Legal uncertainties triggered by the foreclosure fiasco

With Chase, GMAC, Bank of America and other banks suspending home foreclosures a legal nightmare can be added to the economic devastation caused by the mortgage crisis.  Complaints about the foreclosure process have been building up for a while and the dam finally burst this week.  Having seen at least one client sued for a loan he did not take based on unsigned loan documents (to a different borrower) and a phantom (and unrecorded) deed transfer to the actual borrower, I am not surprised at the stories of shoddy documentation that triggered this suspension.

The legal and economic uncertainties include:

  • questions as to who actually has title to the property subject to foreclosure if the creditor cannot produce proper loan documentation;
  • the validity of improperly documented debt and the identity of the creditor entitled to the payments;
  • uncertainty for tenants trapped between a landlord defaulting on their loans and lenders who may be unable to prove their rights to the property; and
  • the effect on the housing market if (or perhaps when) title insurance companies decline to provide “clear title” guarantees to purchasers of foreclosed property.

So far the foreclosure fiasco appears concentrated in the personal housing market, where lenders also have to comply with addition consumer protection rules during foreclosure.  Time will tell if (and how much) the commercial real estate market is affected by this.  It also serves as a reminder for creditors to make sure that have dotted the i’s and crossed the t’s in their loan and security documents.  If not, this is a good time to use the section of the Loan Agreement requiring continuing cooperation of the borrowers to bring their collateral house to order.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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