Purchasing houses in foreclosure seemed risky at the onset, especially after the robo-signing scandal that rocked the property and banking sectors late last year. Many buyers of distressed homes were in jeopardy as the titles in their hands seemed questionable as banks were accused of processing foreclosures carelessly. But if buyers do their homework diligently, they can avoid these pitfalls and buying foreclosures would be rewarding in the end.

Robo-signing

In October 2010, several big banks like JP Morgan Chase and Bank of America have admitted that they have employees sign hundreds of documents a day for houses in foreclosure even without scrutinizing these.

Some claimed that supposedly reputable banks like these cut corners to prove that they have the right to foreclose a property - a process that become complicated in the course of the securitization of mortgages, which made it difficult to produce the original documents. Cutting corners ensures that the banks could submit the documents to the courts as soon as possible and move on with the hundreds, if not thousands, of foreclosures to be executed.

Amid pressure from lawmakers, individual, and class suits, these banks have decided to halt proceedings for foreclosures and review the documents more carefully. In the aftermath, the number of houses in foreclosures fell in the fourth quarter of 2010, thus slowing down the increase in distressed homes in the market.

Avoiding the pitfalls

In light of this, victims of robo-signers ask if they could still take back their homes. This makes buyers wary and fear that their purchased houses in foreclosure would be forfeited. However, some experts say victims would have a hard time getting back their homes, so they instead opt to receive the cash settlement. But others say that robo-signing victims who are updated in their mortgage payments, upon the verification of banks, may still be able to retrieve their homes, but it would have to go through the courts again.

With that, buyers must make sure that they and their bank have title insurance to the houses in foreclosure they just bought. With this title insurance, former owners whose homes were wrongly repossessed cannot take back their old property.

In the same way, buyers should investigate the past of the houses in foreclosure to prevent anything that would cloud the title. Having the title insurance shields them from that, but it also pays to check if the property still has undiscovered liens, forged signatures, and problematic documentation.