Title Search

As described in our prior article outlining the Top 6 Developments For The Title Industry in 2012, some news is already starting to appear on these issues.

I suspect that the MERS/ nominee trustee controversy will settle down, especially in he title records arena. A Supreme Court case in Connecticut demonstrates that trend, as they validated the right for MERS to foreclose. There still may be some legal and regulatory backlash for prior actions, but going forward most of this will follow this trend.

The fallout continues to hit municipal budgets, as seen in Los Angeles where they face a $72 million dollar deficit. The city is looking at for reductions of $4 million to the Los Angeles Police Department, $1.7 million to the city attorney’s office and $1.3 million to the Bureau of Street Services, which is charged with maintaining the city’s 6,500-mile network of roads and highways. The city attorney is worried about the cuts, ”Obviously, you can’t operate a prosecution and litigation office with part-time lawyers, and certainly not when our caseloads have stayed the same and in some cases, increased.”

The market is still in freefall, but some analysts are curiously bullish on the future. While Goldman Sachs sees a bottoming in the market and equilibrium in 2013, CNBC is skeptical, asking: “Are we just supposed to ignore the distressed market? What about the fact that in some cities more than half of the properties selling are distressed? And what about the fact that there are more distressed properties coming to market, as the banks ramp up the long-stalled foreclosure process? And how about appraisers using distressed properties as comps to non-distressed properties?

“Why, land is the only thing in the world worth workin’ for, worth fightin’ for, worth dyin’ for, because it’s the only thing that lasts. ” – Gerald O’hara Gone With The Wind

“Just as man can’t exist without his body, so no rights can exist without the right to translate one’s rights into reality, to think, to work and keep the results, which means: the right of property.”  ~Ayn Rand

“No man but feels more of a man in the world if he have a bit of ground that he can call his own.  However small it is on the surface, it is four thousand miles deep; and that is a very handsome property.”  ~Charles Dudley Warner

Ownership of a persons home is a foundation of human security. “Home ownership” is the face of what is often called the American Dream. The past 5 years have caused many to reevaluate the impact which ownership has on their lives, and whether the impact is always positive.

Home buyers have always recognized the possibility that prices will fluctuate, although until 2006 the idea that home values would drop was largely dismissed as improbable. In fact, the chief economist for the National Association of Realtors was so sure of future price growth that he stated “there is no risk of a national housing bubble” in 2002. Leaving aside the threat of price declines, an even less expected and potentially more dangerous risk has emerged for prperty ownership. The idea that the ownership of a property, or even a specific property claim is invalid was virtually unthinkable even 4 years ago. Today property interests from mortgage rights to outright ownership are being challenged in a multitude of ways.

Homeowners who have purchased properties in good faith are finding that their ownership may be in question if a prior foreclosure on the property may have been conducted improperly. Even if the foreclosure event occurred years in the past and several subsequent ownership transfers took place, the entire chain of title can be at risk. Foreclosed borrowers are using a multitude of mechanisms to challenge the loss of their homes, including quiet title actions, lawsuits, and title insurance claims.

Current foreclosures are being hampered by foreclosure defense efforts which cause lenders to spend a great deal of time and effort demonstrating a valid claim to the title. In fact, an entire state has foreclosures virtually on hold while waiting for a pivotal court case to be decided. The issue in the case causing lenders to pause is the question of whether a foreclosure notice is made invalid because the lender filed a notice of intent to foreclose with the servicer listed on the notice instead of the lender. The use of nominee trustee systems such as MERS to track mortgage ownership calls into question millions of mortgages issued by lenders, totaling trillions of dollars in property interests. Even if the lender side acted inappropriately in their lending process, invalidating trillions of dollars in property rights would be a security problem for property rights, and the economy in general.

