Robo-signing and REO Irregularities Still Stirring Trouble

13 Oct

If you’ve been following the real estate foreclosure news, you know that the robo-signing issue keeps evolving.  Shortly after our blog post last week about Old Republic Title determining it would suspend underwriting title for REO (“REO” is an acronym for bank-owned or “real estate owned”) properties owned by Chase and GMAC/Ally, Bank of America decided to halt the foreclosure process in all fifty states.

Recently the Attorneys General from 40 states have created a coalition to try to investigate whether “robo-signing” lead to mistakes or irregularities that would compromise the validity of how lenders obtained title through foreclosure. (see Wall Street Journal article here: http://bit.ly/dkzpS0.)  However, it appears the Obama administration recognizes that a foreclosure moratorium may be an unnecessary step.  (see Huffington Post article here: http://huff.to/d1syj8.)

According to a Reuters article posted today, while the White House supports reviewing the process to ensure foreclosures are done / were done properly, the Obama administration does not support a moratorium which would stall foreclosures and could further damage a struggling housing market.  (see Reuters article here: http://reut.rs/cMvXhi)

This position seems to reflect the simple reality that despite irregularities caused by robo-signing, most foreclosures are still likely valid, and should not be prevented from going forward.

Unfortunately for title insurance companies, if the validity of foreclosures is challenged by the foreclosed homeowner on the basis of “robo-signing” (failure to do due diligence and verify facts), the title insurers may be brought into litigation when the process and the lender’s acquisition of title through foreclosure is questioned.

Now, ALTA (America Land Title Association) title insurers are in discussions with banks and regulators to obtain assurances that proper procedures were followed and indemnity for the insurers, to reduce the risk for the title insurance companies.  (see Bloomberg article here: http://bit.ly/dmMV2V.) Perhaps that will help resolve some of these issues in the short-term.

Even if the jargon of “robo-signing” and the issue of why the refusal of title insurers to underwrite REO title insurers impacts sales is foreign to you, one fact is exceedingly clear.  In a market such as the Minneapolis-St. Paul real estate market, REO properties and properties in foreclosure are a significant part of our real estate marketplace.  The real estate market is already stagnant and challenging, due in large part to significant foreclosure inventory and short sales.  The real estate market doesn’t need new hurdles to jump.

While the robo-signing and related issues continue to evolve, let’s hope that any mistakes made by banks can be resolved without unduly crippling a struggling real estate marketplace.  If you’re interested in this issue, follow my updates on Twitter @BrokerageAtty.

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This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck. Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals.

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