Foreclosed from Foreclosure?
Purchasing foreclosed real estate has never been easy or risk-free. In Ohio, all purchases are “AS-IS” and purchasers generally do not have an opportunity to inspect the property. A 10% cash deposit is due upon bidding and payment in full is due within thirty days with the threat of contempt of court if the purchase price is not paid. And the risks to purchasers are increasing.
Recently several banks have elected to stop residential foreclosures due to questions about their internal procedures. The attorneys general of all 50 states are now conducting a joint investigation into possible false or unverified information contained in affidavits and improper notarization of affidavits. Remedies for homeowners whose homes have been wrongfully foreclosed are determined by state law, but may include an unwinding of the foreclosure and returning legal title to the borrower. But what happens when that home has been purchased by a third party at foreclosure sale? Or flipped to another owner?
If the new owner purchased an owner’s policy of title insurance, then the title company must defend the homeowner and provide damages up to the amount of the policy. If residential owners elected to purchase an owner’s policies at all, it is likely that the amount of the policy was limited to the purchase price of the home. This amount may be inadequate to fully compensate an owner who has made improvements to the home.
Further, going forward, it will be even more difficult to obtain any amount of title insurance on a foreclosed home. Old Republic National Title Insurance has changed its underwriting and will no longer issue new policies for properties which have been foreclosed by certain lenders. Stewart Title Guaranty Company has issued guidelines to its agents that limit policies for properties foreclosed by certain lenders in states where a foreclosure moratorium is in place. I expect the other two major national underwriters, First American Title Insurance Company and Fidelity National Title Group, to restrict the number of policies issued on foreclosed residential property in the near term.
The immediate effect of the tightening on issuing policies will be lenders’ unwillingness to lend to purchasers of foreclosed properties without a lender’s policy of title insurance. For the bargain hunting property buyer, a short sale can provide an end run around this issue since there will be a deed coming from the owner. Title companies may also be willing to issue a policy following a foreclosure if the foreclosed owner delivers a quit claim deed, although the former owners are likely to require a payment in exchange for the deed. Sellers of residential properties with a foreclosure in the chain of title may also want to reconsider delivering a warranty deed at closing and opt for a quit claim deed. If the limits of their own title insurance policy are less than the purchase price, the sellers could find themselves at risk if a foreclosure is overturned.
So, be careful out there !
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A helpful reminder to lenders – if you’re going to foreclose, read the note and mortgage and do what they say. In a recent Ohio Court of Appeals case, the bank failed to follow these instructions and was rewarded by having its foreclosure complaint dismissed. 
