LITTLE ROCK — Many title insurance companies in Arkansas are refusing to issue policies in the sale of certain foreclosed-on properties, after a local U.S. Bankruptcy Court ruling in September called into question the validity of the homes’ titles.
Sales on those properties are stalled. As lenders decide how to react to the ruling, foreclosure activity in the state has tumbled further, after sliding throughout 2011because of problems discovered in the foreclosure process on the national level.
The backlog of foreclosures began to grow nationally after it was revealed in late 2010 that mortgage documents often had been passed along without proper verifications, forcing a re-examination of past cases. Some of the instances involved so called robo-signing, in which foreclosures were handled so quickly that documents weren’t being fully read and employees were signing off on foreclosures without notaries or other required witnesses present.
Coming on the heels of those problems, the Sept. 28 bankruptcy court ruling in Jonesboro nearly brought Arkansas foreclosure activity to a halt. Numbers were down about 90 percent in November and December compared with 2010, according to California-based consulting firm Realty Trac.
In the ruling, Audrey R. Evans, chief judge of the U.S. Bankruptcy Court for Arkansas, stated that JPMorgan Chase & Co. - an out-of-state bank that had not obtained authorization to do business in Arkansas - was not qualified to use the state’s nonjudicial foreclosure process.
As a result, Evans ruled, three debtors of JPMorgan were not required to pay certain foreclosure fees because the bank had used the nonjudicial foreclosure process.
Nonjudicial foreclosures, also called statutory foreclosures, are less complicated than judicial foreclosures but are available only to lenders who meet specific criteria. They require certain notifications but are not heard by a state court judge. The option of a judicial foreclosure, in which a judge rules on the validity of the action, is available to all lenders but seldom is used because of its added expense and the additional time required.
JPMorgan has appealed Evans’ ruling to the U.S. District Court for the Eastern District of Arkansas, saying it disagreed with an interpretation that it didn’t have authorization to do business in Arkansas.
Because of the legal questions surrounding nonjudicial foreclosures handled by out-of state lenders, title companies are being extremely cautious about providing title insurance.
Brian Perry, executive vice president of ProLand Title Co. in Little Rock, said the company’s title work for the U.S. Department of Housing and Urban Development has been at a standstill after the ruling and recently has started back as “a trickle.”
Perry said the large out-of state lenders are stumped as to how to proceed in Arkansas because of the bankruptcy court ruling.
Attorneys who have followed the Jonesboro case said they have not seen similar decisions in state or bankruptcy courts outside of Arkansas.
HUD has temporarily suspended sales of its properties in Arkansas because of the ruling and is requiring lenders to provide proper foreclosure documents. Otherwise, the department will turn the properties back to the lenders.
HUD owns properties in the state because of defaults on mortgages insured by the Federal Housing Administration. After foreclosure on insured Real Estate Owned properties, HUD pays off the lender, takes possession of the property and is free to sell it. Real Estate Owned properties, known in the industry as REOs, are owned by the lenders because they were repossessed after unsuccessful foreclosure auctions.
Brian Curtis, executive broker and co-owner of Exit Pro Realty in Northwest Arkansas, said his business is suffering because of the ruling.
Exit Pro Realty specializes in foreclosure sales. Curtis said so far he’s lost $900,000 in gross volume and other listings.
He said the biggest problem with the ruling is the uncertainty about what’s going to happen next.
“I’ve got people lined up wanting to buy houses,” he said.
Most, if not all, title insurance companies in the state have decided to stop issuing insurance in cases where the property was gained through nonjudicial foreclosure by a lender that wasn’t authorized to do business in the state, said C. Wesley Lasseigne, president of the Arkansas Land Title Association. He also is vice president and general counsel for Lenders Title Co. in Little Rock.
Title insurance can be issued to the buyer and lender, and covers defects concerning the title to the property. Title insurance is usually required to obtain a mortgage.
Lasseigne said the market’s reaction to Evans’ ruling seems to be “wait and see.”
He said the bankruptcy court ruling could also have the unintended consequence of causing a flood of foreclosed-on properties to enter the market once the legal questions concerning the ruling are resolved. Such a glut could further erode housing prices.
