Qiong Dai and her husband had an offer on their Southborough home and were ready to move into their new place in Wellesley when the sale collapsed two weeks ago.
The problem: They had purchased their Southborough Colonial in a foreclosure sale in 2007, and the title to it was among the hundreds in Massachusetts muddied because of sloppy paperwork by previous lenders. That made the house hard to sell now.
“My whole life is in up in the air,” said Dai, who is facing two mortgages and uncertainty about where to send her children to school in a month. “I didn’t do anything wrong. Why would I suffer?”
A controversial bill aimed at helping homeowners who purchased foreclosed homes in recent years is winding through the state Legislature, and supporters hope it will pass before the session ends Thursday. It would reduce the amount of time people would have to challenge the legitimacy of a foreclosure and sue for the title from 20 years to about three.
Consumers would still be able to sue a bank for an improper foreclosure after the time limit, but under the proposed legislation, it would be for monetary damages and not the title to the home.
While backers of the legislation see it as a way to protect people like Dai and her husband, critics say the bill will hurt the financially distressed homeowners who were foreclosed on in the first place, making it easier for banks to more quickly take over those properties.
“Three years strikes me as a very short period of time,” said Max Weinstein, who works at the Jamaica Plain-based Legal Services Center, a Harvard Law School group that helps low-income clients. Weinstein said he fears that lenders will just keep troubled homeowners in limbo for three years — easily done, given the amount of time it takes to work through the foreclosure process — until the time to sue for the title expires.
At that point, lenders can move to sell the property. “It’s a mess, it continues to be a mess,” said Weinstein.
Historically, the 20-year time frame on challenging a foreclosure rarely caused problems. But the housing bust of the last decade and the flood of foreclosures that followed led to legal shortcuts and technical errors by lenders as they moved against delinquent borrowers at a rapid pace.
Two decisions by the Supreme Judicial Court in 2011 found that those errors could invalidate a foreclosure and cloud a title. For example, the high court ruled that lenders need to establish a clear record of ownership before foreclosing on homeowners and then reselling the property. But in many cases, homes were sold at auctions before the lender formally acknowledged in court filings that it had possession of the mortgage.
Real estate attorneys and the title insurance industry say the ruling has put innocent homeowners at risk, and the legislation would protect them. Ward Graham, the president of the Massachusetts Land Title Association, said these property owners have been in their homes for as many as eight years, paying their mortgages regularly. But now they can’t refinance or sell the homes, Graham said.
And not all have the appropriate title insurance, which protects homeowners from financial losses should a title prove problematic.
Graham described the legislation as “being very, very fair in balancing the rights of foreclosed borrowers” while giving the innocent purchasers some certainty.
Richard D. Vetstein, an attorney who writes a Massachusetts real estate law blog, said homeowners have had to go to extraordinary lengths to find the previously foreclosed owners in order to clear their titles and move on.
Vetstein helped one client track down the previous homeowner in Mississippi and gave him a Best Buy gift card for a plasma-screen television in exchange for signing over a deed. He found another former homeowner in Hong Kong and also paid him to clear the title, Vetstein said.
Shaun Roark, 37, bought a home in Waltham 2007 from an investor who acquired it in foreclosure. But in February, when Roark tried to sell the property to buy a house in South Boston, title problems scared off a potential buyer.
His title insurance company eventually found the former owner in New Hampshire and paid him $500 to release any claims to the property. But in the meantime, Roark had to cash in stocks to cover the down payment on the South Boston property, instead of using proceeds from the sale, and to rent the Waltham house.
“I didn’t plan on being a landlord,” Roark said. “It’s an unfortunate situation.”
Problem titles should become a less widespread problem as lenders have become more careful in processing foreclosures. The Legislature also has passed consumer protection laws that require lenders to give distressed homeowners better notification and more opportunities to modify their loans.
In addition, the rebound in the housing market and economy has meant far fewer foreclosures.
In June, lenders initiated 488 foreclosures, compared to the 2,835 petitions in June 2009, according to data from Warren Group, a Boston real estate tracking firm.
Still, lenders have commenced significantly more foreclosures this year compared to 2013 as they clear what analysts believe is a backlog of distressed properties.
Grace Ross, coordinator of the Massachusetts Alliance Against Predatory Lending, an advocacy group, said the recent uptick in foreclosure actions indicates that the time may not be right to slash the time period for challenging them. Her group opposes the legislation, and says a 10-year statute of limitations might be preferable.
For Dai, 44, waiting seems to the only option. Her title insurance company is trying to find the previous owner of her Southborough home. But she is also fighting the insurer to cover her costs for holding onto the property in the meantime.
“I’m stuck,” she said.