Purchasing Property in Foreclosure-Home Equity Theft Prevention Act

PURCHASING PROPERTY IN FORECLOSURE-HOME EQUITY THEFT PREVENTION ACT
BY
MICHAEL J. LOMBARDO, ESQ.

THE PROBLEM

This article addresses issues involving the attempt to purchase property before the property has been auctioned at a foreclosure sale. If you are interested in issues that concern the purchase of property at a foreclosure sale, please see my article PURCHASING PROPERTY AT A FORECLOSURE SALE IN NEW YORK for more information.

Many investors look for opportunities to obtain residential property at a low cost by making arrangements with homeowners who are in the process of losing their homes to foreclosure. In some insistences, an investor will offer to buy a property from an owner where there is an active foreclosure proceeding involving the property. As part of the arrangement, there may be a promise to allow the owner to stay in the property for some period of time after the transfer. In another scenario, the investor offers to pay off the mortgage for the homeowner in exchange for a deed from the homeowner, with a promise to transfer the property back to the homeowner or a promise to the homeowner that the homeowner may reside in the property for life. In some instances, the investor may take back a mortgage that if not repaid will allow the investor to obtain title to the property through a foreclosure proceeding or by obtaining a deed in lieu of foreclosure from the owner. However, some unscrupulous investors imposed conditions so onerous that the homeowner will never be able to comply with the terms and most likely will never receive their property back.

THE NEW YORK SOLUTION

In response to the actions of a few unscrupulous investors, New York passed the Home Equity Theft Prevention Act (the “Act”) effective February 1, 2007. The Act applies to “covered contracts”, which is any “...contract, agreement, or arrangement, or any term thereof, between an investor and owner which (i) is incident to the sale of a residence in foreclosure; or (ii) is incident to the sale of a residence in foreclosure or default where such contract, agreement or arrangement includes a reconveyance arrangement”.

There are some concepts to understand:

i. A “sale” of a residence includes any transaction whether or not the owner receives any consideration (e.g. money). Although the Act uses the term “equity seller”, for ease of understanding what the Act provides, I will use the term “owner” in place of “equity seller”.

ii. “Residence” means a 1-4 family dwelling, one of the units of which is occupied by the owner as the owner’s primary residence.

iii. Reference to a “default” means that the owner is two months or more behind in mortgage payments.

iv. The Act does not apply if the “owner” is not a natural person.

v. A “foreclosure” means that there is an active lis pendens filed or the property is on the active property tax lien sale list.

vi. A “reconveyance arrangement” means:

A. the transfer of title to residential real property by an owner who is in default or foreclosure, either by transfer from an owner to an investor (although the Act uses the term “equity purchaser”, for ease of understanding what the Act provides, I will use the term “investor” in place of “equity purchaser”) or by creation of a mortgage or other lien or encumbrance during the time of default or foreclosure that allows the investor to obtain legal or equitable title to all or part of the property, and

B. the subsequent conveyance, or promise of a subsequent conveyance, of an interest back to the owner by the investor that allows the owner to regain possession of the property, which interest shall include but not be limited to a purchase agreement, option to purchase or lease.

vii. “Representative” means a person who in any manner solicits, induces, arranges, or causes an owner to transfer title or solicits any member of the owner’s family or household to induce or cause any owner to transfer title to the residence in foreclosure or, where applicable, default to the investor.

N.B. It is not clear what is meant by this, but attorneys and others in the title transfer process may be reluctant to be involved in such a situation.

CONTRACT TO BE DIFFERENT FROM A STANDARD CONTRACT

The Act requires that a contract that is incident either (i) to the sale of a residence in foreclosure; or (ii) to the sale of a residence in foreclosure or default where the contract, agreement or arrangement includes a reconveyance arrangement to satisfy certain requirements. The contract’s failure to satisfy the requirements of the Act will result in a violation of the Act. The requirements include the following:

i. Type and Size. The contract, and the notices that are part of or must accompany the contract, must be of a size equal to at least 12 point bold type.

ii. Language. The contract must be in English, except if the primary language the seller is Spanish, then it must be in both English and Spanish.

iii. Effective Date of Instrument of Conveyance. An instrument of conveyance (like a deed) shall be become effective no sooner that the 5^th business day after the contract is signed.

iv. Contract Terms. The contract must contain certain terms to be valid, including the following:

(a) The name, business address, and telephone number of the equity purchaser;

(b) The address of the residence in foreclosure or, where applicable, default;

(d) A complete description of the terms of payment or other consideration including any services of any nature which the investor represents he/she will perform for the owner before or after the sale;

(e) The time, if any, at which time physical possession of the residence is to be transferred and vacated by the seller;

(f) The terms of any rental or lease agreement;

(g) The terms of any reconveyance agreement;

(h) A notice of cancellation prescribed by the Act;

(i) A notice required to be located in the proximity of the seller’s signature, in 14 point bold print, and in capital letters; and

(j) Accompanied by a Notice of Cancellation.

