Chain of title - proof of who really owns a house - underpins the entire U.S. system of real estate.
Broken chain of title due to slipshod paperwork was a serious issue uncovered in the nationwide robosigning scandal and again last month in a city report that found San Francisco foreclosure paperwork riddled with errors.
Those revelations draw new attention to title companies, which insure a home's clear title for both buyers and lenders.
"If there is not a clear chain of title in the foreclosure process, how can there be a clear chain of title for the person buying foreclosed property?" said San Francisco Assessor-Recorder Phil Ting, who commissioned the audit. "Given our report, it calls into question whether entities selling a foreclosure really have the right to transfer that property to somebody else."
When the robosigning issue first exploded on the scene in October 2010, major title insurers briefly stopped writing policies for some foreclosed properties. That could have stopped foreclosure sales cold: Without title insurance, a bank will not issue a mortgage.
Meanwhile, properties with no guarantee of clear title are sold for all cash every day on the steps of California courthouses as the final step in the foreclosure process. The investors buying these properties get a discount in part because of the title uncertainties.
But the title insurance industry said its concerns have been addressed and it's not worried about the latest disclosures undercutting the assurances it provides people who buy foreclosed houses from banks."When robosigning first came to light publicly, it caused the industry to pause, almost hiccup for a second, in that would we be able to meet our obligations and protect homeowners who purchased homes out of foreclosure if these irregularities had occurred in the process?" said Steve Gottheim, legislative and regulatory counsel for the American Land Title Association, the industry's trade group. "The whole goal of that small period was to get more information. When we had more information, the industry was able to get back to what it does best, insuring title."
That additional information consisted of finding that some of the paperwork defects were not that egregious and of reviewing legal statutes, he said.
"Folks who buy (property) and have no knowledge that there may be some defect in the chain of title are protected very strongly by state law," he said. "Every state provides protection to bona fide purchasers of real property for value."
It's a high bar for the purchaser to know about a title defect. Media reports, or even government reports like the one produced by Ting, would not be sufficient, he said.
Suppose the previous homeowner camps out in front of the house with a sign saying the foreclosure was unjust?
"It would take a lot more than picketing the property," he said. "It would take really good evidence and a court order that says it was an illegal foreclosure."
Gottheim said title insurers are prepared to step up when issues arise."At the end of the day we are the folks who are going to be on the front lines protecting the new homeowner," he said. If a homeowner has purchased a title insurance policy and a defect in the foreclosure comes up after the fact, we will stand there and protect them."
No wave of lawsuits
However, he said there has not been a wave of lawsuits by foreclosed-upon people seeking to take back their properties.
"They don't have the money to bring these lawsuits," he said. "Even if they have a valid lawsuit and a chance to win, which state law would make very difficult for them, if they did win, they get the house back, but also get back the mortgage which they were unable to pay."
Anne Anastasi, president of the title association and owner of a Pennsylvania title firm, expanded on that point in congressional testimony in November 2010.
She said that if a court does find for a foreclosed-upon borrower, in theory they would receive title (subject to a mortgage), the lender would have its mortgage reinstated, and the person who had later purchased the foreclosed-upon home would have their money refunded.
But in practice, because the previous owner would still not be able to afford the mortgage, she said: "Rather, the purchaser would keep their home and the person who was foreclosed upon would be compensated by their lender for their loss."
California courts have rejected faulty paperwork as a reason to overturn foreclosures. But in a 2011 ruling, in US Bank vs. Ibanez, the Massachusetts Supreme Court upheld a decision finding foreclosures invalid when banks could not prove they owned the underlying mortgage. Another Massachusetts case, Bevilacqua vs. Rodriguez, built upon the Ibanez decision to take away property from someone who bought it after a flawed foreclosure and return it to the former owner who had defaulted on the mortgage. However, it left the door open for the foreclosing bank to conduct a new foreclosure process to clear the title.Whether the Massachusetts decisions might help persuade California judges to follow suit is an open question.
What about people who lose their house to foreclosure? Would the title insurance they got when they first bought their homes help them later on if the foreclosure paperwork was riddled with mistakes?
The answer is a clear no. Title insurance only covers what happens before you buy a house, not afterward.
"Title insurance guarantees your title when you purchase the house, it doesn't include you against subsequent clouds on the title," said Diane Thompson, a lawyer with the National Consumer Law Center.
"We are not insuring anything the lender will do in the future, such as foreclose correctly," Gottheim said. "That's the risk and responsibility of the lender; we don't give those assurances."