Equity Protection?

From the NY Times:

A New Law May Hurt More Than It Helps

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.

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.”

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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1 Response to Equity Protection?

  1. Flippers flop as housing market cools
    By Ryan Nakashima, Associated Press


    LAS VEGAS — In the rampant real estate speculation of the Las Vegas valley three years ago, people lined up outside Pulte Homes sales offices overnight as if they were waiting for the release of the latest video game console or hot new movie.
    Having seen his house in an upscale part of suburban Henderson, Nev. jump $200,000 in value in 18 months, Sam Schwartz felt he couldn’t miss any part of the boom.

    He spent the night in the parking lot with TV, snacks and drinks, along with about a hundred other people.

    Schwartz intended to buy a new home and then quickly sell it within the year — for a huge profit. Most people waiting were flippers just like him, he said.

    “We had seen real evidence of what was possible in this crazy, inflated market, and we just wanted to get a piece of that investment equity,” Schwartz said.

    But when home prices unexpectedly took a backward step, many investors seeking to cash in quickly were left “upside-down,” or owing more on their mortgages than what their homes were worth.

    The result was a glut of homes in the marketplace, communities spotted with empty houses and for sale signs — and a foreclosure rate in Nevada that leads the nation as owners unable to sell became saddled with unbearable debt payments.

    Foreclosure filings across the United States rose 47% last month from a year ago to 149,150 — one for every 775 households, according to statistics from Realty Trac Inc., a foreclosure listing service. And for the third straight month, Nevada’s foreclosure rate led the nation when it rose 220% from a year earlier to 4,738 filings, or one in every 183 households.

    In Clark County, which encompasses Las Vegas, one of every 30 homes began the process toward foreclosure last year.

    The day Schwartz reserved his home, the sales staff was raising prices $20,000 after every fifth buyer came inside. The $500,000 house he and his wife were eyeing had shot up to $540,000 by the time they sat down. Somehow, it still seemed like a good deal.

    “Everybody was thinking, ‘Hey it’s not the end of the world, because the homes across town are selling for $720,000. We have almost $200,000 in equity in the house and it isn’t even built yet,'” Schwartz said.

    He and his wife put down $5,000 on a home that would end up costing $560,000 with upgrades.

    While the Schwartzes were able to cancel before closing on a property that suddenly was worth only $490,000 — and recoup their deposit on a legal technicality — others were less fortunate.

    MORE …

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