Distressed home sales hit snag

MORTGAGE BANKERS and real estate attorneys across the state say pending sales of homes that went through foreclosure are being stopped by concerns that the counseling requirement has not been satisfied and the title to the property might not be good. / BLOOMBERG FILE PHOTO/JOSHUA LOTT
MORTGAGE BANKERS and real estate attorneys across the state say pending sales of homes that went through foreclosure are being stopped by concerns that the counseling requirement has not been satisfied and the title to the property might not be good. / BLOOMBERG FILE PHOTO/JOSHUA LOTT

As lenders across the country struggle to sort out confused, sloppy or abusive foreclosure practices, a 2-year-old state mortgage-counseling law in Rhode Island has turned into a stumbling block for many banks trying to move distressed properties off their books.
Mortgage bankers and real estate attorneys across the state say pending sales of homes that went through foreclosure are being stopped by concerns that the counseling requirement has not been satisfied and the title to the property might not be good.
The concerns have prompted title-insurance companies, which investigate land records and write one-time policies guaranteeing clean title, to deny insurance for many previously foreclosed properties.
“It is creating a huge backlog of files of houses that are sitting there in foreclosure status, empty, vacant and not being sold or moved off the inventory of lending institutions,” said attorney James Caruolo, who practices real estate law in Warwick. “This leads to problems with the condition of the homes and unpaid taxes. It ends up hurting the city and neighbors because you are not moving it on to a new buyer.”
The volume and extent of title issues connected with the Rhode Island foreclosure mortgage-counseling law is difficult to estimate. There is no central clearinghouse for pending foreclosure sales or properties caught in legal limbo because of title problems.
Caruolo said he has been personally involved with a couple of sales that have been held up over the past two months.
“The statute is a mistake and a disaster. … It has not saved any homeowners from losing their homes,” said Joseph Vitullo, underwriting counsel for Stewart Guaranty Title Company in Warwick, who added that the law had been copied badly from federal foreclosure law. “It is so poorly drafted that title companies are erroneously reading many requirements into the statute that have no basis in the law. The result is that hundreds of titles have been rendered unmarketable.”
Stephen Tetzner, founding partner of Homestar Mortgage in Providence and president of the Rhode Island Mortgage Bankers Association, said he has seen the problem on the loan-initiation side and it appeared to be slowing down the real estate market. “There are hundreds of properties in Rhode Island that have been foreclosed and the foreclosure has been deemed defective by the title-insurance company,” Tetzner said.
Along with the size of the problem is the question of whether the state’s foreclosure law is to blame or fault lies with lenders still struggling to follow procedures more than five years since the start of the subprime crisis.
The law, which went into effect in 2010, requires any “mortgagee” who intends to foreclose on a home to send a written notice of default to the borrower, including disclosure of their rights to counseling, 45 days before initiating a move to take back control of a property.
“Failure of the mortgagee to provide notice to the mortgagor as provided herein shall render the foreclosure void,” the statute reads.
But with mortgages being sold, securitized, sliced, repackaged and resold, the question of who exactly owns a loan and who the “mortgagee” is can be complex. In most cases, the loan servicer monitoring payments and sending notices out in case of default is not the ultimate holder of the note, especially in loans backed by government lenders Fannie Mae and Freddie Mac.
Caruolo said the vagueness of the term “mortgagee” is making servicers uncertain about who has to send the counseling notice and what names have to be on it to satisfy the notice and counseling requirement in the law.
But others say there is no problem with the foreclosure law as long as the lenders or loan servicers follow it correctly and are careful and accurate in processing the paperwork.
“As long as the servicer is acting on behalf of the mortgagee – the correct mortgagee – it is not a problem,” said Michael Mellion, vice president of Fidelity National Title in East Greenwich and chairman of the Rhode Island Bar Association’s Title Standards Committee.
“We constantly use agents and know servicing is a fact of life in the mortgage industry,” Mellion said. “If the notice is sent by someone who is not the mortgagee, we don’t have a problem, but the servicers should know who the mortgagee is, because someone challenging that foreclosure could demand that proof.”
Mellion said he encounters questionable mortgagee listings “frequently, but not on a daily basis” and that the mortgage-counseling requirement seems to trip lenders up more than other procedures, although he doesn’t know why. The bulk of foreclosures in Rhode Island are done by large national banks, many the same ones that have been dealing with problems connected with sloppy or questionable foreclosure practices across the country.
Bank of America declined to comment on the mortgage-counseling requirement, as did Citizens Bank, which referred questions to Rhode Island Bankers Association legislative counsel William Farrell. Farrell said he had not heard of any issues with the law and could not comment.
Charles A. Lovell, a partner who represents mortgage companies at Partridge, Snow & Hahn in Providence, through a secretary said he could not discuss the issue.
At the R.I. Department of Business Regulation’s Banking Division, Supervisor of Examinations Sara Peterson Cabral said the agency was not aware of any concerns about the foreclosure-counseling requirement, but intends to send out a bulletin clarifying any confusion about who could satisfy the notice rule.
“It was not the intent of the law to limit the providing of the disclosure notice to the sole holder of the mortgage,” Cabral said. “The intent was to allow servicers to do it.”
As for whether foreclosures or titles to foreclosed properties in Rhode Island are actually being challenged in state courts, Bruce Kogan, a real estate- and mediation-law professor at Roger Williams University Law School, said he hasn’t seen much of it so far.
“I am not seeing a huge amount of cases brought on title issues,” Kogan said. “Maybe the lenders are sitting on a lot of inventory because they are worried about title, that there is a specter out there. But it hasn’t really been put to the test.”
After seeing heavier foreclosure volume than neighboring states since the subprime crisis, Rhode Island has seen lenders pull way back on the pace of foreclosures in the first half of 2012. In July, foreclosure filings in the Providence-Fall River-New Bedford area fell 30 percent from July 2011, the fifth-consecutive month of year-over-year decline, according to RealtyTrac. Just counting Rhode Island, year-over-year filings fell 46 percent during the month. •

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