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I'm hearing from readers who wonder how the foreclosure frauds might affect their own homes or real estate investments. The answer is not at all, for homeowners who are peacefully paying off their loans on time. If you're thinking of investing in real estate, however, your strategies might change.
There's nothing new about home foreclosure mills. They represent yet another poorly regulated corner of the banking industry that consumer groups have been challenging for years. Under the pressure of lawsuits, the nasty facts have recently started tumbling out. Some of the leading mortgage servicers including Bank of America, JPMorgan Chase and GMAC Home Mortgage concede that they've mistakenly filed for foreclosure based on faulty or even forged affidavits. Various types of moratoriums are now in effect nationwide. In Connecticut and all the other states, attorneys general have launched investigations.
What does this mean to people buying and selling homes? And what should investors do?
Average home prices in Fairfield County won't be affected. Prices should keep their course in communities where foreclosures aren't a major problem. However, the moratoriums will lengthen the time it takes for the national real estate market to recover. The record inventory of foreclosed homes hangs over values like a sword.
Anyone who already bought a foreclosed property is safe. "The law strongly protects the finality of foreclosure sales," says Bob Lawless, a law professor at the University of Illinois. No court or sheriff will take away a house, commercial property or piece of land that was purchased in good faith, even if the paperwork turns out to be bad. Any errors in the title fall entirely into the pocket of your title insurance company. (You do own title insurance, right?)
Lender incompetence might create a gap in your chain of title after you buy. That happens when a loan is sold and resold among investors without proper documentation. Such a gap turned up in the title to an apartment I was buying in 2004. I went through with the transaction but put part of the payment into an escrow account. The seller collected his money only after his title insurance company cleaned up the problem, which took about six months.
Homes with bad titles could be investment opportunities. The documentation problem is invariably solved, says John Reed, author of "How to Increase the Value of Real Estate." You might be able to pick up the property at a bargain price, rent it out for a while and sell at a profit when the title is eventually cured. In real estate, there's no mistake that doesn't do somebody good.
If you're buying from an owner whose property is scheduled for foreclosure, get title insurance before you sign. These are usually bargain sales, too. As long as you're insured, your purchase is safe.
If you're buying at a foreclosure auction, you run more than the usual risk. Search the title yourself, says Reed, author of "How to Increase the Value of Real Estate." Do it on the afternoon before the sale, to catch as many last-minute liens as possible. You can't get insurance until after you buy the property, so you're running the risk that a title company will find something you missed and turn you down.
If you're currently negotiating for a property that's in foreclosure, your purchase might grind to a halt. The servicer might freeze the process while it checks the documentation. Or the broker's usual title insurer might decide not to cover the property. Old Republic National Title, for example, told its agents that, for now, it won't sell policies on homes foreclosed by GMAC and JPMorgan Chase.
Owners who haven't been paying their mortgages might have many more months to stay in their homes before they're forced out. That gives them more time to try for loan modifications, although given lender resistance, that's a long shot. They're unlikely to recover their homes, even if a court agrees that the documentation was bad. Once borrowers get more than six months behind on payments, they rarely catch up, says Guy Cecala, CEO of Inside Mortgage Finance Publications. Bottom line: The financial industry failed consumers and investors again. What's your bet that the bankers will soon be knocking at Congress's door, asking for more relief?
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