5-14 Lawson PowerPoint Judicial and Non-Judicial Foreclosures

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Insuring after Judicial and

Non-Judicial Foreclosures

Montana Land Title Association

Spring Education Seminar

May 2014David E. Lawson, Underwriter

Fidelity National Title Group

NOTE: “ deed of trust ” (DOT) is used to refer to Trust Indenture, Deed of Trust,

or Mortgage, as applicable.



IDENTIFYING MATTERS THAT

MIGHT SURVIVE FORECLOSUREUCC WITH PURCHASE MONEY PRIORITY ON FIXTURES

Ineffective limited Subordination Agreements are common.

SIMULTANEOUS DOT WITHOUT SUBORDINATION

Title insurer relied only on instructions from the lenders.

Consult with your underwriter

Seller s purchase money DOT will have priority

JUDGMENT JUNIOR IN TIME ARISING FROM

FORECLOSURE OF A PRIOR ENCUMBRANCE




MIGHT SURVIVE FORECLOSUREGOVERNMENTAL CODE VIOLATIONS AND

LIENS RELATING TO CODE VIOLATIONS

GOVERNMENTAL CRIMINAL FORFEITURE RIGHTS

Unless the government formally authorized the foreclosure.

EASEMENTS AND AGREEMENTS

If required by building permits or needed to use the propertyeven though recorded later.

Non-compliance with local codes if treated as extinguished?

Contact your underwriter if you have any questions.




MIGHT SURVIVE FORECLOSURELEASES TO PARTIES UNRELATED TO THE BORROWER.

Often no notice given to lessees; or notice given but lender

relies on the lease attornment & nondisturbance provisions

to treat the lease as surviving. A lease is part of the cash flow & gives value to the property

HOA LIENS:

Unless they clearly create a lien only upon recording orupon delinquency, or CCR contains a provision granting the

priority to this type of lender.

Priority may hinge on a legal interpretation of the precise

CCR wording. Maybe as of date of CCR recording?




MIGHT SURVIVE FORECLOSURECAUTION: COPING WITH HOA LIENS

If a lien clearly has priority or priority is questionable then

just show the HOA lien and require a release.

If lender has priority, will HOA recognize lien extinguished?Does HOA understand priority?

Requesting unnecessary release - often provokes objection

or attempt to collect the entire lien.

Consider showing the lien and using the following:“ Note: Said lien appears to have been extinguished by the

foreclosure of a deed of trust. This exception will be removed

if the association claiming the lien confirms their records show

the lien on the land was extinguished by foreclosure.”



RECORDING SEQUENCE vs LOAN

MODIFICATIONS AND SUBORDINATIONSRecording sequence only benefits a BFP without

knowledge of another unrecorded document.

Loan modifications frequently cause a lender to

lose its original priority, but not always.

Assume the foreclosing lender s priority was

altered - as of date of most recent modification.

If junior lender forecloses, don t assume it gainedpriority because of prior lender s later modification.

Lender might argue about priority or assert partial

priority.



RECORDING SEQUENCE vs LOAN

MODIFICATIONS AND SUBORDINATIONS

Subordination Agreements:

Some are limited in scope and not fully effective.

If initially effective, a Subordination might loseeffectiveness when senior loan is later modified.

Subordinations to any future modifications or

advances are not always treated by the Courts as

effective.



PARTIES WHO DID NOT RECEIVE NOTICE

If lender intentionally does not provide notice to a

junior party - the junior party s interest will survive.

If failure to provide notice is unintentional, it is

possible in some instances to re-foreclose.Terry L. Bell Generations Trust v. Flathead Bank of

Bigfork – Montana Supreme Court - 2013 MT 152:

first trustee s sale was invalid and ineffectual (as to

only Bell), the second foreclosure action wasappropriate the first foreclosure proceeding did

not result in a merger of title and extinguishment of

Flathead Bank s trust deeds.



SPECIAL RISKS IN JUDICIAL

FORECLOSURES

Notice by publication

Default orders

Orders determining priority contrary toapparent priority rights

Lack of a recorded lis pendens

Foreclosures of smaller encumbrancesn History of claims - challenges to foreclosures

when significant equity or value is lost



FEDERAL REDEMPTION RIGHTS

FOLLOWING ANY FORECLOSURE

IRS: 120 days, or such longer period as is

allowed in the foreclosure.

n Possible to obtain a waiver of redemption right,but if equity IRS will often require payment.

