Here is a tale of woe that is real, and may be repeated many times in the future for Massachusetts real estate scenarios. Well before I started representing my client, he purchased a home which had a recent foreclosure in its title. My client, now attempting to do a refinancing to take advantage of lower interest rates, has run into a seemingly “non-fixable” road block with regard to his home. The property in question had been foreclosed upon and purchased back by the bank at auction. My client subsequently purchased the property from the bank at a price in excess of $450,000. At the purchase closing, my client made a decision not to purchase an owner’s policy of title insurance as it was “too expensive.”

After the closing took place, the Massachusetts Land Court issued several decisions that, in part, retroactively invalidated certain foreclosures. My client, who informed me he had paid for substantial improvements to the property, had just learned his application to refinance the property had been denied as a result of the Land Court decisions. In sum, the underlying foreclosure by the bank had been rendered invalid and, therefore, there is a question as to whether my client even owns the property. The invalid foreclosure probably means that the person who was foreclosed upon still owns the property. Not all foreclosures will be affected.

The Land Court decision concerned a foreclosure where the original mortgagee had assigned the mortgage to another servicer but had not received an executed assignment for recording prior to the commencement of the foreclosure. That being the case, the Land Court held that the foreclosing party did not “own” the mortgage and could not foreclose on a mortgage that it did not own. The decision stressed that the assignment did not have to be “on record” before the foreclosure. It just needed to be in existence. It would appear that if my client had purchased owner’s title insurance, he would at least have “insurable title” to his property. Insurable title would probably be enough to permit a refinancing of the property. That would be much better than the current condition.

On the other hand, “insurable title” is NOT “marketable title”, and even if there was an owner’s policy in place, my client may have insurmountable problems selling this property in the future, if the person examining the title realizes that the proper steps were not taken in terms of the foreclosure. People attempting to sell homes which have foreclosures in the title may be faced with the unpleasant prospect of obtaining a confirmatory deed from the former owner who may be “long gone” or “hard to find” and then paying a large sum to obtain same. Given the circumstances, and the justifiable reliance these people had on the strength of the owner’s policy, many title insurance companies may be willing to pay the fee to the former owner just to straighten out the really difficult position the current owner (who paid a premium for an owner’s policy) now find himself in.

Without an owner’s policy, a seller of real property with this problem is facing the difficult, and expensive, prospect of cleaning up this title problem, all on his or her own dime. The lesson learned here, at least in Massachusetts, is that if you are aware that a customer of yours is purchasing a home which has a foreclosure in its title history, you need to be extremely careful about moving forward. I have recently contacted my state senator to see if he could sponsor legislation which would cure this problem. In my eyes, the good faith purchaser for value should always prevail over the person who did not pay his or her mortgage and was, accordingly, foreclosed upon. I urge all of you Bay Staters to consider similar kinds of initiatives with your elected officials, so we can prevent this situation from becoming extremely disruptive to our already fragile real estate market.