The small ripples initially caused by GMAC/Ally’s admission last month of problems with thousands of affidavits erroneously signed by employees have grown into waves – and local industry insiders are already trying to figure who’s going to get splashed.
Some analysts have suggested title insurers ought to be among those pulling on their wetsuits. And while they may stay dry here at home, thanks to the nature of foreclosure proceedings in the Bay State, they would nonetheless be wise to take precautions.
The widespread “robo-signer” problem affecting more than a score of states nationwide stems from flawed affidavits submitted to courts as part of foreclosure proceedings in judicial foreclosure states – those states where foreclosure cases are heard by a judge.
Massachusetts is a non-judicial foreclosure state. Here, title attorneys working for lenders submit a form to the Land Court to register their intent to foreclose on a property, indicating the place in the registry of deeds in which the mortgage is recorded. With the exception of swearing that the loan is in default and that the homeowner is not a member of the military, there is no affidavit required.
“There’s no lying to the court, there’s no perjury, because there’s no affidavit. It’s not a court document,” said Neil D. Golden, an attorney with the Boston law firm Gilmartin, Magence & Ross LLP.
That means the kinds of class action lawsuits which are already springing up in judicial foreclosure states – including one on behalf of homeowners in Maine filed recently by the Center for Responsible Lending – ought to skip Massachusetts, despite recent angry rhetoric to the contrary from Attorney General Martha Coakley.
Getting Their House In Order
Right now it’s unclear how judges in affected states will respond to the problem posed by the flawed affidavits. Given that the vast majority of homeowners affected were indisputably in default (even if the filing affirming that was not properly submitted), affected foreclosures may be allowed to stand. Alternatively, judges may throw out the cases but allow lenders to resubmit them, this time with all Is dotted and Ts crossed.
There is a third option, however. Judges have the right to throw out cases “with prejudice” in which false evidence has been submitted – meaning that it cannot be resubmitted.
Such a decision would turn what is currently a cloud on titles into a dark and stormy night, and that’s exactly what many foreclosure defense lawyers will be angling for.
Title companies, in turn, might be drawn into such suits, and even if they prevail, the legal costs could be substantial.
Even so, it should be lenders who bear the costs, not insurers, argued title insurance analyst Mark Dwelle of RBC Capital Markets, which has an office in Boston.
“In such a case it would be up to the bank to make all parties whole – which realistically would be done by incurring whatever cost was necessary with the original owner to clear title,” Dwelle said. “[The] title company…would never have paid any claim and would certainly look to the bank for defense costs as necessary.”
Title insurers pitted against the lenders and homeowners they represent is exactly the outcome insurers want to avoid. Talks are ongoing among lenders, insurers and regulators to come up with an industry-wide solution that would indemnify insurers against the potential risks posed by flawed paperwork.
“Our request to the lenders is that you need to get your house in order,” said Jeremy Yohe, spokesman for the American Land Title Association, the title insurance trade association and advocacy group. Yohe said the group has been in talks with Fannie, Freddie, and federal banking regulators regarding what steps lenders need to take to ensure adequate title policies continue to be written on REO properties potentially affected by flawed paperwork.
Without such steps, other insurers may follow the lead of Ohio-based Old Republic, a national title insurer with offices in Boston which has stopped offering insurance on some bank REOs while the problems are sorted out.
No Backstop
Even though Massachusetts titles may not be swept up in robo-signing lawsuits, the enormous number of cases involved may still pose a systemic risk to the industry as a whole, which is dominated by a few big players.
Whether defending themselves against foreclosed homeowners or going after lenders whose flawed paperwork clouded the title, many title insurance companies could find themselves with substantially greater legal bills than they’d planned, sources told Banker & Tradesman. And while it may be incumbent on banks and lenders to make everyone whole, as Dwelle suggests, upfront costs may be substantial.
Most insurance companies try to offset these kinds of risks by purchasing reinsurance – essentially insurance for insurers – which can mitigate losses against an entire portfolio. But title insurers are different than most.
There are strict laws governing who can enter the title insurance market. As such, reinsurance within the title insurance industry is usually only obtained on large commercial properties, and even then the reinsurer is usually another title insurance company.
“The broader reinsurance industry has not been much of a factor in the title insurance business,” said Rich Patterson, president and CEO of New England’s largest title insurer, Connecticut-based CATIC, which also has offices in Massachusetts. “We all reinsure one another.”
