Mortgage Short Sales and Modifications: Make certain you get a new title insurance policy without exceptions for the securitization process or you could be facing the same situation with a different party — the one who REALLY owns your note and mortgage

So the only way you can protect yourself in a short sale or modification is to either deal with the real parties in interest, or to get indemnification from the party offering to accept the short sale or modification AND a new title policy that does not state exceptions to the securitization process. In order to be sure that the insurance company does not disclaim coverage because the application for title insurance lacked full disclosure, you need to make certain that you have disclosed in writing to the title agent what he/she already knows — that it is possible that others might have an interest in the property or the mortgage.

Nearly everyone is missing an essential and basic element of property law — you can’t sell, transfer, alter or modmify title that you don’t own. The deed is an interest in real property. The mortgage is an interest in real property. Interests in real property MUST be recorded to be valid, but the converse is not true. Just because you have an interest recorded in real property does not mean you own it.

Take for example the old deal where you pay a certain amount of money every month and THEN get title. The sellers thought they were cleverly avoiding the cost of foreclosure. But the courts have uniformly held that an agreement for deed is the same as a deed with a mortgage. So even though the Seller is the title owner of record, he istreated as though he is only a lender with a mortgage and the buyer is treated as though he is the owner of record. Thus he is rquired to file a foreclosure action on property he already has “legal” title to.

The securitization of mortgages created a very similar situation. The “lender” on the Trust deed or mortgage has already been paid by the undisclosed mortgage aggregator upstream in the securitization process, plus a 2.5% fee, plus the points and fees at closing. From the “lender’s prospective, the “lender” has no asset and therefore no right to enforce the mrotgage even if the borrower misses the first payment. It is for this reason that the “lender” does not report this as a loan outstanding, it doesn’t require the lender to provide a reserve against defaults or delinquencies, nor does the “loan” count in the “lender’s” reporting to the government regulatory agencies.

Through the process of securitization the note, and sometimes the mortgage is moved upstream, but in no case are all of the “movements” recorded in the local property records because of many reasons, not the least of which is avoiding the stamps and taxes that would apply to each recordation.

Thus the REAL owner (holder in due course) of your note is the one who actually MIGHT have the power to enforce the note and foreclose on the rpoperty, but one thing is certain — the “lender” at closing has no right to proceed. To prove your point you need only ask the “lender” where the money is going to go if they foreclose on the property, and sell it to a third party. The answer will surprise you.

So the only way you can protect yourself in a short sale or modification is to either deal with the real parties in interest, or to get indemnification from the party offering to accept the short sale or modification AND a new title policy that does not state exceptions to the securitization process. In order to be sure that the insurance company does not disclaim coverage because the application for title insurance lacked full disclosure, you need to make certain that you have disclosed in writing to the title agent what he/she already knows — that it is possible that others might have an interest in the property or the mortgage.

If the agent refuses to issue the poplicy without the exception for securitization you have an independent third party witness who will make your case. Otherwise someone needs to either proceed in “friendly suit” in foreclosure to finish the deal, giving published notice to all people who might have an interest and forcing the lender to perform due diligence in reaching those people, or filing a quiet title. In most cases this will lead to you simply getting the title free and clear if they cannot satisfy these requirements.

One of the interesting scenarios here is that if you have a title agent who refuses a clear policy it might be the same agent who did the closing knowing that the securitization process was in play but failed to appreciate the effect and failed to disclose this knowlegde to the borrower — thus depriving the borrower of knowing the real lender and therefore the real party in interest to whom a rescission letter could be sent. This, it could be argued, extends the three-day rescission rights indefinitely. And the three-day rescission remedy is much stronger that the 3 year rescission.

4 Responses

  1. […] see also post #1450Mortgage Shortsales and Modifications […]

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  4. We have to always remember to cross our t’s and dot our i’s in real estate. Not getting a title insurance policy is reckless. Real estate short sales have gotten a bad name from investors and gurus that teach impractical methods for investing.

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