short sale canceled 12 days after closing

[Ryan Raak]

On April 2 I purchased a rehab property that was a short sale. This was a major rehab project and my crew had been ready and waiting for over a month so as soon as we closed we got started. Then, 12 days after (April 14) the bank (IndyMac) inquired about the title history. The title company gave them title history and back in '07 the owner transfered title to someone else (his business partner at the time). Fannie Mae is the investor on the note and they said this was a breach of contract and are calling the note due. IndyMac received a HUD prior to closing that showed this on the HUD and they approved it. Nothing changed from the HUD they approved prior to closing to the one used at closing. By this time I've got $30,000 repair work completed and planned to be done within two weeks (this weekend actually). I even had renters lined up and ready to move in. The bank has since returned my funds and they are in an account at the title company. The title company says it isn't their fault as everything was approved by the bank. My attorney provided a letter to the bank on April 27 stating my intentions of fighting this issue and that I have performed significant repairs. They have 10 days to respond. Yesterday I received a call from an agent as the bank has requested a BPO. I'm hesitant to let them in as I don't know their intentions. It could be that they want to verify the work that we said we've done.

Has anyone ever seen anything like this before? Shouldn't my title insurance cover me for this?

Thanks,
Ryan