FEWER FORECLOSURES
Evans’ ruling comes as foreclosure rates in Arkansas and the nation have declined significantly compared with peaks in 2010.
“Foreclosures were in full delay mode in 2011, resulting in a dramatic drop in foreclosure activity for the year,” Brandon Moore, chief executive officer of Realty Trac, said in a news release Jan. 12.
Moore said the industry was hindered by a lack of clarity regarding documentation and legal issues, resulting in inefficiency and a dysfunctional foreclosure process.
An investigation of problems with the foreclosure process, including robo-signing, is under way with all 50 state attorneys general participating. The investigation is to determine whether companies indicated that they had reviewed and verified supporting documents when they had not; signed affidavits without notaries public present; and whether in each case the company seeking the foreclosure was the correct one to do so.
In April, banks including JPMorgan, Citigroup Inc. and Wells Fargo & Co. reached separate settlements with the Federal Reserve, the Office of Thrift Supervision and the Office of the Comptroller of the Currency, agreeing to review loans that went into foreclosure in 2009 and 2010. The banks also said they’d improve foreclosure, refinancing and loan modification procedures.
On Wednesday, The Wall Street Journal reported that a settlement on robo-signing complaints that will cut what some families own on their home loans was near at hand. The newspaper reported that a $19 billion deal was on the table between Ally Financial Inc., Bank of America Corp., Citigroup, JPMorgan and Wells Fargo and the attorneys general and federal officials. It said the amount could grow if regional banks join.
Realty Trac projects that the number of properties in some stage of foreclosure will rise to near-record levels this year as the industry begins to clear the backlog.
In Arkansas during 2011, the number of foreclosures was down 61 percent compared with 2010, according to Realty Trac. Foreclosure activity across the nation dropped 34 percent last year, compared with 2010. The consulting firm said foreclosure activity last year was at its lowest nationally since 2007.
The ratio of Arkansas’ total housing units with some type of foreclosure filing during the year was 1 in 171, ranking 37th in the country, compared with the national average of 1 in 69, the firm’s data show. The state hasn’t seen one of the higher foreclosure rates, at least in part because housing prices didn’t spike as much as in places such as Florida or Nevada.
Michael Pak ko, chief economist at the Institute for Economic Advancement at the University of Arkansas at Little Rock, noted that 2011 foreclosure numbers were being compared with peak times in2010, which would make the recent declines appear more severe.
Foreclosure activity in Arkansas dropped by 15 percent in the first and second quarters of 2011 compared with the same period in 2010, according to Realty Trac.
Activity began a steeper drop in the third quarter, falling 57 percent, with fourth-quarter activity - after the bankruptcy court ruling - down 90 percent compared with the same period a year earlier, Realty Trac data show.
Realty Trac compiles data on homes in all stages of foreclosure, including initial notices of default, notices of auctions of foreclosed-on property and bank repossessions. The accuracy of Realty Trac’s foreclosure statistics, which are used widely by news media, has been questioned by some media outlets and mortgage lenders, but Realty Trac stands behind its methodology.
With so many factors in play, it’s difficult to measure the direct impact of the bankruptcy judge’s September ruling, but industry watchers say the decision of title companies to stop writing insurance in those cases put a substantial crimp in already slumping fourth-quarter foreclosure activity.
THE RULING
Evans ruled against JPMorgan in three bankruptcy cases that involved foreclosures. The lead case in the appeals is Daniel L. Johnson, 3:10-bk-12119, U.S. Bankruptcy Court, Eastern District of Arkansas, Jonesboro Division.
Evans determined that the nonjudicial foreclosures by JPMorgan were invalid, since a key requirement - authorization to do business inside the state - was not met. She rejected arguments that the bank was qualified to use nonjudicial foreclosure by employing an Arkansas-based attorney in fact. Attorneys in fact act as business agents, allowing them to act on the businesses’ behalf.
