Foreclosure Moratorium Creates Challenges for Buyers

All over the country, major banks have enacted foreclosure moratoriums while they sort out paperwork and procedural issues. The causes of the banks’ paperwork snafus are likely to fuel debate for months, leaving buyers of foreclosed homes caught up in the disarray.

I have a contract to buy a foreclosed home. What happens now?

If you’re buying a foreclosed home, hire an attorney to represent you in the purchase transaction by looking over your contract, working with your real estate agent on contingencies, confirming that you will receive clear title to the property, and making sure your closing is done right.

Foreclosures in limbo are likely to be withdrawn from the market. If you’ve contracted to buy a foreclosed home, you may have to wait for the foreclosure moratorium to end before you can close on the transaction, or you may have the opportunity to cancel the transaction and look for and buy a home that’s not caught up in the foreclosure moratorium.

Christopher T. Immel, a foreclosure attorney with Ice Legal, P.A., in West Palm Beach, Fla., says the market generally has concerns that because foreclosures have proceeded in questionable manner, a buyer might not get clear title.

New York attorney Wayne Greenwald says problems are particularly difficult in nonjudicial foreclosures, those that don’t go through a court but are governed by state statutes. “In such situations, no court has determined if someone’s rights have been trampled. There’s no protection for either side,” he says.

In states like New York, where judicial foreclosures—those that go through courts—are required, there’s some judicial oversight of the process and an opportunity for each party to challenge the paperwork. The buyer has a lot more security that everything is being done right, says Greenwald.

What do I need to do to protect myself if I’m buying a foreclosed home?

To make sure you’re protected from any problems with the title of your new home, be sure you obtain an owner’s title policy from the title company doing your closing. That policy protects you from losses caused by title problems. It’s different from the lender’s title insurance policy that you have to buy when you get a mortgage. The lender’s title policy protects the lender, not the home owner, from losses caused by title problems.

I bought a foreclosed home. Can the previous owner take it away from me now? 

If you bought a property that has been through foreclosure, you probably have numerous defenses available to assure you can continue your ownership, according to the American Land Title Association.

If you bought an owner’s title policy, your title company would defend you in a lawsuit filed by the former owners. The company’s attorney would likely argue that the foreclosure was done correctly, that the paperwork problems weren’t significant, and that it’s too late to go back and re-argue the foreclosure.

“It’s unlikely that a court will take property from an innocent current home owner and return it to a previous home owner who failed to make payments on the loan subject to the foreclosure,” says Kurt Pfotenhauer, ALTA’s CEO.

Foreclosure attorney Immel agrees it’s unlikely. He believes that once you’re in the home, it could be an uphill battle to get you out, even if the former owner, evicted after foreclosure, believes his foreclosure was handled improperly.

Attorney Greenwald adds that in judicial foreclosures, the eviction of someone who bought a foreclosed house is highly unlikely. There’s a somewhat greater possibility in a nonjudicial foreclosure, because the paperwork might have been handled incorrectly. But because the original home owner has to come up with so much money to redeem his home, Greenwald doesn’t think it is likely.

And available cash is one of the reasons that redemption (the original owner buys back the home from the person who bought it at foreclosure) and reinstatement (the original owner catches up on payments in default, including fees and penalties) are among the rarest tactics to retrieve a home.

The original owners must come up with a lot of cash to get the home back, which is unlikely because the same situation that led the person to foreclosure probably will keep that person from getting the cash or financing. In addition, the home must be located in a state that supports these tactics.

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These articles are not intended to give legal or tax advice, and you should consult your attorney or financial advisor for additional information.

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