New Problems With Buying Foreclosure Homes

By Gina Pogol
Mortgage Credit Problems Columnist

Jim Asks: Dear Gina, I found a fantastic deal on a foreclosure house. I have bad credit but got a hard money lender to finance the deal. Now the lender says I can't get the loan because he can't get title insurance! Is title insurance required because I have bad credit? Is it because I am using a hard money lender? Are there bad credit lenders that don't require it?

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Gina Says:

Dear Jim,

This trouble getting title insurance is relatively new. It has nothing to do with you or your credit problems. It's the fact that the property was foreclosed on that is causing the hangup.

Foreclosure problems invalidate the process

You may have heard that some lenders have stopped processing foreclosures recently because of problems with their paperwork. In some cases, employees were signing off on thousands of foreclosures each day without verifying the validity of these actions. This has been dubbed "robo-signing" in the press.

Other cases have come to light in which mortgage servicers foreclosed on the wrong house (even on one home that had no mortgage on it!). And finally, even when the lender has every right to proceed, the paperwork may have some flaw or it may not all be in order or every procedure may not have been followed exactly as it should have been--the sheer volume in foreclosure activity almost guarantees that this happens to some extent.

Who owns this house, anyway?

So imagine that all over the country, even when banks won their foreclosure lawsuits, took title to homes, and sold the houses to independent third parties, the original homeowners can still sue and re-take possession and ownership of the homes. So those independent third parties are making claims against their title insurance companies in droves--something that in normal times almost never happens. I bet you don't know a single person who has collected from a title insurance company.

Title companies are now refusing to insure purchases of foreclosure homes because they are taking a bath on them!

If it were me....

In addition, lenders like Wells Fargo are now issuing special deeds that do not warrant that they have the right to transfer ownership of the property. Instead, they only transfer whatever rights they have to transfer, and if they messed up the foreclosure process and have no rights to transfer, well, the lender still keeps its money. The former homeowner gets his or her house back. You are the one twisting in the wind.

Your hard money lender has decided to take a pass. Until the mess with foreclosure homes gets sorted out, I suggest that you do as well.



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