Fraudsters are using the turmoil in the real estate market as cover for various schemes. Deed fraud is exploding in popularity, with groups moving through areas claiming squatters rights on vacant homes. Adverse possession rules were designed to allow good faith land users to be compensated for their efforts. Career criminals are grabbing homes to rent out to unsuspecting tenants. A rash of these actions in Texas is a good example of how this works. The schemes are hard to unravel because of a loophole in a state law that allows people to suddenly claim supposedly abandoned sections of property if no owner is on the spot to challenge such a claim. But the law doesn’t distinguish between a claim on a $27 section of sod and one on a $2.7 million mansion with an elevator, three master bedrooms, a five-car garage and a pond with fish in the back yard. “File the proper paperwork, pay a $16 filing fee, keep up with the property taxes and live in the house three years or more, and even the courts may not be able to evict you.”

If that isn’t enough to worry about, the “Occupy” movement is using foreclosure sales as a target for demonstrations, disrupting a process designed to ease the backlog of built up property inventory. Protesters interrupt the bidding process to guilt buyers into backing off purchases out of sympathy for evicted borrowers

The consequences may be playing out in the market itself. CNBC reports that ownership levels are sinking to levels below anything on record for decades. Even the most optimistic predictions don’t have ownership returning until 2025. Ownership and price woes make headlines, but negative equity adds to the problem as a hidden factor. As home prices refuse to stabilize, and in fact continue to fall, negative equity will only increase. The vast majority of the ten plus million people who are underwater are still paying their mortgages, but they are deeply underwater, 30 percent and higher. That will take a long time to correct, and will stagnate much of the market for years to come, as these owners are unable to sell.

“We take care of our health, we lay up money, we make our roof tight and our clothing sufficient, but who provides wisely that he shall not be wanting the best property of all – friends?”  ~Ralph Waldo Emerson

Even as recently as 5 years ago, foreclosure properties represented a relatively small portion of transactions. Consequently, the need for title search expertise on this type of property was not significant. Today foreclosures represent a large percentage of property activity, more than half in some areas. the foreclosures are also more complex, due to assignment chain issues and foreclosure defense methods.

Professional title abstractors recognize the increased skill level necessary when running a title search on a foreclosure property. In fact, some searchers do not do foreclosures because they are so much more difficult. Normal title search methods are often insufficient on complicated foreclosures. There can be questions about ownership of the mortgage, whether any prior lienholders have remaining claim to a property, and a necessity to search more deeply into releases of  liens and mortgages. For example, Wells Fargo recently discovered it had lost claims to a property due to a tax lien which wiped out its lien position. A title abstractor would need to be aware of this provision when running a search.

Getting the search results correct on a foreclosure requires a higher standard of care than on a “normal” property. For title abstractors in the industry today, it is important to keep search skills at a high level because foreclosures are not going away soon. In fact, the Federal Reserve reported today that the mortgage delinquency level rose again, meaning that more foreclosures are looming. In addition, cure rates of existing delinquencies are dropping, meaning more of those will end up in foreclosure.

This month Tiffanie Tedesco, AFX Title’s Director of Operations, gained the distinction of being only the 54^th Certified Title Abstractor by the National Association of Land Title Examiners and Abstractors (NALTEA). NALTEA is the largest organization within the Title Abstracting community. Tedesco becomes a member of an elite group of Title Abstractors that has successfully completed NALTEA’s highly regimented training and certification program.

AFX Title is committed to the ongoing education and training of its employees.  Tedesco has been with AFX for over 11 years and is the backbone of the company’s operation. Tedesco will be bringing this advanced training to the daily operations at AFX Title.  With Tedesco’s new title of Certified Title Abstractor, AFX Title’s customers can be confident that one of the most qualified Abstractors in the country is managing their Title Searches.

MSNBC –  ”The U.S. foreclosure rate has climbed to its highest level in seven months, suggesting that lenders are moving beyond a “robo-signing” scandal that had temporarily slowed bank takeovers, according to a private firm that tracks the activity. Foreclosure filings — including default notices, scheduled auctions, and bank repossessions — were issued on 230,678 homes in October, up 7 percent from September but 31 percent below the level of October 2010, according to the report issued by RealtyTrac Thursday.”

