As described in the current edition of Banker and Tradesman, home buyers and Realtors® are now reporting that many post-foreclosure sales of REO (Real Estate Owned) homes  in MA can’t go to closing.  The sales are delayed pending resolution of a foreclosure title glitch relating to backdated “assignments of mortgages,” a common but obscure aspect of mortgage practice in Massachusetts.

The Land Court’s ruling has caused many title insurers to stop issuing coverage for new REO sales.  This has halted many REO closings, making a lot of buyers very angry. 

So if you are considering buying a bank-owned property in Massachusetts, you should be aware that there may be a serious impediment to your closing on that home, at least until after this foreclosure title issue is resolved.

The Background

Mortgages and the promissory notes they secure are routinely bought and sold as investments.  “Assignments of mortgages” is a high volume business with lots of paperwork that often gets backlogged.  Lenders are flooded with foreclosures, creating an environment already fraught with delays, confusion and mistakes.

One way of easing the bureaucratic burden is to “backdate” some of the paperwork supporting the mortgage assignment.  Assignments of mortgages has become sort of an ‘I’ll buy it now and we’ll handle the paperwork later’ transaction.

The Trouble with Backdating

Even mortgages in arrears are assigned (they are sold at a steep discount).  The trouble with backdating assignments of mortgages heading into foreclosure arises where the entity initiating foreclosure proceedings lacks clear ownership of the mortgage, relying instead on backdated documents sometimes signed AFTER the foreclosure sale is completed.

This backdating of mortgage assignments can create conflicts with the strict notice and publication requirements of Massachusetts foreclosure law designed to protect the interest of mortgage debtors.

The conflict can call into question the validity of a foreclosure sale and can seriously delay the post-foreclosure re-sale of the property by the foreclosing lender.  Quite a mess!

REO Buyer Beware

So until the conundrum is resolved in the courts, it’s “buyer beware” with REO property: you may not be able to close on that REO home as scheduled!

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As you probably know, the Title 5 regulations in Massachusetts mandate that all homes not on town sewer have their on-site sewage disposal systems (typically a septic system) inspected prior to the sale of the property.

Most home sellers routinely pay for the Title 5 inspection as part of the process of selling their home

You’d think that this would mean that when you buy a foreclosed MA home from a lender (often called an REO property) the lender would offer it to you with a passing Title 5 inspection report.

This is unfortunately not the case with Massachusetts foreclosures; there is an exception in the Title 5 regulations which specifically allows foreclosing lenders to avoid the Title 5 inspection obligation. 

This exception in practice puts the onus of ensuring compliance with MA’s Title 5 regulations squarely on the buyer of the REO property.

Here’s how this works:

The regulations colloquially referred to as “Title 5” comprise 96 legal-sized pages of text codified under 310 CMR 15.000.

You can download the Title 5 regulations here.

310 CMR 15.301 sets forth the inspection requirements of Title 5. 

Title 5 requires that all on-site sewerage disposal systems be inspected prior to the sale of the property they serve.  The inspection must take no earlier than 2 years prior to the sale (3 years if the waste disposal system was pumped annually after the inspection). 

If weather conditions preclude inspection prior to the sale, the inspection can he performed no later than six months after the closing.

310 CMR 15.301(3)(b) makes the important exception for foreclosure sales. 

Essentially, this provision allows a foreclosing institution to avoid performing the Title 5 inspection for up to six months after the Massachusetts foreclosure sale, so long as within that time period it contractually allocates responsibility for the inspection to an “unaffiliated third party” (i.e. the buyer at the subsequent REO re-sale).

Thus, lenders selling a REO Massachusetts foreclosure property can refuse to pay for or perform the Title 5 inspection, seeking instead to make the buyer deal with the Title 5 hassles.

If you as the buyer need financing to fund your acquisition of an REO property, your mortgage lender will require a passing Title 5 inspection before the closing. So you’ll have to go out of pocket to pay for the Title 5 inspection of a home you don’t yet own.  This can cost you anywhere from $350 to $700 or more.

