A recent ruling by the Court of Special Appeals of Maryland should reassure lenders and title insurers as homeowners in the state turn increasingly to their right to rescind a deed in the wake of a "foreclosure rescue."

In Julian v. Buonassisi, et al., the court reaffirmed the protections in place in Maryland for bona fide lenders and their assignees under mortgages executed before April 3, 2008. The court held that even when a homeowner rescinds a transfer under the state's Protection of Homeowners in Foreclosure Act, the buyer's mortgage is not void because a bona fide lender is not subject to a homeowner's rescission right. Significantly, a lender may be bona fide even if it has constructive notice of a pending foreclosure against the homeowner. A lender may also be bona fide even if the foreclosure consultant, settlement agent, or buyer in the transaction was an agent of the lender because an agent’s knowledge cannot be attributed to the lender when their interests are adverse.

The surge in foreclosures across the United States has left banks, loan-servicing companies, and title insurers facing a torrent of litigation by homeowners. Much of it stems from "foreclosure rescues": homeowners enter into transactions with "consultants" who promise to stave off foreclosure, often by temporarily conveying a property to a third-party "straw buyer." Federal authorities recently indicted eight participants in a foreclosure rescue operation based in Prince George’s County, Maryland, that allegedly stripped more than 400 people of equity in their homes.

Maryland’s Protection of Homeowners in Foreclosure Act (PHIFA) allows a homeowner who has conveyed property through certain types of foreclosure rescue arrangements to rescind the deed for a three day period after the provision of required disclosures. The rescission period does not begin until all required disclosures have been provided, so a homeowner could rescind a deed months, even years, after the transaction, which can bring deeds and deeds of trust into question long after conveyance.

Originally, PHIFA protected a bona fide lender who made a loan to a straw buyer without notice of facts triggering a homeowner's right of rescission. Now, however, that protection applies only to mortgages executed before April 3, 2008, when PHIFA was repealed and reenacted without the protection.

Protection or not, homeowners have filed dozens of lawsuits and intervened to prevent foreclosures against homes in straw buyers' names, arguing that when an underlying deed is rescinded under PHIFA, the straw buyer had no interest to give to a lender and the current mortgage is void. So, for lenders and title insurers with interests in residential real property in Maryland arising before April 3, 2008, without notice of facts triggering a homeowner’s rescission right, Julian provides significant reassurance of mortgage validity.


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