Reuters – Home prices won’t bottom out.  - “Myriad problems are going to weigh down the housing market for months to come. The lingering malaise in the economy has triggered a new wave of defaults and foreclosures. After five straight quarterly drops, foreclosures nationwide shot up 14 percent from the second to third quarter this year. Yet as the average 30-year mortgage rate has slipped below 4 percent, the combination of employment insecurity and unusually tight standards for lending are discouraging buyers en masse.”

There are good reasons for title insurers to be cautious when writing title insurance on a property where there has been a prior foreclosure. Title policies insure against defects on title often resulting from errors and document problems. A foreclosure introduces many more ways errors can get on title.

A foreclosure is a property transfer with the important difference that the parties who are exchanging property rights are in an adversarial relationship. This potentially exposes any potential paperwork error to scrutiny. Debtors foreclosure defense techniques include analyzing mortgages and assignments for technical errors, quiet title actions, slander of title, and demand for note production.

Lenders bring notice of default recordings, lis pendens, foreclosure suits, and sheriffs sale auctions in their arsenal. Each of these drastic measures is a potential source of defect to the property title. Unlike a voluntary warranty deed where the parties come together cooperatively, a foreclosure is a conflict from the first day.

Incorrect actions can have disastrous results. When something seemingly insignificant as a single signature is incorrect, the entire title integrity can be called into question. Such is the case with this example of mortgage assignment processing.

“If someone’s home was foreclosed on using improper documents, it calls into question the validity or legality of the foreclosure itself,” said John Kelleher, Chief Deputy Attorney General for Nevada’s fraud unit. “The fraud may call into question the purchaser title rights and it could cloud their title as well.”

According to the official as a result of the scam, many Vegas residents may be living in homes they do not actually own.
“I would suggest you review your documents and bring them to an expert and an attorney.” Kelleher said.

One title insurer is refusing to issue policies on properties with a previous quiet title to extinguish a mortgage. “You are not to close any transaction where your title search includes a quiet title action to extinguish an outstanding mortgage” the Company Alert states. Insurers avoid these types of risks for good reason since their role is assisting homeowners in procuring a secure title to their home.

Home buyers should be careful when purchasing a home with a prior foreclosure, and rely on professionals to review and insure their prospective ownership interests. Remember that just because a property is not being purchased from a bank or foreclosure auction does not guarantee that it does not have a prior foreclosure history. The current or previous owner may have been the immediate owner after the foreclosure. Check the chain of title for a lurking previous foreclosure. With the high volume of properties having been in default in the past decade it is more likely a home has a foreclosure history than ever before.

Real estate records were once considered boring documents, a technicality to confirming property interests. A title search was largely a formality since errors were almost non-existent. In the past decade the number of mistakes, errors, and defects in title records has exploded. Let’s take a look at the reasons why, and the consequences. The top 5 reasons for more errors:

1. Each transaction was painstakingly documented and double checked by seasoned title search professionals. Due to a long history of low error rates, fewer resources are going into preemptive quality control.

2. Volume of transactions was low enough to where attorneys, county recorders, and title abstractors had enough time to review everything.

3. Fraudsters were not aware of the vulnerability of title records; deed fraud is a relatively new scam. More recently, the nature of real estate records has become known to a larger number of people some of whom have tried to exploit loopholes for fraud. Real estate industry insiders sometimes are the perpetrators of this.

4. Mortgage assignments were done transparently, not in a nominee trustee system like MERS.

5. Quiet title, slander of title, and quit claim deeds were obscure events not used in everyday business. More recently, these are common methods to manipulate property records and results.

The consequences:

Complacency: The expectations of a title search was that the results would match the ownership and encumbrance scenario known to the parties. Over time, title search standards lapsed to where it was easy for a new title searcher to become complacent when doing a search, because a title defect had never been seen. (See Keeping Real Estate Records Reliable)

Electronic Records: A true title search is one using official land records as provided by the county* recording office and legal documents. In the late 90′s it became more common for some searchers to use online records, electronic databases, and title plants. While these records sources do not contain all of the data in the real title office, the difference was not noticed until recently. Until the mid-2000′s the results from “online” searches were similar to a genuine title search. By using electronic search records a client could cut his search cost from $100 to maybe $45. That is a significant savings for a bank doing 100 searches. However, one missed lien or overlooked mortgage could negate all of this savings. Until the mortgage collapse and robo-signing issue hit, this was not much of a worry. (See Land Records Are Not Data)

