Deborah Orr, Broker Unique Properties of Florida
With the unprecedented number of foreclosures today, everybody wants to jump on the bandwagon and get a really good deal on a foreclosed property but the risks associated with the purchase of bank owned properties may not offset the benefits of buying a foreclosed property.
Purchasers of REO's (Real Estate Owned by banks) or any real estate, for that matter, need to look more closely at what they are getting for many reasons but this article will exlusively address title issues.
An "estate" is the TYPE ownership interest that someone has in real property.
1) "Fee Simple Estates" - ONE person has "exclusive" right to use the property in any way they choose (rent it, sell it, will it to heirs).
2) "Joint Estates" - More than one person has simultaneous rights to the property. The types of joint estates include:
• Joint Tenancy
• Tenancy in Common
• Tenancy by the Entirety
When interest in real estate is transferred, a "deed" is given from the seller to the buyer. This deed to the property generally infers some sort of "warranty" or guarantee that the seller actually has the interest in this property that you are paying for. It's very important to understand the type of deed that a seller is giving you. In Florida, there are 4 different types of Statutory Deeds (abbreviated deeds recognized in state law) where certain guarantees are "implied" without really spelling out every covenant. Each type of deed gives different levels of protection to the buyer:
• General warranty deeds - expressly guarantees that seller is giving you a "free and clear" marketable title
• Special warranty deeds - guarantees that seller has the right to sell and didn't encumber it but doesn't guarantee against any encumbrances that may have existed prior to seller taking ownership.
• Bargain and sale deeds - guarantees that seller didn't give this property to anybody else but no guarantee that seller even has the right to transfer it to buyer.
• Quitclaim deeds - makes no guarantee that seller has any rights but if they do, they are transferring them to buyer.
One additional evidence of ownership should be noted at this point - A Certificate of Title - A certificate of title is often given as a result of a judicial foreclosure. It makes no guarantee of legal title and is merely an opinion of the title status on the day that it's issued. The buyer assumes all risks for title defects.
Most people have heard the word Securitization but few really understand what this means and how it could impact their property rights. Securitization is the process of transforming collateral or loans into traded securities. Huh?, you say. Let me simplify this. In 2003, interest rates had dropped to an unprecidented 5% and the banks decided that they wanted to find a way to increase their profits. Securitization or the pooling of mortgages and selling "shares" (bonds) of that pool to investors offered distinct advantages to lenders.
- Securitization turned long term mortgages into liquid money thereby allowing banks to originate more loans
- Securitization transferred the risk to investors (including mutual and pension funds) - That's where your pension went!
Now in their quest for profit, the banks forgot one little thing - the US Constitution and an American's right to face their accuser. How does that relate, you ask. Well most states require the "owner" of a mortgage to file a foreclosure and since a mortgage became part of a pool, technically the lender first had to figure out which pool that particular mortgage became part of AND then they had to find out every investor who bought a share of that pool since the bank no longer owned the mortgage.
Some (including judges) might say, "what's the big deal? They borrowed the money from the bank so they owe it, right?" Well, there used to be something known as ethics and since the bank already got the money from the investor and they can't find the investors (as if they'd pay them if they could), we must ask "is the bank really entitled to be paid again?" And what about that pesky Constitutional Right? Below is a representation of "mortgage securitization"and where the money goes. Pretty cool if you are the originating bank.
MERS stands for Mortgage Electronic Registration Services, a private company that keeps track of mortgage loans. Lenders thought this was a great idea because now they didn't have to keep all that paper that they make borrowers sign. So the banks started using MERS to keep track of mortgage loans and transfers and the original paperwork signed by the borrowers entered an unretrievable black hole which sometimes came from shredding those documents. Again, something was overlooked in this effort to "streamline" mortgages and that was that many states require recording of the records related to the transfer of property with the county Clerk's office to maintain the integrity of those records. Oops! Ok, so they forgot to record transfers of ownership of mortgages and now the original records are missing. We all lose paperwork once in awhile. There must be a photocopy somewhere, right? Well....... we still have some problems.
- Lost Notes - If someone is allowed to foreclose with a photocopy of a mortgage, what happens if someone else later claims that they bought the mortgage and produces the original paperwork?
- Mortgages severed from Notes - A mortgage is merely security for a "note" which is the promise to pay. The problem with MERS is that the mortgage which grants the power to foreclose is severed from the note which creates the obligation to pay.
