Fannie Mae May Be Reluctant to Purchase Mortgages Involving Resale of Foreclosure Properties

Posted By Cliff Tuttle | October 8, 2010

No. 514

The New York Times reports that Fannie Mae may be nervous about purchasing mortgages that have recently been through judicial foreclosure. The Times specifically mentions only one property in Florida, but the mere hint that Fannie may not purchase some foreclosure mortgages may be enough to cause lenders to exercise extreme caution when financing or refinancing such properties.  Until this problem is definitively addressed, thousands of sales throughout the country  could be in jeopardy. This is true even in states like California and Texas where nonjudicial foreclosures are authorized.

A judicial foreclosure is one that involves the courts.  The foreclosing party must file a complaint and obtain a judgment. In some states, notably Ohio, foreclosures regularly come before judges before entry of judgment.  This has exposed numerous documentation problems. Foreclosing parties have been unable to produce promissory notes or other documents demanded by judges reviewing their filings.  In Pennsylvania, a judicial process is followed but the overwhelming majority of foreclosures are uncontested, leading to default judgment without any review by a judge. Non-judicial states generally permit a trustee to conduct a sale of the property without filing a complaint in court.  However, Bankruptcy judges have been increasingly critical of certain lender practices in both judicial and nonjudicial states, contributing to the uncertainty over whether foreclosure sale procedures may be found deficient after the fact.

Until now, reports of irregularities in foreclosure procedures have been vague. The allegation of “robo-signers” rapidly signing verifications without reviewing the facts has been the principal charge to emerge.  Such practices have been commented upon in court cases from time to time and J P Morgan Chase, GMAC and Bank of America have suspended judicial state foreclosures while initiating internal investigations.  Of course, these companies set up and administered the process which they are now investigating, so they may be simply buying time while planning their next strategic move to avoid or reduce liability.

In Pennsylvania, sheriff sales are presumed to be valid after the delivery of the sheriff’s deed.  But a lack of constitutional due process, particularly lack of proper notice or failure to follow mandated procedures, could be raised after the sheriff’s deed is delivered.  This could cause title insurers to scrutinize the record of foreclosures and perhaps demand indemnity from the foreclosing lender before issuing a title insurance policy.  Under their lending policies, required by bank regulators, lending institutions generally cannot make a real estate loan without obtaining title insurance.  These developments have the potential to create a serious crisis for foreclosing lenders, since selling the collateral is how lenders recoup losses and stay in business.

CLT

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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