Why a bank doesn't record a deed until closing?

Question

We purchase 5-7 REO's each month, and I have always had this question...

On at least 80% of the deals we do, the bank has not recorded the deed or CT, and they do not until right before closing. While it does not affect me, just always wondered why they did this. As an example, we are under contract on a deal where the original seller did a deed in lieu. The bank has not recorded the deed. Now, many sellers in financial trouble have other issues or pending judgments. If the bank does not record the deed and get themselves on title, there is the possibility that a judgment from the previous owners could potentially attach to the property. Now the lender has agreed to NOT foreclose on the property, but there is another lien attached, forcing the lender to move forward with a foreclosure action or negotiate the judgment/lien.

If I had to guess, I would say the lender does not want to be on title due to them doing something odd with their books and not actually taking ownership of the property, but that is just a guess.

Would welcome anyone with true insight on this.

Thanks!

Bill Gulley · Answer

Hi, title is passed upon the execution of the deed, not the filing. I would think that it is an adminstrative proceedure as there is no accounting advantage or responsibility avoided from delaying the filing of any deed, giving public notice of the transfer of title. As to any other lien holders, any lien I could file after the date of the title transfer of a foreclosed property could be lifted and would not have any effect, but since public notice was not made and I had acted in good faith, I would not be liable for filing a false lien either.
State law may not address when a deed must be filed, accept as necessary to provide good title. Most states have time limits for the filing of any release of liens after they are satisfied. With any foreclosure, it would be those liens and encumbrances made of record prior to the sale, as the sale wipes out other claims not of public record with the exception of taxes, assessments, court orders and workmens'/ materials liens, depending on state laws.

In Missouri for example, a contractor may sell a property and sign a release, but sub contractors may still file a lien for unpaid work/material and the buyer would be responsible to pay the workers, but the contractor-seller is then liable to the buyer for the financial loss. Since your seller is a bank, I would not be concerned about collecting damages arising from this aspect. Good luck....

Jimmy C. · Answer

I know that bulk reo buyers wait for quite a while to get the deed after they purchase. And they always inherit the back taxes, hoa liens etc...

Perhaps the banks wait to see if they will need to clear liens to sell or not?

Bill Gulley · Answer

Jason, I'm sure you are correct, it only becomes necessary for others to comply with applicable regulations and law, by others, as with lenders, Realtors and closing agents, it's by involvement with other aspects of a transaction that the filing becomes necessary, to perfect a security interest, to evidence a sale for a commission earned or to close a transaction in compliance with ALTA.

An example of not filing a deed is in connection with estate planning, where a deed might be held in escrow by an admistrator, by a will, where it could be filed after death. By deeding property to kids now, they would have control that an owner might not want to allow at that time. But watch the tax man! Installment contracts are another good example, where the deeds are filed only upon certain events.

J Scott · Answer

Great answer by Bill...

In addition, I don't believe any state actually requires the deed be filed pubicly. I could be wrong, but that's my understanding...

Billy Ross · Answer

Maybe I should not have asked the question, because what i suspected could happen has happened.

Seller did a deed in lieu of foreclosure. Signed a deed back in July. Bank did not record the deed, but instead just let it sit.

In the meantime, the former owner had judgments on him which attached to the house.

We went under contract and have been sitting here waiting to close, and the bank has to negotiate the judgments. they cannot foreclose them out, as they have agreed not to foreclose on the property.

A previous post had said the title transfers upon the signing of the deed, not the recording of it. I agree, and at the same time these are bona fide valid judgments against the owner of record of the property. You cannot simply record a deed months later and have those judgments go away.

Still does not answer my question on why a bank would not want to get the house back in their name as soon as possible. This is not an isolated case.

Why a bank doesn't record a deed until closing?

Why a bank doesn't record a deed until closing?

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