The chain of title is the guy-wire that holds the home finance industry upright. Without some method to determine who owns a given parcel of real estate, it cannot be used as collateral for a loan. In cases where these loans go into default, a clear title is essential for a smooth foreclosure and REO process. Unfortunately, problems arise that cloud the title, increasing loss severity for investors.
This occurs all too often. A case in point is provided by a transaction in California in which Washington Mutual (now defunct) made a $620,000 loan to a person named Sciarratta, which later went into default. When the dust cleared another top 10 bank had acquired WaMu’s assets, including this problem loan. It would later experience a complete loss on this transaction due to a simple but surprisingly frequent event that could have been easily avoided had better information been available to the lender.
There is nothing very strange or exciting about the law relied on by the court in Sciarratta. What is unique about the case are the facts on which it was decided.
The bank first assigned the Deed of Trust, including all its rights, to Deutsche Bank on April 24, 2009.
Three days after the assignment to Deutsche Bank, the Trustee (CRC) recorded a Notice of Default, identifying the bank as the successor in interest of WaMu. There was no mention of the Deutsche assignment.
In an apparently unrelated move, the plaintiff homeowner then sued the bank, Deutsche Bank, and the Trustee (CRC) for quiet title.
The bank then, a bare seven months after the Deutsche Bank assignment, purported to assign the same Deed of Trust to Bank of America (BofA). On the same day, the Trustee (CRC) recorded a Trustee’s Deed upon Sale, identifying BofA as the “foreclosing beneficiary” in exchange for a “credit bid.” This was the first of the void assignments.
The following month, the bank attempted a “corrective” assignment of the same loan to BofA, effective as of the date of the original assignment to Deutsche Bank. This, of course, is also a void assignment. There was, naturally, no mention of the Deutsche assignment.
The court held that Sciarratta had standing to question the bona fides of the assignment to BofA, because the assignment was void, not merely voidable. In so holding, the court relied on the outcome in Yvanova v. New Century Mortgage Corp., a 2014 decision of the California Supreme Court that held a foreclosure by a third party to be actionable. BofA actually had no interest at all in this loan, and was definitely not (notwithstanding the allegation in the Deed upon Sale) the Beneficiary of the Deed of Trust. The assignment of the property to BofA was therefore void, so it did not acquire title to the property. It did not take the land. It took nothing.
The striking reality of this case is that all these undesired consequences could have been avoided had the bank “known” about the assignment to Deutsche Bank when it attempted to assign this Deed of Trust to BofA. A simple report disclosing the contents of the public record before the assignment to BofA would have prevented the costly error of attempting to assign the Deed of Trust a second time.
The cost of such a report—and Nationwide Title Clearing, Inc., uses its own AVX report as an example—is not negligible, but with a population of loans a bank has acquired from another, for example, it is definitely warranted, especially given the fact that the bank in this case lost $620,000 on Sciarratta alone. Entities that are considering the purchase of someone else’s loan portfolio might in many circumstances consider factoring into the purchase price the cost of such a report. The knowledge obtained would act as useful insurance.
The same risk would be present in a large bank that owns a large portfolio but also employs enough people that someone else within the bank could assign a loan without it being general knowledge. In the Sciarratta case, for example, the confusion within the bank over who was the appropriate assignee arose entirely from within the bank. It was not another entity that assigned to Deutsche Bank, but likely another department within the bank.
The same issue could arise in the context of a release of lien. If the release were inadvertently signed on behalf of the wrong entity, it might raise the issue of whether the release is effective, and thus might cloud the title of the subject property. This could result in statutory penalties in many states, and to demands for the correct release from the homeowner in most of them.
Executing an assignment without first knowing what the loan's title history looks like is akin to working in the dark. If the financial institution does not have sufficient resources internally to acquire this information, reports that cover the public record are available to provide that security.