The New Home Equity Theft Prevention Law Hurts Those It Was Intended To Protect

The NY Times is reporting the State’s new law – – which is designed to prevent the theft of equity by scammers who prey on desperate homeowners in foreclosure – – is actually hurting homeowners in foreclosure. I have already seen this in action in my practice. Many homeowners in foreclosure decide to sell their property. Sometimes it is because they don’t want it anymore. Sometimes, their LTV is too high to refinance and they don’t have a sufficient budget for a feasible Chapter 13. Many of them have legitimate buyers for legitimate prices. As of February 1, 2007, the State doesn’t care. Sales by these homeowners are now officially a pain in the you know what. All in all, it has not been a good two years for financially distressed borrowers. First, in October 2005, Congress slams them with a “consumer protection” revision of the Bankruptcy Code that does anything but protect consumers. Now, it’s New York’s turn. I wish our legislators would wake up and see the reality of what they have done. Legitimate bankruptcy cases and now, legitimate sales of property to avoid foreclosure, are filled with gotchas. The law has become a specialized minefield that very few New York attorneys can navigate. The troubled homeowner who goes to a general practioner for advice is inviting disaster. Many investors/buyers are scared.

Here is the NY Times take on this law:

A New Law May Hurt More Than It Helps

By JAY ROMANO
Published: April 29, 2007
NEW YORK STATE’S Home Equity Theft Prevention Act, which took effect on Feb. 1, is meant to protect homeowners who have defaulted on their mortgages from predators intent on bilking them out of their property. But lawyers and title insurers say the law may have some unintended consequences.

“The Legislature’s intentions were good,” said John Martin, the general counsel for All New York Title in White Plains. “But this law is going to cause problems for the very people it was intended to protect.”

The law applies to the owner of a one- to four-family home who is facing foreclosure or who is more than two months behind on mortgage payments. If he sells the house to avoid foreclosure, under some circumstances he can rescind the sale for up to two years.

The law was intended to curtail scams in which a buyer approaches an owner in financial distress, offers to buy the house for less than it is worth while allowing the owner to remain in it, and then promises to sell the house back if the owner makes payments to the buyer.

While the law does protect homeowners from such tactics, Mr. Martin said, it will also make it difficult for owners facing foreclosure to find investors to help them out.

Marvin N. Bagwell, the chief counsel for United General Title in White Plains, said that when a homeowner defaults on a mortgage and the property cannot be sold for enough to pay it off, there are only a couple of options available to avoid foreclosure. One is the lender’s allowing the property to be sold for less than the amount due and accepting the sale amount as payment in full. The other is the lender’s accepting a transfer of title from the owner in exchange for forgiving the loan.

Under the new law, if a homeowner in default sells to an “equity purchaser” — basically, someone who is not going to use the house as his principal residence — the owner has two years to rescind the sale if the buyer has not fully complied with the law.

“And there are a host of requirements to comply with,” said Bruce Bergman, a mortgage lawyer in Garden City, N.Y. He pointed out that the law is so detailed it specifies the type size to be used in various parts of the sales contract. “Even if a purchaser crosses every t and dots every i,” he said, “he can never be sure that his compliance with the law won’t be attacked. Title insurers have the same concerns.”

Mr. Bagwell, the United General Title lawyer, said that because of such concerns, title insurance companies will issue a policy only with the caveat that no coverage is provided for damages arising from failure to comply with the law. And that, he said, will make it difficult for investors to get mortgages and for homeowners in financial trouble to find buyers.

Mr. Bagwell added that while lenders sometimes accept a deed from a defaulting owner to avoid the time and expense of foreclosure, lenders will now be much less likely to consent to such deals. “The safest thing for the lender to do now is go through with the foreclosure sale,” he said.

Adam Leitman Bailey, a Manhattan real estate lawyer, said anyone who buys from a seller in default and uses the house as a principal residence is exempt from the law; so are third parties who buy from “equity purchasers” who bought from the original owner, provided they did not know that the owner had been in default. Also exempt are immediate family members and purchasers in court-ordered sales.

William Friedman, a real estate lawyer in Hempstead, N.Y., said lawyers who represent real estate investors will face the problems with the new law head-on. “How can I let a client buy a property knowing that the seller can come back two years from now and demand the rescission of the sale?” he said. “This is going to be a monster problem.”

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