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Planning on Purchasing a Foreclosed Home In the Tampabay Florida Area? Watch out for Freddie Mac’s Disclaimers!

Our neighbors are considering buying a condominium in Tampa that was foreclosed by Wells Fargo (owned by Freddie Mac) and noticed two strange things in the paperwork this weekend. First, Freddie Mac is only offering insurable title not marketable title and they wanted to use their own title agent.

Fortunately, our neighbors were smart enough to notice the distinction. First, the possibility of fraud in the foreclosure or anything else wrong with the foreclosure appear to have been excluded from the insurance coverage. So if the prior homeowner comes forth and says I didn’t have notice of the foreclosure because I wasn’t properly served (this happens all the time) or a faulty affidavit or assignment was submitted in the foreclosure litigation to support the plaintiff’s claim that it owned or held the note (also a common occurrence), the homeowner can have the foreclosure sale reversed. Where does this leave the new buyer? Well they would have a claim for the failure of Freddie to provide good and clear title — or would they? With an insurance exclusion, depending upon how it is written, this could be a major dilemma.

Second, Freddie specifically noted that the purchaser was responsible for any unpaid homeowners association expenses. In Florida, there is Florida Statute Section 718.116 that provides that upon foreclosure, the plaintiff is required to pay the past one year of unpaid condominium association dues or 1% of the original principal balance whichever is less. (This is not necessarily true for all homeowners associations). If the plaintiff lienholder fails to do so, are all the delinquent assessments plus attorney’s fees, costs and interest due and owing, perhaps going back years? I wonder, how often does the bank or mortgage servicer actually make this payment by the thirty day deadline? These are the same parties that cannot look at mortgage modification paperwork within the first 30-90 days of submission because they are so overwhelmed.

On a somewhat unrelated note, I can see additional defenses to deficiency balance lawsuits. If Freddie and other lenders are limiting protection to new buyers by only providing insurable title instead of marketable title, this will cause the purchase price to be lowered. It’s not the former homeowners fault that the first lienholder wasn’t able to provide proper and thorough documentation of ownership and amounts due in the foreclosure case. This should provide a partial defense against the deficiency.

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