Wednesday, August 31, 2011

Title Search Failure To Disclose Subordinate Lien Leaves Lender Holding The Bag With Foreclosed Home Subject To Junior Lienholder's Claim

The following facts have been taken from a recent court ruling from a Memphis, Tennessee Federal Court:

  1. Bank, a 1st mortgage holder, initiates foreclosure process against homeowner.

  2. At the sale, Bank is the successful bidder and takes title to home.

  3. At some point subsequent to the foreclosure sale, Bank discovered that a junior lien on the premises was not included in the title report prepared prior to the foreclosure sale.

  4. Because Bank was unaware of the existence of the junior lien prior to the foreclosure sale, it failed to give the junior lienholder proper notice of the sale.

  5. Because junior lienholder failed to receive proper notice of the sale, its lienholder's interest in the premises was not extinguished - it survived the sale.

  6. Upon said discovery, Bank went to court and sought to rescind the foreclosure sale; to void the deed recorded pursuant to that sale; and to reinstate the foreclosed mortgage (actually, it was a deed of trust) and other liens as to the subject property.

  7. In effect, Bank requested a chance for a 'foreclosure do-over' to undo the mess it now found itself in, holding title to a home encumbered by a lien that, prior to the foreclosure sale, was junior in priority to its own mortgage.

For the reasons set forth in his ruling, U.S. District Judge S. Thomas Anderson told Bank, in effect, 'tough luck' and refused to set aside the foreclosure sale, and left Bank holding the bag with a foreclosed home subject to the 'now-no-longer junior' lienholder's interest.

For the ruling, see Nationstar Mortgage, LLC v. Humphrey, No. 11-2185-STA (W.D. Tenn. July 29, 2011).

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