change: ”They dotted every I and crossed every T to ensure they had 100 percent complete control of the property, even though there was no deed in their name.”

The City eventually was paid $23 million after 20 years of dispute and a series of chance discoveries triggered by the complaints of the disgruntled sandwich-maker and legwork undertaken by private individuals — which city employees initially blew off. Government agencies which were interviewed for the story report that their budgets do not provide enough manpower to audit building records to discover more tax revenue for their budgets.

In reality the term “refinance” is incorrect. The existing mortgage was not refinanced or modified, what actually occurs is that a new mortgage is obtained, and the prior loan is paid off. Even when the new lender is the same bank the refinanced mortgage is actually a new loan. The new loan could be for a different amount either higher or lower than the old one which made cash-out refinances possible as property values rose, at least on paper.

So the mechanism for this process was that a new loan is created and the title agency or attorney which performs the closing takes the funds from the new loan and pays off the prior lender who receives the funds to credit the loan balance to zero. That is not enough however to clear the old mortgage off of the property title. The loan balance at the bank may show a zero balance, but unless the title documents in the official county land records show the loan being removed from the title that mortgage will continue to exist as a cloud on title. In many cases a property owner would receive the paid off loan papers from the bank but not be aware that the lien was not removed from the title.

In order to do this the lender would need to create and sign a legal document called a mortgage release, which is then presented to the county recorders office for recording on title. The process of preparing, transporting, and recording the document could cost upwards of $150 including county fees. Over the past decade we have seen that many mortgage releases were never filed especially when the lenders were overworked with new loans. In some cases the borrower had to ask for the release documents specifically. Whether it was a money saving technique or simply oversight many mortgage releases went without being executed.

When doing millions of title searches over the years we have found properties with multiple mortgages because of this phenomenon, as reported in 2007 and 2008. If this is detected early, the property owner can normally request a release from the lender and fix the problem. If an extensive period of time has elapsed it is often difficult to obtain the relase as the lender my have been acquired by another bank, or be out of business. Even when the lender is still around, an old loan might be difficult to track down and get the authorized signatures for. Now it seems that some property owners are discovering this from loans paid off years ago.

MSNBC reports that more and more homeowners say that mortgages they thought were dead and buried are springing back to life, sometimes haunting them all the way into foreclosure. “The problems grew from a lot of sloppy recordkeeping that began during the housing boom, when Wall Street built a quick-and-dirty back-office operation to process mortgages quickly so lenders could sell as many loans as possible. As the loans were later sold to investors, and then resold around the world, the back office system sidestepped crucial legal procedures” the article states. Diane Thompson, an attorney with the National Consumer Law Center, says she has defended hundreds of foreclosure cases, and in nearly all of them, the homeowner was not in default. “The record-keeping on the part of the mortgage servicers is not to be trusted.”

For property owners who have paid off or refinanced a mortgage in the past decade, it may be a good idea to check the property title to ensure that the old loans have been properly cleared and released from the title.

The US Department of Justice (a client of my company, AFX LLC) announced a sweeping investigation into the mortgage securitization process. “For the first time since the crisis, federal investigators will be joined by state law enforcement officials as part of a working group that, New York Attorney General Eric Schneiderman said, would launch the “broadest, deepest investigation into what blew up the economy” as reported by USA Today. “The U.S. government dispatched 55 prosecutors, FBI agents and analysts Friday to a new financial crimes enforcement unit focusing on home mortgage abuses that fueled the 2008 economic collapse.” US Attorney general Eric Holder said the new effort will involve a new collaboration of federal and state officials with collective authority to investigate abuses in all aspects of the financial services industry, including the packaging, selling and valuing of residential mortgage-backed securities.

At the other end of the spectrum is the foreclosure defense industry. Many legitimate firms and attorneys work with borrowers to help fight off overly zealous lenders. Some defenders prey upon desperate homeowners extracting fees for litle or no subsequent effort. A recent prosecution in Texas describes one alleged example. This scheme involved the use of unrelated bankruptcy cases to delay foreclosures. Since bankruptcy automatically puts a hold on any action against the debtor, properties in distress were signed over to an unrelated person already in bankruptcy to use that ongoing process to stay the foreclosure. In theory it is a creative idea. In reality it resulted in the person behind this idea Frederic Alan Gladle to plead guilty to felony fraud.

“From 2007 until his arrest in October, Gladle operated a business that helped distressed property owners delay foreclosure by paying a monthly fee — usually about $750 a month, according to prosecutors and charging documents. After clients signed up for his services, one of Gladle’s salespeople had them sign deeds transferring a fractional share — usually one one-hundredth — of their distressed property, the documents said. The shares were transferred to an unrelated person who had previously filed a bankruptcy petition in court, the documents said. Those people were unaware that Gladle was using their names, which were obtained from online court records, the documents said. Gladle, or “a co-schemer operating at his direction,” would then send a copy of the fractional deed and a copy of the unrelated person’s bankruptcy petition to the lender that was expected to foreclose, the documents said. Because bankruptcy proceedings automatically delay foreclosure actions, the lender would not be able to immediately foreclose on Gladle’s client’s property, the documents said.”

Forbes Magazine calls the housing market “dead” even though other segments of the economy appear to be improving. “Housing remains in the gutter, as the latest Case-Shiller Home Price Indices suggest.  Prices have barely moved off their crisis lows despite unprecedented support from the Federal Reserve. “

A separate Forbes article is titled “Why You Should Wait to Buy a House.” The article offers a bullet point list of reasons why staying on the sidelines would be prudent, including the following:

• Strategic defaults, foreclosures and short sales all force prices lower
• High levels of underwater mortgages
• A “shadow” inventory of unsold homes held by banks will put pressure on prices when these homes are marketed

Business Insider takes this idea a step further and calls the idea of home ownership itself a “fraud.” The article outlines how all of the intervention to promote mortgages, bail out banks, delay foreclosures, and force modifications have made the housing market dysfunctional and that the solution is to let “home prices drop low enough that investors will want to buy them.”