Other agencies of the United States: one

year, even for Trustee s Salesn Examples: Junior SBA loan, or Judgment in

favor of the U.S. or one of its agencies



JUDICIAL FORECLOSURE

REDEMPTION RIGHTSRead the Order - what redemption period applies?

Conventional Mortgage 1 year from the date of sale.

If Small Tract Financing Act trust indenture or DOT

used then not entitled to any right of redemption.

n But recent foreclosure orders sometimes grant a

30 day redemption right upon request of lender.

First State Bank of Forsyth v. Chunkapura, 226 Mont. 54, 57,734 P.2d 1203, 1205 (1987).

Steven L. Cavanaugh v. Citimortgage, Inc., et al 2013 MT 349




REDEMPTION RIGHTSEXTENSION OF THE REDEMPTION PERIOD by the

Servicemembers Civil Relief Act:

Period of military service not included in computing

redemption period

Redemption period extended for the length of

service plus 90 days




REDEMPTION RIGHTS

ASSIGNMENT OF REDEMPTION RIGHTS

General rule - assume redemption rights of the

owner or any other party cannot be assignedindependently of the assignor s interest in the

property since redemption rights apply to the

successors in interest.

Issue has been a source of litigation in other states.Montana has court decisions on limited issues, but

still room for additional litigation.




REDEMPTION RIGHTS

WHO MAY REDEEM

Debtor, debtor's spouse, debtor's successor in

interest in all or any part of the property.

Any stockholder of judgment debtor corporation.

Junior lien holder on any part of the property sold.

Any stockholder of a junior corporation lien holder.

Effect of redemption by debtor or debtor's spouseDebtor redeems: effect of the sale is terminated.

Spouse redeems: spouse becomes the owner of the

debtor's interest. All junior liens are revived.




REDEMPTION RIGHTS

Possession of lands during redemption period.

Debtor if personally occupying as a home for the

debtor and family.Otherwise the purchaser or assignee



CAN YOU INSURE PRIOR TO

REDEMPTION RIGHTS EXPIRING?

Complex topic - obtain your underwriter s approval.

Purchaser at a sheriff s sale acquires most of the

rights of the borrower

That interest is not fee simple

Does not fall within the chain of title without

recording the Certificate of Sale.

Subject to extinguishment upon redemption.



CAN YOU INSURE PRIOR TO

REDEMPTION RIGHTS EXPIRING?

If the purchaser at the Sheriff s Sale does not want to

wait out the redemption period before selling:

Can assign the Certificate of Sale.

BUT if sale price exceeds the foreclosure bid amount,

a redemptioner is not obligated to pay the mark-up.

A lender to the holder (or assignee) of a Certificate ofSale will have its lien extinguished by a redemption,

without any obligation on redemptioner to pay any

amount to the lender.



EQUITABLE REDEMPTION

Refers to purchase at or after foreclosure

by an affiliate or relative of the borrower,

or later repurchase by the borrower,

relative or affiliate.

Junior parties can assert their lien or

interest is revived in the same manner as

in a redemption from a judicial foreclosure,even if title is acquired by an LLC or in

another manner than previously held.



SUBDIVISION COMPLIANCE ISSUES

Lender failed to require creation of mortgage lot by

borrower:

Recourse - court order to require county and

department of revenue to allow mortgage lot

Conveyance of road right of way by borrower

without a partial release:

Lender has rights to foreclose on original boundaries.

Adjustments of boundaries by COS:Lender has rights to foreclose on original boundaries.

Trustee s deed often not recordable - original legal

description not conforming to most recent survey.



SUBDIVISION COMPLIANCE ISSUES

CONDOMINIUMS:

Underlying platted lots within a condo cannot be

encumbered and foreclosed as independent

parcels. They are common elements owned in

undivided interests by the existing unit owners,even if designated for future unit development.

Carefully review Declaration to determine the

nature of areas designated for future units.

Portions of common elements in which declarant

has rights to create additional units are not

capable of being owned, encumbered or

conveyed separately from other existing units.



MINOR DEFECTS IN FORECLOSURES

STRICT COMPLIANCE WITH CODE REQUIRED:

Any variation should be run by your underwriter.