- Failure to record transfers and Pay Taxes - In most states, excise taxes must be paid when the transfer of a deed is recorded. We call them DOC (documentary) stamps in Florida. Since banks using MERS to keep track of transfers of ownership "forgot" to record transfers with County officials didn't pay the DOC stamps. Banks continue to assert that they are exempt from paying these taxes but laws expressly state that Federally chartered banks are NOT government entities and are NOT EXEMPT from paying DOC stamps. At an average sales price of $150,000 per property and over 300,000 homes currently in some state of foreclosure, we are looking at $45 Billion is property or over $315 Million in lost taxes in Florida for current foreclosures alone for the "upcoming" foreclosures! This doesn't address the Millions that they haven't paid in DOC stamps till now. That's a total of about 1/2 BILLION in taxes evaded by lenders and servicers and nobody is doing a thing about it.
Sounds like a mess, huh? Well it gets even worse, if you could belief that.
ROBOSIGNING AND BANK FRAUD
At first, it was easy for banks to foreclose on defaulted mortgages because nobody really understood or even imagined that the bank did not follow recordkeeping laws, so people just rolled over and the banks won foreclosures by default. Then those nosy defense lawyers got involved and in states that required judicial foreclosure, people started defending themselves. Very often, banks would not respond to the defendants answer to the foreclosure complaint and the open foreclosure cases have been sitting in the system, often for years. Rather than dismissing the cases for lack of standing, the courts let them sit there and the banks pumped money into local politicians getting laws passed in their favor which is exactly what happened in Florida with the passing of HB-87.
SO DO I OWN IT OR NOT?
First I need to say that I am not an attorney and if you have concerns about whether you own property that you have purchased, you should contact an attorney for advise. OK, so now what I learned about court rulings after 13 years as a state investigator.
As we all know, laws are not always interpreted the same and we have generally relied on "precedent" (previous rulings) for guidance on how other judges have interpreted the law. These precedents often depended on "who had the best lawyer" (as in the OJ Simpson case). But today we can't even get the best lawyers that money can buy and hope to win a foreclosure case that is based on sound historic interpretations. Today it appears to be more about "who owns the judge". The judges don't really like being put in that position because after all they are supposed to be "blind" or impartial and not influenced by money, race, sex, threats etc. It seems however, that in the case of foreclosures at least, some judges have changed the interpretation of Blind Justice to mean "blind to what's right or wrong" and doing what I'm being told to do by the people who appointed me. In order to make these "honorable" judges feel better, their lawmakers have passed a law, in a very shifty way which changes Florida homeowners' constitutional rights to defend themselves in the courts (see HB87) So today, a delinquent homeowner with valid defenses against foreclosure would have had a better chance of getting a fair shake in the wild west than they do in todays courtrooms. As if this all wasn't strange enough, many lawyers (fka sharks) are coming to the rescue of these wronged homeowners and sticking their necks out to stand up to judges, often at their own peril, to do what's right. What a turn of events, huh?
You should care because every day those "deadbeats" are waking up to the fact that crimes were committed against them and they are getting mad. Every day, more banker wrongdoing is uncovered that threatens ALL real estate ownership in the US.
Consider this. The system that we rely on to determine who owns real property is the recording of a deed and mortgage transfers in the County Clerk of the Court's Office. Recent audits of real estate records in various Clerks of Court have revealed that as many as 75% of mortgage assignments were invalid.
You may still be asking, "How does this affect me?" Well the integrity of our property records has been severely compromised by forged and fraudulent records filed by lenders and mortgage servicers. The fact is that these records may be "irretrievably corrupted" and can affect any property owner who refinanced or got a new mortgage or line of credit since 2006. A corrupted title can affect unsuspecting owner's ability to:
- Sell the property and/or
- Obtain title insurance
So now that you know that the integrity of our real property records has been destroyed and that DOC stamps may be owed on numerous mortgage transfers, there is one last thing you must know before you decide to try to make big profits buying up those bank owned foreclosed properties. When banks sell foreclosed properties, they generally provide a "certificate of title" or "special warranty deed" rather than a generally warranty deed. Go back to the paragraph on "Deeds" for a shock. This means that the bank provides no warranty regarding the marketability of the title to the property that they are selling. A title search should uncover any recorded liens against a property but the reason that we purchase title insurance is to cover clouds on the property that did not show up on a title search. With all of the wrongful foreclosures, falsified records and unrecorded transfers, its just a matter of time before title insurers decide that the risk is too great and begin to limit coverage or refuse to insure "at risk" purchases.
Consequently, more than any time in history, buyers must beware because we are treading on unexplored territory and with few exceptions, the courts and legislators are not adequately protecting our rights as homeowners.