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Thorny foreclosure questions

Thursday, March 3, 2011; 9:46 PM

I never bought a foreclosure. I pay my mortgage faithfully. Now, is someone going to tell me a back-office clerk mishandled my title and their actions threaten my legitimate ownership? Will this mess hurt me when I try to sell my home?

That's exceedingly unlikely. Chaos would ensue if the millions of solvent homeowners who purchased their home - or refinanced their mortgage - in recent years had their ownership thrown into question. Even if investigators conclude that land titles have systemically been registered improperly as the associated mortgages were carved up into mortgage-backed securities and sold to investors, government would be compelled to avert such chaos by legislating a fix to the system.

And then there's the less-theoretical assurance provided by title insurance. Lenders require all borrowers to pay for a policy at closing. This protects the lender if there is a ownership claim against the title. (That's commonly called a "cloud" on the title.) Borrowers can choose to pay extra to have that coverage extend to them as well. Title insurers promise to pay legal expenses to defend a title - or to compensate owners if they lose such a challenge.

So, does that mean the foreclosure problem doesn't affect me at all?

It may not affect you directly, but the fallout could. If nearby foreclosures remain empty longer, or if buyers avoid bidding on foreclosures, your home value could deteriorate. Condominium-unit owners could face higher dues and special assessments if foreclosed units are not bought by dues-paying new owners. Existing condo owners also could have trouble selling their units because lenders refuse new mortgages at complexes that already have too many defaults.

More broadly, a prolonged halt to foreclosures could further damage the economy and the financial system, delaying the day when economic recovery gains real traction.

My bank says it is going to foreclose on my home. Is there any way to determine whether my documents were mishandled - and keep my home?

You need the advice of a lawyer who is expert on the foreclosure laws in your state. However, you can at least examine all the documents related to your home purchase and mortgage, dating from your loan closing to default and foreclosure notices, to look for errors and discrepancies. Are details such as account numbers, loan amounts, payment amounts, addresses and legal jurisdictions correct? Bring any errors to the attention of your lawer, who can advise you whether they will help you challenge the foreclosure.

I'm planning to buy a home. Will the foreclosure problem complicate things?

If you're thinking of buying a foreclosed property, or one that was bought by an investor and resold, or "flipped," you may indeed face problems. Even if this foreclosure is not one of the ones affected by questions over foreclosure processing, local title lawyers and title insurance companies are giving extra scrutiny to the chain of ownership. If they aren't comfortable with what they see, you won't be able to get title insurance. Without that, you won't be approved for a mortgage. Despite delays, some foreclosure sales are still going through.

There is no indication that buyers of homes that were not foreclosures are facing extra difficulty.

How can I buy a foreclosed home?

Many traditional real estate agents have started to specialize in the foreclosure market, and many bank-owned homes are now marketed on the traditional multiple-listing service. Local real estate auctioneers handle some sales, and some homes are offered through traveling, high-publicity real estate auctions that set up camp at a convention center once or twice a year. You also can search through properties owned by Fannie Mae or Freddie Mac through their foreclosure-marketing Web sites homepath.com (for Fannie Mae) and homesteps.com (for Freddie Mac). Until the foreclosure problem is resolved, be prepared for extra delays and scrutiny from your lender, the title examiner and the title insurance company.

How do I find out if there is a second mortgage on a property - or other problems that could cloud my title?

It's the job of title examiners to review the chain of ownership and flag such problems. Mortgage lenders then require borrowers to pay for a title insurance policy that protects the lender if a challenge to ownership comes up after closing. Buyers have the option to pay extra to have that insurance coverage apply to them as well, and that has always been an especially prudent choice when buying a foreclosure.

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