Title Insurance: The rates for title insurance were based on historical claims rates. This means that the low instances of title claims over the past 50 years determines how much the rate is today for title insurance. Since the number of title errors was very low until recently, it is expected that title insurance claims will rise in the coming years. Another factor in boosting title insurance claims is that many policies were written using current owner searches instead of 50 year searches used until this decade, and the fact that many title searches used by insurers were outsourced to overseas backoffice locations, using only electronic records.

The security of real estate ownership is dependent upon accurate and reliable records. Allowing title search standards to deteriorate puts ownership security in jeopardy.

As lenders worked with financial institutions in the early 2000′s to develop more advanced means of funding mortgage operations, complex financial mechanisms were brought in from use in the equity markets and applied to mortgage securitization. These instruments were typically in the form of pooled debt instruments into mortgage backed securities.

One such device which exploded in popularity was the Real Estate Mortgage Investment Conduit, or REMIC. These investment vehicles are nothing new, having been used since the late 80′s. The expansion of mortgage volume and more direct contact between lender and financial markets created a perfect storm for these instruments to be implemented in the last decade.

A REMIC is a tax advantaged class of investment made viable through the Tax Reform Act of 1986. It allowed for pools of mortgages to be created as an investment fund which is exempt from many types of income taxes. This means that the REMIC itself is tax exempt. The catch is that the REMIC must be created and structured using very specific rules in order to qualify for tax exempt status. Remember that point as we get further into the discussion.

The basic rules for creating a legally intact REMIC go something like this:

• Must be created using only qualified mortgages
• Mortgages must be placed into the REMIC at startup, or committed to placement within 90 days
• Loans must be secured by real estate
• Foreclosure income may be taxable

So why is this a potential problem for mortgage markets? This is where MERS and the nominee trustee system comes in.  As the transfer and assignment of mortgages was shifted to nominee trustees such as MERS, recording in county land records was bypassed. This is now widely known. At the same time, the transfer documentation to the REMIC may also have been bypassed or neglected.  If the paper trail for documentation of the transfer was not done at the time of origination, it may place the tax exempt status of the REMIC at risk. This could throw off the entire profit model of the security.

Making it worse is the possibility that some security instruments had a set of rules for investment which only allowed for investing in quality mortgages, those meeting certain credit guidelines and not in default. This setup is for the benefit of investors so they know that their mortgage pools only contain good mortgages.

So consider this scenario. A REMIC or CMO is set up. One thousand new mortgages are used to initially set up the instrument, but due to the MERS shadow recording system the documentation for the transfer is technically not done. Fast forward 5 years later when some of the mortgages are in default and need to be foreclosed. The REMIC trustee needs to go to court to process the foreclosure, but in order to have standing to act as the owner he needs to have an assignment showing that the fund is the legal owner of the mortgage. No problem, just write up a transfer that day and be done with it. Not so fast. If the fund has a charter requiring the purchase of only quality mortgages, these delinquent mortgages can’t be acquired. The transfer form can’t be backdated either, and lenders have discovered in the whole robo-signing fiasco.

It is a complicated scenario, but has the potential to be a serious liability. The real estate crash has already resulted in REMIC’s being reclassified with different ratings (referred to as Re-REMIC). It is unknown whether the risk was distributed in these new classifications but a Wall Street Journal article quoted one banker as saying that the reason for Re-REMIC’s was to “create buyers for orphan securities that otherwise would have languished.”

The 10-Q disclosure filing of one investment provider contained warnings about their product that investment conditions have changed “suddenly and negatively and may continue to change adversely” and point to “changes in laws and regulations and industry practices.” This may be boilerplate language but it is worth noting.

One analysis of how REMIC issuers have scrambled to restructure securities to retain AAA rating was offered by this website: 

If it unknown what happened to the shareholder value as the cumulative rating was reduced.

Mortgage holders are getting hit from several directions over robo-signing, securitization, and consumer issues.

