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 5th 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;
(c) The total consideration to be given by
the investor in connection with or incident to the sale;
(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.
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Last Update: March 27, 2011