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Inverse Foreclsoure?
by Robert Franco | 2012/05/09 |

I have seen two very odd situations recently... where the lenders didn't complete foreclosures.  Both owners are stuck with properties, still subject to the liens, and they can't sell them.  It seems like the homeowners should have some remedy.  Perhaps what they need is a right to force a foreclosure - an inverse foreclosure where the homeowner initiates the process.

Source of Title Blog ::

In the first situation, the homeowner inherited the property from her deceased father in 2008.  The property was conveyed to her and the estate was closed.  She contacted a Realtor to list it for sale and a buyer was found.  The title company discovered that there were two open mortgages of record.  No payments have been made in over 4 years, but neither lender attempted to foreclose.

The first mortgage was a business loan to the decedent's wife. The decedent offered his home as additional collateral for the loan.  Sometime before his death, the wife's business failed and the lender foreclosed on the business property, but not this one.  The two divorced and the ex-wife is out of the picture now. 

When the title company called for a payoff, the lender indicated that they had charged-off the remaining balance.  However, they didn't release the lien.  They are currently investigating the matter.

The second mortgagee has never attempted foreclosure, either; probably because they appear to be in second place and wouldn't get paid from the proceeds. 

Most likely, if this property is going to be sold, both will want to be paid something and it will probably be more than the property is worth at this point.  This one is stuck in limbo, waiting for the first lender to provide a payoff, or release their lien.  This may turn into a short sale, if everyone can agree.

In the second situation, the homeowner filed for bankruptcy.  The lender filed a foreclosure and got a default judgment.  They took it all the way to sheriff's sale.  Unfortunately, it didn't sell for "lack of bidders."  Rather than try again, the lender simply dismissed the case.  This was also in 2008.

The home had been vandalized and is practically worthless.  After re-establishing her credit, this homeowner tried to buy another house.  The new lender turned her down - not because her credit was not good enough, but because she still owns this house.  They informed her that they won't be able to loan her money until at least 3 years after this house is sold. 

She was shocked to learn that she still owned it.  She was served with a copy of the decree of foreclosure, and assumed it was all over with, 4 years ago.  Nobody told her that the home didn't sell, or that the case had simply been dismissed, leaving her with title to the house that she thought she lost a long time ago.

When she called the lender, they told her to sell it... but, of course, they didn't release their lien, either.

In both of these cases, the homeowners do not want the houses. And, they cannot sell them. What is the owner to do when the lenders do not foreclose... even after several years of no payments?

I think there should be an inverse foreclosure process that would allow the owners to initiate the foreclosure.  I envision a statutory inverse foreclosure statute that would allow the owner to recover the costs incurred in bringing the foreclosure, including their attorney fees, from the proceeds of the sale before the lenders are paid on their liens.

It is strange to think that a homeowner would want to foreclose on themselves.  However, these properties both need to be sold free and clear of liens.  A foreclosure is the best way to do it.  Unfortunately, if the lenders won't foreclose the owners don't have many options to get rid of the properties and move on with their lives.

I can think of a couple of other ways to handle the situation.  But the alternatives seem to have other drawbacks.  I thought I would open this up for discussion.  There is more than one way to skin a cat... as they say. Anyone have any ideas, while I wait for the legislature to pass new laws allowing the homeowner to foreclose on their own property?



Categories: Foreclosures, Innovation

962 words | 4354 views | 6 comments | log in or register to post a comment

Why Try to Re-Invent the Wheel?


I may be way off base here, but wouldn’t an Action to Quiet Title be a more appropriate remedy for these situations?

If not, why not?

Scott Perry

(Incidentally, there are exactly 37 ways to skin a cat.)

by Scott Perry | 2012/05/10 | log in or register to post a reply

It is a possibility...

The down side to a quiet title action is that if these lenders, once served with notice of the suit, file an answer claiming their interest is valid, the homeowner would probably lose.  There is no real legal basis to extinguish the liens.  They are valid mortgages.  The homeowner would have spent the money trying, and gained nothing.

I don't know if the arguement could be made that by not attempting to collect or foreclose in over 4 years is a waiver of their right to a lien.  It might be worth a shot.  However, in the case of the bankrupt homeowner, the lender was barred from collecting against her personally but the lien on the real estate is still valid.  If it ever would sell, they would be entitled to collect.

It is certainly an option, though.



by Robert Franco | 2012/05/10 | log in or register to post a reply

Potential for Abuse
Robert, I foresee huge potential for abuse if this type of foreclosure is allowed. Homeowners would be incentivized under this type of rule to just file a foreclosure anytime they were underwater on their home and then either bid themselves or get straw buyers to bid the 2/3 appraised value or highest bid at the Sheriff's sale. This may seem insensitive, but this person bought this home, took money from the bank to do it, and then walked away. I think bearing some responsibility would be to put the house on the market, see what the best price would be, and then negotiate the payoffs and releases upon sale. It isn't a quick fix, but I don't think we should legislate away an individual's responsibility in this case. If the house will sell at foreclosure sale, it will sell on the market with a low enough price. I don't think we should clog the court dockets further with owner-initiated foreclosure actions. The bank gave the money and took a right to foreclose. This owner accepted a deed to a house. If the bank doesn't want it, the owner needs to take care of it. 
by J. H. | 2012/05/10 | log in or register to post a reply

Abuse, maybe...

But the "new law" could be limited to "non-owner occupied" premises, where payments are more than a year behind. 

I guess, first I should say that this "idea" was intended to be more "tongue in cheek" than a serious suggestion.  The real point of my post was to point out that there needs to be something that can be done where banks don't want to foreclosue... despite 4 years of non-payment as in the cases I described.

If the banks do not want to foreclose, they should be required to release their liens at some point.  I do see your point that "the owner needs to take care of it," but where you can't even get the bank to quote a payoff, how can the homeowner do anything?

I have read articles about lenders that won't foreclose on properties just because they don't want to pay homeowner's association dues if they take the property back.  But, their liens prevent the owner from selling the property and it forces owners to incur the fees for years (or it sticks the homeowner's association with them). 

I don't know what the solutions is... but I think we do need one.  At the very least, it makes for an interesting discussion.

by Robert Franco | 2012/05/11 | log in or register to post a reply

Two to Tango...
Sounds like abuse is possible on both sides. How about a statute that imposes a daily fee that the lender of record must pay for every day after 30 days from the date a mortgage payoff is requested? It would serve the dual purpose of incentivizing lenders to generate payoffs and timely record assignments. I don't t think it would get past the bank lobby and MERS supporters, though. Maybe the quiet title action is the best route with an additional prayer for relief or claim for unconscionable conduct against the lender for failing to provide a payoff statement.  
by J. H. | 2012/05/11 | log in or register to post a reply

That sounds reasonable to me...
I just want to scream.... "Give me a payoff or release your lien!"  I think a quiet title may be necessary just to get someone's attention.  It is a shame, though, that you have to take such drastic steps just to get somebody to do something. 
by Robert Franco | 2012/05/11 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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