The attorney for the debtors, Joel Hargis of Crawley & DeLoache of Jonesboro, said legal precedent requires lenders to adhere to all aspects of the statute for a nonjudicial foreclosure to be valid. He said it’s essential that debtors be given a “fair shake” when facing the possibility of losing their property without court oversight.
The case in the U.S. District Court appeals is J.P. Morgan Chase Bank, N.A. vs. Daniel L. Johnson, 3:11-cv-00249 BRW.
In a brief filed on behalf of JPMorgan in mid-January, attorneys contend that the bankruptcy court erred by misunderstanding oral stipulations made during the hearing. JPMorgan contends attorneys said the company was not “registered” with any state official or entity,not that it was not authorized to do business in the state or that it was not in compliance with state law regarding nonjudicial foreclosure.
A JPMorgan spokesman declined to comment on the case.
JPMorgan was represented by Little Rock-based Wilson & Associates in bankruptcy court. Telephone calls requesting comment on the case were not returned. Wilson & Associates focuses on the real estate default market and has offices in Arkansas and Tennessee, according to its website.
Robert M. Wilson Jr., the managing attorney for the firm, wrote the Arkansas Statutory Foreclosure Act, according to his biography on the website.
MORE TO COME
The bankruptcy court ruling has spawned three lawsuits in Arkansas that seek class-action status. The suits contend that the ruling calls into question the validity of some nonjudicial foreclosures. Rulings in these cases are expected to determine the property rights of those who lost their homes and those who purchased them.
Lynn Foster, a professor at the University of Arkansas at Little Rock’s William H. Bowen School of Law, said that until there are more rulings in federal court and a definitive answer from a state court, it will be risky for lenders not authorized to do business in the state to continue to use nonjudicial foreclosures.
She said there likely will beat tempts to amend the Statutory Foreclosure Act in 2013, in the next regular legislative session, so lenders will be able to use the act without having to register to do business in the state. The act, passed in 1987, authorized the use of nonjudicial foreclosure in Arkansas and established criteria for its use.
Foster said the most prudent action for lenders is to turn to judicial foreclosures until challenges to the ruling are resolved.
Tim Tarvin, associate professor of law at the University of Arkansas at Fayetteville, said nonjudicial foreclosure is the preferred method of residential foreclosure in states that allow it. He said a nonjudicial foreclosure in Arkansas can take as little as six to eight months and is less costly than judicial foreclosures, which can take years and generally have higher attorneys fees.
He said the ruling calling into question the legitimacy of many nonjudicial foreclosures is frightening to title companies, and it is understandable that they’d stop writing policies until the matter is resolved. He said no one would want to buy a home without assurances it had a clear title.
LENDER ALTERNATIVES
Out-of-state entities seeking foreclosures, usually banks or other lenders, could obtain authorization to do business in the state through the secretary of state’s office or seek authorization through the state Bank Department and then begin the nonjudicial foreclosure process from scratch.
In its brief January in the federal district court appeal, JPMorgan argued that it did not need either of those authorizations to do business in Arkansas. JPMorgan’s attorneys contend that as a national bank organized under U.S. law, it is authorized to do business in the state and therefore meets the requirement of the Arkansas statute. Furthermore, they said, even if there were a conflict, the state law would be preempted by the National Bank Act.
Alex Reed, a spokesman for the secretary of state’s office, said it’s fairly simple and inexpensive for an out-of-state entity to register to do business in Arkansas. He said the process includes filling out some forms and about $300 in fees. Reed added that the office hadn’t registered any out-of-state banks recently.
Brent Taylor, attorney for the state Bank Department, said issuing a certificate of authority to do business in Arkansas as a bank requires a branch location and the intention of the lender to offer banking services in the state. He said there would be no basis for approval for the certificate if it was just to allow a lender to use the nonjudicial foreclosure process.
Seventeen out-of-state banks hold certificates of authority to do business in Arkansas, according to the Bank Department’s website. Bank of America, the nation’s second-largest bank, and Wells Fargo, the fourth largest, are on the list.
Taylor noted that the judge’s ruling has no impact on Arkansas-based banks since the statutes allow them to use the nonjudicial foreclosure process.
Front Section, Pages 1 on 01/22/2012