What if you bought a property only to find out that it had been foreclosed upon by robo-signers? Can the previous owner come after you and demand you turn over the deed? And will they?
The Walk-Away Scenario
The property’s prior owner(s) may not care to dispute the foreclosure particularly if the property was underwater anyway (the outstanding mortgage exceeds the property’s fair market value).
There is a reason for that: In a number of states, the lender has no recourse (aside from the foreclosure sale) and cannot go after a borrower who walks away from a first mortgage. The lender in this case, in non-recourse walkaway states such as Nevada or California, must absorb their losses (this only applies to the first mortgage).
So if the property is located in a no-recourse state and the previous homeowner was underwater, it is unlikely they will want to dispute the foreclosure.
If the prior owner does dispute the foreclosure (most likely in one of the states with a judicial foreclosure), one of several scenarios could unfold.
The Merits of Title Insurance Being Put To A Test
If the new buyer of the foreclosed property has obtained an owner’s title insurance, he or she should be just fine.
Should the prior owner of the foreclosed property be able to challenge the foreclosure (be it on the grounds of robo-signing or other missteps), the title company will attempt to settle the matter to satisfy the prior owner’s claim to the title. In most likelihood, the property would not have to change hands in the process. Although there is no guarantee that this scenario will work out for you as expected, your interests are protected within the limitations of your title insurance policy.
If what you paid for is a lender’s title policy, however, you could end up in trouble because your equity in the property (your share of ownership as opposed to the lender’s share) is most likely not covered by the policy and thus not protected.
What If You Have No Title Insurance?
This is where the difference between a title search report and a title insurance looms large.
Your attorney may have conducted a thorough title search but it means nothing in the light of the facts which may have surfaced since (such as robo-signing). Even though he or she certified the title report, the attorney merely owes you an apology. Without the protection of title insurance, you are basically on your own.
In most states, you the buyer are still protected if you purchased the property in good faith (which you have unless, say, you were the robo-signer). You will be able to defend your right to the title, but be prepared to empty your pockets in what may turn out to be a long fight. In the meantime, you will not be able to sell the property, borrow against it or refinance.
What You Can Do Now
You could try to locate and contact the prior owner. You may be able to convince them to waive their rights to the title for a small payment in cash. After all, they have already moved out of the property and may want to close that chapter once and for all. Be sure to treat the other party with respect, to make a convincing argument, and to part peacefully.
If you purchased a REO from a bank you can always argue it was their fault. It would be hard to dispute that.