Ruling Means Possible Trouble For Buyers Of Foreclosed Homes

There's wide agreement in the real estate industry that the nation's housing market won't recover until the glut of foreclosed homes has been taken care of. But a decision this week by the state's highest court could cause the foreclosure crisis to drag on even longer. The Massachusetts Supreme Judicial Court ruled on Tuesday that the buyers of some foreclosed homes may not be the legal owners of those properties. To get a better understanding of which house purchases may be in jeopardy, WBUR's All Things Considered host Sacha Pfeiffer spoke with Suffolk University law professor Kathleen Engel, an expert on problems with foreclosure purchases.

Sacha Pfeiffer: Could you first give us a sense of how big a deal this may be in terms of how many people have bought foreclosed homes in the state and may be affected?

Kathleen Engel: I think we're talking at least in the thousands. What happened is that during the boom in lending, money was flying from Wall Street to borrowers at lightning speed and the paperwork didn't. And as long as everybody was making money and borrowers didn't fall behind on their loans, there was little concern about the missing paperwork. But now that's all come to a head. Borrowers have started defaulting, lenders have begun foreclosing, and the paperwork just isn't there. So the people who bought homes at foreclosure sales may not have good title. People who want to sell homes that they bought at foreclosure sales may not have good title so they can't sell the property.

If someone out there is listening and they bought a foreclosed home, how can they find out whether their home is one of these jeopardized homes?

Most people, when they buy a property, have to take out a mortgage, and when they do that they buy title insurance. So the first thing I would do is to call the title insurance company that ensured that they have good title and ask them to look into it. The title insurance company should do an investigation at that point.

If you have title insurance, are you not necessarily protected?

If you do have title insurance, you are more likely to be protected, although you may go through a very big hassle. If you don't have title insurance — for example, if you paid cash; say a developer who had a lot of cash on hand and used money to develop the property and didn't buy title insurance — they could be in big trouble.

If someone finds out that the foreclosed home they bought is in jeopardy, what are their options? What can they do next?

They can be a claim against the title insurance company and it really will be the responsibility of the title insurance company to try to get some kind of clear title. But whatever the solution is, it's messy, it's going to take a long time, and it's going to slow down the movement of properties through foreclosure. And, in the meantime, people who purchased the property, people in communities that have already suffered from subprime lending and now are suffering from abandoned properties that can't be foreclosed upon and all of that will continue to experience a great deal of devastation.

This ruling is potentially a bad thing for people who bought foreclosed homes, but it sounds like a potentially good thing for people who might have been forced out of their homes under questionable foreclosure circumstances. What can those latter people do?

Well, those people still have a right to their homes, but they don't realize that. And one of the problems that has come up is: what are their obligations? Say that there was a foreclosure that wasn't valid; they're still the owners of their property. Does that mean they're responsible for real estate taxes? For public nuisance violations? For housing code violations?

A local lawyer connected to this case has said this court decision is about holding banks accountable for unlawful foreclosures. But it seems that, in the process of holding banks accountable, it's homeowners who get hurt. Is there a better way?

That's the big question that's facing the entire country, because this issue is not unique to Massachusetts. Any solution is gong to have to be state-by-state. It will be impossible to come up with a national solution to this. I think there are some solutions. For example, solutions that would involve some type of fund that was created for borrowers, some emergency program that would allow the foreclosures to go through even though there were some title problems.