Blackacre 2.0 » settlement

Foreclosure Proceedings and the Right of Redemption in NY

Kathleen A. Scanlon — Fri, 12 Mar 2010 01:42:54 +0000

New York is a judicial foreclosure state and the process can take over a year to proceed from Summons & Complaint through judgment and then auction. A homeowner has a right to redeem up and until auction, but unlike many states, there is no right of redemption after Sale (but see Bill proposing to allow right of redemption for up to 1 year post Sale.).

The New York Court of Appeal recently opined in NYCTL 1999-1 Trust v. 573 Jackson Avenue Realty Corp., 13.N.Y.3d 573 (December 15, 2009) that the definitive requirement for redeeming real property during foreclosure proceedings is the “unconditional tender [to the foreclosing party] of the full amount due” before auction. This general rule in mortgage foreclosure proceedings also applies to the foreclosure of a tax lien.

However, note that the Courts will exercise their broad equitable powers to void judgments and even set aside sales (extending the homeowner's right of redemption), where homeowners are seeking to modify or reinstate their mortgages while the lender continues with the foreclosure action. Jimmy Lathrop, Esq., the Director of Foreclosure Intervention at the Brooklyn Bar Association Volunteer Lawyers Project, recently discussed in his blog post, three cases where the court found that the homeowner's good faith negotiations mandated an equitable solution and a possible complete bypass of RPAPL §1341 which defines the requirements and time frame of the borrower's right of redemption.

Don’t Believe the Hype: FHA’s Temporary Waiver of 90 Seasoning Rule

Kathleen A. Scanlon — Sun, 17 Jan 2010 17:05:18 +0000

On Friday, January 15, 2010, HUD Secretary Shaun Donovan issued a press release, as part of HUD’s Neighborhood Stabilization initiative, temporarily waiving FHA’s 90 Day Seasoning Rule. Amazingly, HUD is cognizant that the seasoning guideline is having a negative impact on alleviating the problem of abandoned and blighted homes:

“In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.”

The online real estate community was buzzing yesterday as news of this waiver spread quickly. The investor “gurus” are, of course, rejoicing and spreading the news far and wide, without a careful read of the Waiver itself. The intent of this temporary policy change is to allow investors to take title to a property, rehab it and sell it quickly. It is not a panacea for those investors who pick up a property at a discount, seeking to flip it for a profit in a “back to back” or “double” closing. For those types of transactions, the 90 day seasoning rule is a non-issue if you utilize a land trust correctly.

HUD’s Mortgagee Letter 2006-14 clarified the Rule and Regulations set forth in 24 CFR 203.37a concerning the eligibility of properties for FHA insurance and the rules governing sales of property. As I have discussed in a previous blog post, Legal Analysis of FHA’s Seasoning Requirements, the real estate and mortgage industry routinely misunderstands and applies these eligibility rules incorrectly and it appears that the trend is continuing with this new Waiver.

FAQS:

1. Does it have to be a property acquired through a short sale, bank auction or an REO to be eligible under the Waiver?

No. There are no requirements in the Waiver concerning the status of the property itself. It is not necessary to demonstrate the distressed nature of the property.

2. So I can get a property under contract, execute a contract with a potential FHA buyer and close with my FHA buyer the same day or the day after I purchase the property?

No this transaction would not be eligible for FHA insurance. The waiver is actually of the requirement that the real estate contract be executed on the 91st day after the investor takes title to the property. The requirement that the investor own the property is still in effect and therefore Contract Vendees and Assignments of contract are still prohibited. Further, an application for an FHA mortgage cannot be submitted to a Lender for consideration without a fully executed Contract. Therefore, Back to Back Closings will be impossible.

3. So I can close a week after I take title?

Virtually impossible for several reasons. I venture that there are almost no Lenders in this post-bubble market that will take an application for an FHA mortgage and be in a position to close a week later. I am going to stretch that to probably 30 days. This is definite if your sale price to your FHA buyer is 20% or more higher than your acquisition price (do the math – its not that hard to hit that number – especially in certain areas of the country where housing prices are below $50,000). If the sale price exceeds the 20% threshhold, the investor will have to document the increase in value with supporting documentation and/or a second appraisal and the Lender will have to obtain a Property Inspection Report (see paragraph 2 of the Waiver). This report will not be ordered prior to application submittal and as discussed previously, that doesn’t take place until there is a fully executed Contract of Sale.

4. I found this great property that my buddy picked up 2 months ago for $120,000.00. He rehabbed it and I am in contract to purchase it from him for $220,000. I want to flip it to an FHA buyer for $250,000.00 can I do it?

You will have to wait until the 91st day after you close title to enter into a Contract of Sale with the FHA buyer. The Waiver will not apply if there is a history of prior flipping activity in the 12 month chain of title (see paragraph 1(c) of the Waiver).

