With the prevalence of foreclosures in the current marketplace, it is more likely that a property being searched was at

one time a subject of foreclosure. As the frequency these searches increases, abstractors will notice that the circumstances surrounding the records are often different from non-foreclosure properties. Here are three examples from just this week of different types of complications with foreclosures:

1. Conflicts from new foreclosure laws. In response to the volume of foreclosures, legislative bodies are rushing to pass laws which have the intention of protecting homeowners from mistreatment by lenders. Leaving out the opinion of whether government should intervene with private enterprise, these new laws will create new intricacies in title records for abstractors to consider.

In one example, the city of Providence RI is proposing to punish mortgage holders who do not attempt to negotiate with borrowers. In addition to a $2000 fine, the lender is prevented from recording a deed of ownership with the recorder. Obviously, this would create a scenario where the actual ownership of the property cannot be documented in public records. The consequences of this conflict between actual ownership and recorded documents could be serious.

“Should the Recorder refuse to record the foreclosure deed, it would create a gap in the chain of title, which will affect the value of the property and create a problem for the purchaser,” according to a memo from the acting Recorder of Deeds, John A. Murphy.

During this period of ambiguous ownership, claims against title could accrue from any number of parties. An abstractor searching title may not immediately discover these claims in name indexes of the principal parties.

2. Foreclosure process adds opportunities for multiple claims. The foreclosure process itself is a risk to title. By definition, a foreclosure is an adversarial process between two (or more) parties with interest in title. Both parties have opposing interests and claims, which are ultimately decided by a court (in judicial states.) In most cases the ruling is clear. However, the process leaves room for any number of disputable issues. In one case from Colorado, a borrower dies leaving the property to an estate. The property is ultimately foreclosed, and purchased at a public foreclosure sale by a corporation.

After the sale, the estate and its principals claim that they were improperly prevented from redeeming the property. After a complicated series of claims and counterclaims including bid-rigging and backdated documents, a court rules in favor of the new owner, and issues a ruling of quiet title. The estate and its principals appeal, and the appeals court overturns the decree quieting title.

This extreme case of clouded title is atypical, but the point to take away from this is that a foreclosure process introduces many opportunities for an interpretation of title records to be less than obvious. When a prior record of foreclosure is discovered, it means that the title search is not going to be a standard run-of-the-mill process. An expert abstractor should use this as a call for action to more thoroughly scrutinize the documents and the index for  additional records which would clarify the nature of events.

While all searches should be this inclusive, a foreclosure should be a reason to keep all eyes open for “interesting” records.

3. More delinquent borrowers mean more creative legal challenges. There are indications this issue can get worse. In California, a Federal court has accepted a case from a borrower who is challenging the idea of non-judicial foreclosures on the grounds it violates constitutional rights granted under the Fifth Amendment. The borrower alleges that the lender violated their due process rights because in some circumstances the Fifth Amendment applies to private entities, so long as there is sufficient nexus between the government and the private entity. The court, in refusing to dismiss the complaint, agreed with this novel argument because the case involves the Home Affordable Modification Program (“HAMP”), which is a federally funded program, there could be a nexus over and above just extensive regulation.