If the property is an REO then the bank does need to clear all liens. One thing to note, when you do purchase an REO and you sign the multipage liability release from the lender, there is verbage in there that actually releases the lender from making sure title clears. However it is common sense that if title doesn’t clear then you as a buyer will not get financing. So those liability releases also say in the same breathe, well if you don’t get financing because we couldn’t give you clear title, then you do get your deposit back. Now not all of the REOs I have seen state that but most of them have. It is kind of a chicken/egg deal right? Generally though, I have not seen an REO go down where title didn’t pass cleanly.
The biggest issue one may have is a situation that happened to OC Scam where there was some funky stuff going down with the lenders.
As far as a short sale goes then there is no responsibility at all for the lenders that have liens to check on other liens. In a short sale all you care about is that the lenders holding the liens agree to release those same liens at whatever discounted price is negotiated. Then it is up to the title report/search to identify all other liens and then it is up to escrow to make sure there are sufficient funds to pay them all off and distribute those payments.
