In judicial foreclosure states, also sometimes called Lien Theory states, a homeowner may bring action to “Quiet the Title” if there is any indication that irregularities in the loan processing or transfer of title process may have clouded the title. In Lien Theory states homeowners hold both legal and equitable title and therefore may bring an action as a plaintiff in a Quiet Title Action.
Since at least 75 to 80% of all mortgages have bifurcated the deed and the mortgage documents through electronic mortgage transfer, have failed to have documents properly notarized, or display one or more of other numerous documentation problems, there are a very large number of homeowners who may be able to argue successfully for rescission of the mortgage holder’s lien on the property and therefore uncloud the title. If the homeowner and his or her attorney have done their homework, they can come to court with written proof that the mortgage holder did not properly secure the loan.
This, of course, does not guarantee that every judge in every Lien Theory state will be sympathetic to the argument. The judge may still rule in favor of the lender—who in this type of case will be the defendant, not the plaintiff as in a foreclosure lawsuit. The court may allow the lender to submit amended documentation, or they may rule that the widespread practice of electronic reassignment of mortgage liens is, in fact, a legal transfer.
At the very least, a Quiet Title Action can buy some time for a family struggling to complete a Short Sale and can guarantee that once a Short Sale is completed there will no longer be any question about the legitimacy of the title. Frequently, a Quiet Title Action will induce a lender to be a little quicker and more generous in settling a Short Sale, or coming to the table with a more generous Loan Modification plan.
Given the mortgage documentation mess, it is a wise idea for anyone, at least anyone in a Lien Theory state, to file a motion for a Quite Title Action before trying to sell a property. It just may save the deal from being declared invalid sometime in the future, and it may become increasingly necessary in order to obtain title insurance.
In Title Theory (non-judicial foreclosure) states the strategy of quieting the title in order to possibly gain rescission of a faulty mortgage lien is not very likely to work because the mortgage holder retains the legal ownership (the homeowner retains just equitable interest) and the lender is the one who must bring any motion to Quiet the Title. A lender is hardly going to agree to this strategy if they have dirty laundry to hide.