5. In April, the Treasury’s Short Sale Program goes into effect and there should be a lot of distressed properties coming on to the market. The Waiver is going to be a big help in moving those properties!

No, it isn’t. Apparently, government offices do not communicate with each other before issuing rulings – one of the requirements under the Treasury short sale program is that the Contract include a representation that the Purchaser will hold the property for 90 days post-closing. Perhaps the Treasury will revise its Directive and remove this offending language (which, as I had discussed previously, is extremely short-sighted).

Conclusion

Investors should rejoice as finally they are receiving the recognition they deserve: properties are moving because of their hard work and without the proper incentive, it wouldn’t happen. Instead of being the black sheep of the real estate community, investors are a major part of the solution. This Waiver is what investors need to get the properties rehabbed, sold and occupied to ameliorate the problem of abandoned and blighted homes. It is not a license to flip and should you wish to engage in that type of activity, you will not be able to use this Waiver to accomplish your goals.

Contract Contingencies: Sale of Purchaser’s Current Residence

Kathleen A. Scanlon — Wed, 06 Jan 2010 04:34:41 +0000

While the first time home buyers are out in force looking to purchase a home, the reality is that a good part of the elusive purchaser pool is made up of homeowners looking to trade up to a new home. Which means, for the most part, they need to sell their current residence to be able to purchase a new residence. Contracts often contain certain contingencies which, if not met, allow the parties to unilaterally cancel a contract and the buyer recoup their down payment monies. One such contingency is conditioning contract performance on the sale of the Purchaser’s current residence.

In the seller’s boom market in years past, any prospective purchaser who would dare ask for this contingency would never even make it to the binder stage let alone contract. Contracts often crossed my desk that were missing mortgage contingencies, even though Purchaser needed a mortgage to complete the transaction – competition was so fierce that these buyers would agree to almost anything to cinch the deal. But that market has come and gone – we are in the midst of a buyer’s market and now the purchaser has some leverage.

Still, most real estate attorneys will balk on including a Sale of a Purchaser’s Current Residence (SPCR) Contingency in their Contract. The rationale is that the Seller has to take their home off the market and risk losing the opportunity to snag a qualified Purchaser who doesn’t need such a contingency. This is a very sound rationale and definitely makes sense in the Seller’s market. Here, however, there is some bargaining room as “qualified” purchasers aren’t lining up in droves so that the Seller’s risk is lessened.

There are a few strategies that can be employed on a Purchaser’s behalf in this type of situation. If Purchaser is obtaining a mortgage and needs the funds from the sale of the current residence (or the removal of the debt obligation), this will often be a condition in the mortgage commitment. So, even if seller’s attorney won’t include an actual SPCR Contingency, the mortgage contingency clause will therefore indirectly include the SPCR contingency. I am not overly fond of this strategy because of its ambiguity. Ambiguity creates issues of fact which can lead to uncertainty and litigation. Also, please note, attorneys have caught onto this trick and include language that specifically states the contract is not contingent upon the sale of the purchaser’s home and that a mortgage commitment will be considered firm and unconditional (and therefore satisfy the requirements of mortgage contingency clause which causes its removal) even if it has a condition requiring the sale of Purchaser’s real property or the payoff of certain debts and liens.

I have a unique solution to this very problem and it is usually well received by other real estate attorneys. Modify the SPCR Contingency to include an escape clause for the seller. Allow the Seller to continue to market the property for the time the contingency is in effect. If a prospective buyer makes a bona fide offer, Seller gives notice to the Contract Purchaser of the offer and allows Contract Purchaser to either remove the SPCR contingency and continue with the Contract or cancel the Contract and receive a refund of the down payment monies. With this modification, Purchaser does not have to worry about jeopardizing their down payment and Seller does not have to take their house off the market and lose out on potential qualified buyers.

The modification of the Sale of a Purchaser’s Current Residence Contingency is a way to balance and satisfy the needs of both parties while removing an almost impossible roadblock to a potentially successful real estate transaction. Careful examination of the terms of the proposed contract and wording of the SPCR Contingency with modification language is key and should be left to the expertise of a real estate attorney.

Buyer $5,000 Short – How to Close the Gap…from a NY Point of View

Kathleen A. Scanlon — Thu, 12 Nov 2009 16:37:56 +0000

Inman columnist Bernice Ross posted an excellent article, in response to a Seller’s question, on what to do if your buyer is $5,000 short for the deal. As a New York real estate lawyer, I wanted to add my two cents as to a rather innovative way to close that gap.