SUCCESSOR TRUSTEE:

No powers until appointment is recorded.MERS:

Challenges in other states can occur here, too.

Assume it can only assign the DOT.MCA 71-1-110. The assignment of a debt secured by mortgage carries

with it the security.

MCA 71-1-303. "Beneficiary" means the person named in a trust

indenture as the person for whose benefit a trust indenture is given or the

person's successor in interest



MINOR DEFECTS IN FORECLOSURES

SCRIVENER’S ERRORS:

Errors in legal descriptions and names are

commonly encountered.

If the legal description is still adequate todescribe the property, usually not a critical defect.

Name discrepancies often not a problem as long

as notice was given to the right parties.

If uncertain, consult your underwriter.



CLAIMS - FAILURE TO SURRENDER

POSSESSION

Major title claim risk - challenge by a party who

remains in possession after foreclosure.

May assert lack of sufficient notice, invalidity in

the foreclosure.

May assert common law challenges or rights.

Might have issues of competency impairing their

understanding of the foreclosure.

In general, confirm all parties whose interests were

foreclosed have surrendered possession.



SHOULD YOU INSURE A BIDDER AT

A FORECLOSURE SALE?

Purchaser at a trustee s sale - not entitled to the

statutory protections of a Bona Fide Purchaser.

If there are foreclosure defects or the borrower

has equitable or contractual claims against thelender, the sale can be set aside.

Insuring a resale is much less risky if the

purchaser is a bona fide purchaser for fair

market value. Protections exist under MCA 71-1-

318(2) and MCA 70-21-304

Consult with your underwriter.



SHOULD YOU INSURE A BIDDER AT

A FORECLOSURE SALE?

Sometimes you might receive approval only if you

show an exception in the policy for any challenge

to or defects in the foreclosure. Below is a sample

exception which can be considered:“ Right of any party interested to sue or petition to have

set aside, modified, or contest a judicial or non-judicial

foreclosure or forfeiture, or any deed pursuant thereto,

through which title to the land described herein is

derived; and any liens, encumbrances and/or ownership

interests which may exist as a result of any acts or

omissions of the foreclosing parties, or as a result of

such suit or petition.”



CONSTRUCTION LIEN RIGHTS –

RESALES BY INVESTORSMany investors fix up the properties or

repair damage caused by the foreclosed

borrower.

Be aware It is important to determine if

construction lien rights exist if providing

extended coverage or ALTA Homeowner s

coverage.



INSURING AFTER A DEED IN LIEU OF

FORECLOSURE HELD IN ESCROW

MCA 71-1-209 allows a BFP to rely on a previously

recorded deed in lieu. Policies have a duty of defense.

There can be grounds to challenge a deed in lieu

recorded without the grantor s consent.Remember, we do not know all off-record rights of

the grantor to challenge the deed.

Bankruptcy could invalidate or void the deed.

If requested to rely on a newly recorded deed in lieuexecuted earlier, contact your underwriter.

Option: obtain from the grantor a new estoppel

affidavit or written consent to recording the deed.



NEW FRAUD TRENDS - FICTITIOUS

FORECLOSURES & DEEDS IN LIEU

A new wave of fraud involving purported assignments

to fictitious lenders using names similar to national

lenders. In most instances they insert the word

Northwest or Southwest before the lender name,such as Northwest Wells Fargo Mortgage.

The schemes are complex, appointing a new trustee,

holding a foreclosure, purchase by a fraudulent

affiliate (often a land trust) who tries to resell orborrow. In other situations we see a deed in lieu to

the fictitious assignee, who attempts to resell.

Probably the borrowers are in on the scam.



NEW FRAUD TRENDS - FICTITIOUS

FORECLOSURES & DEEDS IN LIEU

National Recovery REO Services, Inc. is often

involved, being given a POA by the new assignee .

These fraudsters go to great lengths to give the

appearance of legitimate transactions, taking stepsspread out over several months. We have seen the

them go so far as to hire a legitimate attorney to

obtain relief from a bankruptcy stay when a title

company told them they violated it.*** Keep an eye out for anything out of the

ordinary. Contact your underwriter if you see

anything suspicious.

5-14 Lawson PowerPoint Judicial and Non-Judicial Foreclosures

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