TRANSACTIONS EXCLUDED FROM THE ACT

The Act does not apply to every transaction where the property being purchased is a default in the payment of taxes or a mortgage. Specifically excluded from the application of the Act are certain transactions where the investor acquires title:

i. To use, and who uses the property as his/her primary residence (i.e. intent alone is not sufficient);

ii. By a deed from a referee in a foreclosure sale conducted under Article Thirteen of New York’s Real Property Actions and Proceedings Law;

iii. Any sale of property authorized by statute;

iv. By order or judgment of the Court;

v. From a spouse, parent, grandparent, child, grandchild or sibling of such person or such person’s spouse;

vi. As a not for profit housing organization or as a public housing agency; or

vii. A bona fide purchaser or encumbrancer for value (i.e. a bona fide purchaser for value who buys from or who grants a mortgage to the original investor or subsequent purchaser provided they are not aware of the seller’s continuing right to or equity in the property or of any violation of the Act).

OTHER RESTRICTIONS PLACED ON INVESTORS

The Act provides that the investor is prohibited from directly or indirectly making certain representations as follows:

i. The investor is acting as an advisor or a consultant, or in any other manner represents that the investor is acting on behalf of the seller (e.g. cannot represent to the lender holding the mortgage that the investor is acting as the seller’s agent) ;

ii. The investor has certification or licensure that the investor does not have, or that the investor is not a member of a licensed profession if he or she is actually such a member;

iii. The investor is assisting the owner to save the house unless the investor has a good faith basis for the representation;

iv. The investor is assisting the owner in preventing a completed foreclosure unless the investor has a good faith basis for the representation;

v. Make any false or misleading statement regarding the value of the residence, the amount of proceeds the owner will receive after a foreclosure sale, the timing of the judicial foreclosure process; any contract term; the owner’s rights or obligations incident to or arising out of the sale transaction; or any other false or misleading statement concerning the sale of the residence or any reconveyance agreement.

OWNER GRANTED AN OPTION TO PURCHASE

One way of providing a mechanism for the owner to obtain title back from the investor is for the owner to be granted an option to purchase the property back once it is conveyed to the investor. However, the Act provides that a conveyance with an option to purchase will now be considered a loan. This means that the owner will not lose the owner’s equity interest in the property because it has been conveyed to the investor.

AFFECT OF ACT ON OTHER FORMS OF RECONVEYANCE

The Act does not prohibit the use of all reconveyance agreements, but does regulate what must be satisfied so that the reconveyance agreement is enforceable. The requirements imposed by the Act are:

i. The investor must verify by documentation that the owner has the ability to pay for the subsequent conveyance back to the seller (need to obtain documents other than a statement of the seller of the seller’s assets, liabilities and income-the documentation expected is usually what a bank would require).

ii. There must be a closing, and the closing must be a face to face meeting conducted by an attorney not employed by the investor.

iii. The investor must obtain written consent from the seller before the investor grants any interest in the property to anyone else, including an option to purchase.

iv. The investor must contact all existing lien holders of the intent to accept a conveyance of an interest in the property, and fully complies with all provisions of the mortgage, including the due on sale provisions, and must meet the lender’s qualifications for assuming the repayment of the mortgage.

v. Any repurchase or lease terms cannot be unfair or commercially unreasonable, and the investor cannot engage in any other unfair or unconscionable conduct.

vi. Investor must ensure the title to the property on reconveyance, or make a payment to the owner of at least 82% of the fair market value within 120 days of either the eviction or voluntary relinquishment of possession by the seller.

vii. All deeds or conveyances subject to a reconveyance agreement shall state explicitly on the face that the conveyance is subject to a reconveyance arrangement, and the terms of the arrangement. Also, the reconveyance arrangement must be simultaneously recorded.

CONSEQUENCES FOR NON-COMPLIANCE

The Act provides several remedies should the investor not comply with its provisions. The remedies include the following:

i. The contract is voidable, and the owner can rescind the sale within 2 years following the recording of the instrument. If a legal action is commenced, the owner is entitled to legal fees and court costs.

ii. An owner may sue for damages, and the court may award legal fees, court costs, equitable relief and treble damages. There is a 6 year time frame for the seller to bring such an action.

iii. If there is intent to defraud or there is any deceit of the seller, and a violation of Section 7 (which includes a prohibition on paying consideration, accepting the conveyance instrument, making any misleading statements), it is a Class E felony (fine of up to $25,000 and/or imprisonment).

iv. Even if there is no intent to defraud, if there is a knowingly violation of Section 7, it is a Class A misdemeanor (fine of up to $25,000 and/or imprisonment). A second offense shall be considered a Class E felony (same fine and imprisonment provisions).

v. The Attorney General can seek an injunction and the court can impose a penalty of up to $25,000 and order restitution to cover the cost of the Attorney General.

INVESTOR AS HOLDER OF MORTGAGE

If the holder of a mortgage wants to bring foreclosure proceeding due to a default under the mortgage, the Act provides that certain notices must be served on the owner in a foreclosure Proceeding. This is beyond the scope of this article and may be the subject of a future article. However, this is an issue that should be addressed with your attorney.

The above is not intended to be an exhaustive discussion of the rights, obligations or liabilities of either a seller or purchaser of residential real estate covered by the Home Equity Theft Prevention Act.

CAUTION: THIS ARTICLE IS INTENDED TO PRESENT GENERAL INFORMATION AND IS NOT INTENDED TO BE A SUBSTITUTE FOR CONSULTATION WITH LEGAL COUNSEL.

Last Update: March 27, 2011