An Arizona judge issued rules for lenders to show rights in title in foreclosure cases. It does allow for some non-recorded documentation, but does place the burden on the lender. The bank “must provide evidence, in the form of assignments, endorsements or otherwise, demonstrating that it is a person entitled to enforce the note under the Uniform Commercial Code as well as a complete chain of title of the beneficial interest under the deed of trust or mortgage. Absent such a showing, a hearing on the motion may be vacated and sanctions may be imposed.”

A life insurance company who invested in Countrywide mortgages is suing bank of America over assignment chain irregularity. National Integrity Life Insurance Co., which mainly sells annuity products, is seeking at least $93.8 million after investing in certificates issued through 24 securitizations that it had believed were safe. The Goshen, N.Y.-based company contended that most of its certificates are now “junk” after Countrywide abandoned its underwriting guidelines, failed to properly assign many mortgages underlying the certificates, and failed to properly transfer notes and loan files to the relevant trusts.

Some of these paperwork problems may be behind the wild swings in foreclosure rates. “Recent state court rulings and new state laws keep changing the rules of the foreclosure game on the fly,” James Saccacio, RealtyTrac’s CEO, “creating more uncertainty in the housing market and threatening to prolong the road to a robust real estate recovery.” The pressure is artificially lowering the rate of foreclosures in Nevada. Foreclosure filings in Nevada plunged in October during the first month of a new state law stiffening foreclosure-processing requirements. Slightly more than 600 default notices were filed against homeowners through Oct. 25 in the state’s two most-populous counties, Las Vegas’s Clark County and Reno’s Washoe County. That was down from 5,360 in September.

According to mortgage industry insiders, lenders may be in denial to the depth of the problem. At a recent industry event, Laurie Goodman of Amherst Securities gave a talk where she went through a very persuasive (and conservative) analysis that there are 8.3 to 10.3 million more foreclosures than anticipated. This would be in line with the invisible inventory figures I reported on earlier this year. An attendee noted that ”given the severity of the chain of title mess and the high odds of a European banking crisis, which would wind up impacting the US economy, I found it telling that no one was willing to hedge their views with a consideration of a downside scenario.” When the question of “the little problem of failure to convey the mortgage notes as required on time” came up, one lender representative responded that “it’s just paperwork” and that “securitization is all about legal fictions.”

The indications for future market recovery in residential dos not look god this week. Several reports point to a future with lower prices, more foreclosures, and a catastrophic backlog of unsold homes. Let’s take a closer look.

Florida markets are plagued with underwater properties. Zillow figures estimate that roughly 47 percent of all single family homes with a mortgage in the three counties are “underwater,” up from 42 percent a year ago. Values have fallen about 55 since peaking in June 2006. About 44 percent of all South Florida homes sold in September sold for a loss.

Foreclosure backlogs could take “decades” to clear. Foreclosure sales are moving so slowly in half the states that at the current pace, it will take more than eight years on average to clear the homes in foreclosure or with seriously delinquent mortgages. Some states fare much worse. In New York and New Jersey, where courts imposed new rules last fall, it would take lenders more than 50 years at their current pace to clear pipelines of homes that are seriously delinquent or already in the foreclosure process, according to LPS Applied Analytics, which collects data on nearly 40 million mortgage loans. In New York, foreclosure lawyers now must affirm that they reviewed documents and asked lenders to verify their accuracy, too.

It could get worse since foreclosure filings are on the rise. Alan Ziobrowski associate professor at Georgia State University’s Department of Real Estate says that a new wave of defaults could come from previously current borrowers who have had enough. “For a while you hang on to the hope that things will turn around and you will be back in the game again,” Ziobrowski said. “But the lower the prices go the less likely that becomes.

Prices are down as well. U.S. home prices fell in September for a second month in a row, pressured by weak demand and cheap distressed sales, data analysis firm CoreLogic Inc said on Monday. In 75% of US metro areas, prices are down. Nationwide, “distressed property,” including foreclosures and homes at risk of foreclosure, accounted for 30% of third-quarter transactions, down from 33% in the second quarter.