It may matter whether the foreclosed home was REO (real estate owned, i.e. the property of the foreclosing bank) or sold to a distinct party. In foreclosure sales, it is very common for the bank to be the only bidder (traditionally, the bank would bid the value of its outstanding mortgage plus fees, but that can sometimes create problems). If everything goes right, the bank then can sell a piece of property that it owns through the regular existing home sale market (i.e. listing it with a realtor or whatever).
If the bank hasn't resold the house, then once the foreclosure turns out to be invalid, the original owner has a clear right superior to the bank's and can move back in.
If the bank has sold to a good faith purchaser for value, then the question becomes (a) what the title rules for the state provide about who is entitled to possession and (b) what the recourse is. Almost certainly, the bank has breached its warranties of sale, especially because it probably sold with a warranty deed, and is liable to the purchaser for the consequences of its error, but there are at least two different scenarios: (1) the new purchaser has the right of possession, but the bank is liable to the old owners for money damages, or (2) the old owners have a right of possession, but the bank is liable to the new purchaser for damages. The new purchasers will then generally have title insurance, so the title insurance company is liable to them for (1) the legal costs involved and (2) to pay more or less upfront any damages they suffer, then stepping into their shoes in holding the bank liable.
Also, note that negotiation is going to be an important part of this--for example, the Ibanezes might have a right to possess, but be willing to sell that right to the new purchasers (really to the title insurance company on behalf of the new purchasers) for a cash payment, which the title insurance company would then try to collect from the bank. Or the bank might be able to cut a deal with the old owners to avoid the liability, although the emotions involved will surely make that more difficult.
Standard disclaimers apply: I'm not your lawyer, this is not legal advice, while I am a property law professor, I am not an expert in issues of title, foreclosure, and sales transactions.
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Date: 2011-01-12 03:19 pm (UTC)If the bank hasn't resold the house, then once the foreclosure turns out to be invalid, the original owner has a clear right superior to the bank's and can move back in.
If the bank has sold to a good faith purchaser for value, then the question becomes (a) what the title rules for the state provide about who is entitled to possession and (b) what the recourse is. Almost certainly, the bank has breached its warranties of sale, especially because it probably sold with a warranty deed, and is liable to the purchaser for the consequences of its error, but there are at least two different scenarios: (1) the new purchaser has the right of possession, but the bank is liable to the old owners for money damages, or (2) the old owners have a right of possession, but the bank is liable to the new purchaser for damages. The new purchasers will then generally have title insurance, so the title insurance company is liable to them for (1) the legal costs involved and (2) to pay more or less upfront any damages they suffer, then stepping into their shoes in holding the bank liable.
Also, note that negotiation is going to be an important part of this--for example, the Ibanezes might have a right to possess, but be willing to sell that right to the new purchasers (really to the title insurance company on behalf of the new purchasers) for a cash payment, which the title insurance company would then try to collect from the bank. Or the bank might be able to cut a deal with the old owners to avoid the liability, although the emotions involved will surely make that more difficult.
Standard disclaimers apply: I'm not your lawyer, this is not legal advice, while I am a property law professor, I am not an expert in issues of title, foreclosure, and sales transactions.