Insuring after Judicial and

Non-Judicial Foreclosures
Montana Land Title Association
Spring Education Seminar
May 2014
David 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 FORECLOSURE
UCC 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
Sellers purchase money DOT will have priority
JUDGMENT JUNIOR IN TIME ARISING FROM
FORECLOSURE OF A PRIOR ENCUMBRANCE
IDENTIFYING MATTERS THAT
MIGHT SURVIVE FORECLOSURE
GOVERNMENTAL 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 property
even though recorded later.
Non-compliance with local codes if treated as extinguished?
Contact your underwriter if you have any questions.
IDENTIFYING MATTERS THAT
MIGHT SURVIVE FORECLOSURE
LEASES 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 or
upon 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?
IDENTIFYING MATTERS THAT
MIGHT SURVIVE FORECLOSURE
CAUTION: 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 SUBORDINATIONS
Recording 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 lenders priority was
altered - as of date of most recent modification.
If junior lender forecloses, dont assume it gained
priority because of prior lenders 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 lose
effectiveness 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 partys 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 trustees sale was invalid and ineffectual (as to
only Bell), the second foreclosure action was
appropriate the first foreclosure proceeding did
not result in a merger of title and extinguishment of
Flathead Banks trust deeds.
SPECIAL RISKS IN JUDICIAL
FORECLOSURES
Notice by publication
Default orders
Orders determining priority contrary to
apparent priority rights
Lack of a recorded lis pendens
Foreclosures of smaller encumbrances
n 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 Trustees Sales
n Examples: J unior SBA loan, or J udgment in
favor of the U.S. or one of its agencies
JUDICIAL FORECLOSURE
REDEMPTION RIGHTS
Read 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
JUDICIAL FORECLOSURE
REDEMPTION RIGHTS
EXTENSION 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
JUDICIAL FORECLOSURE
REDEMPTION RIGHTS
ASSIGNMENT OF REDEMPTION RIGHTS
General rule - assume redemption rights of the
owner or any other party cannot be assigned
independently of the assignors 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.
JUDICIAL FORECLOSURE
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.
J unior 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 spouse
Debtor redeems: effect of the sale is terminated.
Spouse redeems: spouse becomes the owner of the
debtor's interest. All junior liens are revived.
JUDICIAL FORECLOSURE
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 underwriters approval.
Purchaser at a sheriffs 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 Sheriffs 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 of
Sale 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.
J unior 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.
Trustees deed often not recordable - original legal
description not conforming to most recent survey.
SUBDIVISION COMPLIANCE ISSUES
In most instances a lender cannot foreclose
additional land acquired by borrower and added to
the original parcel by recorded survey.
ALTA policies, other than ALTA Homeowners, do
not insure against loss from subdivision non-
compliance except to the extent a notice of
violation has been recorded.
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
SCRIVENERS ERRORS:
Errors in legal descriptions and names are
commonly encountered.
If the legal description is still adequate to
describe 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 trustees 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 the
lender, 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 INVESTORS
Many 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 Homeowners
coverage.
INSURING AFTER A DEED IN LIEU OF
FORECLOSURE HELD IN ESCROW
Clogging the Equity of Redemption Doctrine:
Legal argument: a debtor cannot contractually give
up rights of redemption prior to a final default and
intent to surrender title.
A deed in lieu deposited into escrow at the time a
Contract for Deed is common practice.
Sometimes a lender will require deposit of a deed
in lieu to be recorded upon default.
A deed in escrow prior to the final default might be
construed as only a security document.
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 grantors 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 lieu
executed 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 or
borrow. 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 steps
spread 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.