If the inspection can’t be done prior to the closing, your mortgage lender will expect you to put many thousands of dollars into an escrow fund to cover the cost of the inspection and any system repairs that might be indicated by the results of a post-closing Title 5 inspection.

Either way, the Title 5 inspection gets done at the expense of the buyer of the MA foreclosure property.

A potential trap lies in wait for cash buyers of Massachusetts foreclosures: a cash buyer may be tempted to skip the Title 5 inspection, because there is no purchase money mortgage lender demanding that the inspection be done or funds escrowed.

So cash buyers sometimes buy REO homes with the septic system uninspected in the (mistaken)  belief that no Title 5 inspection need be done at all.

These cash buyers may not realize that the Title 5 inspection is mandatory and must be performed within 6 months of their purchase of the REO home.
And if the on-site system fails the Title 5 inspection, all system repairs must be performed at their, the new owner’s, expense.  That can be a costly proposition!

In reality there are no “septic police” out there stringently monitoring compliance with Title 5.

 So a cash buyer of an REO property may encounter no ramifications for his failure to get the Title 5 inspection performed.

But local boards of health are charged with enforcing Title 5 and your cash purchase sans Title 5 inspection may catch a health agent’s eye – with potentially very expensive consequences for you! 

So cash buyer beware . . . or buy Massachusetts foreclosures only on public sewer!

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But REO home sales carry a hidden problem for prospective purchasers: the properties frequently have been “winterized” to protect them from the cold Massachusetts weather.

If you’ve ever seen a home that has had burst pipes, you know the terrible damage water can cause to a structure.

Where a water pipe bursts on an upper floor, the water damage quickly spreads.  Ceilings on lower levels collapse, walls sprout mold, wood floors buckle – whole sections of a structure must be gutted if water runs unabated for even one day.  It’s easy to run up repair bills of $50,000 and more.

That’s why lenders which foreclose on properties during the cold winter months in MA will “winterize” the structure immediately upon taking title at the auction. 

They turn off the utilities, drain all pipes and often add anti-freeze.  Sometimes electrical service is left on, but everything else is turned off, disabled and drained.

This creates a lot of challenges for the post-foreclosure marketing and sale of REO homes. 

It’s impossible for buyers to do a full home inspection of a winterized home. 

“Dry” inspections are easily done, but there’s no way to judge the functioning and condition of the home’s heating and plumbing systems.  You just assume the risk of undiscovered problems with mechanical systems if you buy a home with only a “dry” home inspection.

Buyers may get the REO lender’s OK to pay to dewinterize the structure for a home inspection, but the buyer will also have to foot the bill to re-winterize the place after the inspection is done.  Together, the dewinterize/rewinterize process can cost well over $1,000.

You can say everything is negotiable and seek to get the REO lender to pay to dewinterize and rewinterize a property.

Some REO lenders will pay at least part of the dewinterize/rewinterize costs.  But communications with REO lenders (or their 3rd party asset management company) are notoriously slow and difficult. Many buyers give up on a REO purchase in frustration after lots of lost time.

Lack of open, easy communications between real estate agents and REO lenders greatly complicates inspections and sales of REO properties.  It’s the part of the buyers’ cost of doing business with REO properties.

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These REO sales are post-foreclosure offerings by the lender often via an agent using the MLS.  So most REO homes are easy to find and any agent with MLS access can show these listings.

As you will find when you look at the insides of a majority of REO homes, there often are a lot of structural problems and mechanical defects.   And the utilities are almost always disconnected, making a full home inspection nearly impossible.

The lender (who has become the property owner) will rarely fix any defects for you.

Often the cost of repairs when added to the price the lender wants greatly exceeds what the market value of the home will be once the repairs are done.  The lender often dismisses low offers out of hand, holding out for a high sale price.

So quite a number of REO homes sit unsold on the MLS for months as the asking price slowly drops as the lender feels its way down to the home’s “as is” market value.

Still you can find some compelling REO deals if you work hard at eliminating the money pits!

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