New York is one of the only states that imposes a mortgage tax upon a purchaser. Depending on the county and the size of the mortgage, this tax can range anywhere from .8% to 2.8% of the purchase price. This tax can be fairly substantial and severely impact a purchaser’s buying ability. However, there is an exception to the implication of this mortgage tax and that is for continuing liens. Most real estate industry professionals are aware of this exception and refer to it by the document name, CEMA or MECA, which is a necessary part of the process. Also, they are often under the mistaken impression that it is only available in a refinance. Not so…you can effect a CEMA transaction on a purchase. The procedure is as follows: the Seller’s current Lender assigns the Note to the Purchaser’s new Lender and the remaining principal balance (“old money”) is combined with the “new” money, advanced by the Buyer’s Lender, to form a new mortgage in favor of the Purchaser’s Lender. There is no mortgage tax due on the “old money”. So, for example:

Buyer needs a mortgage of $400,000.00 to purchase a home in New York City for $450,000.00. Seller’s remaining principal balance is $300,000.00.

With CEMA Without CEMA

$100,000 x 1.8%= $400,000.00 x 1.8% =

$1,800 mortgage tax $7,200 mortgage tax Savings of $5,400.00!

Also, not only is a Purchaser exempt from paying mortgage tax on the continuing lien, the Seller is exempt from paying transfer tax on that amount as well for a net savings of $4,200.00 to Seller based on the example above.

Total monies saved in our example – a whopping $9,600.00!!! Now, the caveats: not every mortgage lender will assign the note, many charge a fee and there is a fee to prepare the CEMA documents and record them. However, these fees are often miniscule compared to the amount of potential savings. Also, it can take some time to get the assignment documents from the Seller’s Lender so this option needs to be investigated at the outset.

A CEMA is an excellent way to reduce substantial closing costs on both sides and make a deal happen, without other parties taking a cut in their hard-earned fees and commissions. It just takes a little knowhow and some time.

Why Retain An Attorney for a Real Estate Transaction? Ask Maria Espinosa

Kathleen Scanlon — Sun, 21 Jun 2009 17:29:48 +0000

CNN recently posted a video on their website detailing the “shocking” story of a woman who paid her mortgage but whose home is being foreclosed upon, jumping on the fraud bandwagon and telling the stories of homeowners preyed upon by the real estate & banking industry. The video leaves out more than it tells, in an obvious attempt to manipulate the truth for their story.

Maria Espinosa, a Nevada realtor, apparently purchased her home, without counsel and without purchasing an Owner’s policy of title insurance. It appears that a previous owner in the chain of title had a VA mortgage that was never satisfied and as such, brought an action to foreclose. She sought redress from Chicago Title who advised her to retain a lawyer and visit the ALTA website, wherein the message was to potential home buyers to purchase title insurance so that if there is a title claim, the title company will not only insure the property but pay to defend such title. Ms. Espinosa finally retained an attorney who admits he has only 18 months of experience in real estate and foreclosure defense who just states “he has never seen anything like this before”.

I learned of this video through the New York State Bar Association Real Property List Serv’s forum wherein my esteemed colleagues brought up a valid point yet again – why would anyone, who is about to make one of the biggest purchases of their life, choose to do so without retaining a real estate attorney? This topic is discussed, ad nauseam, on the listserv but is often not publicized…until today and here on my blawg.

I am amazed at the mentality of the realtors and abstract companies of other states who are so resistant to attorney involvement, nevermind the

Federal Trade Commission, which for years has lobbied heavily against having attorneys involved in residential
real estate transactions. However, it has become clear, in light of the collapse of the Housing Market, that the rationale was to keep the people blind to the greed of those certain mortgage brokers and bankers, realtors, appraisers and title companies who made fortunes selling homes riddled with toxic mortgages and funded with fraud, kickbacks and the like. They told those people, “We are saving you money”, “It is like buying a car” or “The attorneys are just trying to control everything and get rich in the process”. What they didn’t tell them was “We want you at the closing table with NO ONE to look after your interests” or “We want you to take out a loan you can’t afford or understand”.

Numerous times I have engaged in discourse, in various internet forums, with members of the real estate industry who had been vocal and derisive of attorney involvement in real estate transactions. I heard their closing horror stories of deals falling apart because of the lawyer’s failure to prepare contracts in a timely manner or instructing their client to not move forward etc. While I agreed with them that retaining any attorney for a closing was not conducive, I argued that the retention of a real estate attorney was a necessity and would eliminate their apprehension. A real estate attorney has a far different focus than the average litigation attorney and the expertise to close a transaction without issue. Most importantly, the real estate attorney is the only party who only represents the interest of the buyer or seller and probably one of the least of the expenses paid at closing, especially compared to the thousands of dollars paid over to the realtors.

In New York State (particularly downstate), it is customary to retain attorneys for real estate transactions. And it shows: New York had a 23% decrease in foreclosures in 1st Quarter 2009 as compared to 1st Quarter 2008 and compared to a 24% increase nationally!

So, while I am sympathetic to the plight of Ms. Espinosa and others out there in the same position, I can’t help but shrug my shoulders and say it all could have been avoided or at the very least, addressed with no out of pocket expenses, had she had a lawyer at her side when she bought that home.