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Foreclosure “Rescue” Schemes Addressed by New Law
In an effort to address abuses arising from foreclosure “rescue” schemes, the Legislature has enacted the Foreclosure Rescue Fraud Prevention Act [“FRFPA” or the “Act”], P.L. 2011, c. 146, approved Dec. 20, 2011, eff. ca. June 18, 2012, which provides for the licensing and regulation of foreclosure consultants by the Department of Banking and Insurance. The Act nevertheless exempts from licensing several classes of persons, including attorneys, real estate brokers, and any person “...licensed as a title insurance producer ... while acting under the authority of that license or conducting the business of title insurance...”. Under the law, a distressed property is a one-to-four family, owner-occupied dwelling, which is the subject of a mortgage foreclosure or in which the mortgage is at least ninety days delinquent. FRFPA regulates two types of transactions: a distressed property conveyance, in which the owner conveys his interest in the realty; and a distressed property conditional conveyance, in which the seller continues to occupy the realty and is given an option to re-purchase. (The closing of a conditional conveyance must take place at the office of an attorney or title company.)
The Act accordingly places certain limitations on the form of contract which the owner of distressed property may enter into and proscribes certain conduct by the distressed property purchaser. (Such contracts are also subject to a 10 business day cancellation and attorney review period.) Furthermore, the contract must be recorded. A conditional conveyance which violates the Act is subject to avoidance within a two-year period, but the title of a bona fide purchaser or mortgagee is protected.
What is a foreclosure rescue scheme, and what is its connection with flip sales and short sales? A flip sale is a transaction in which the purchaser acquires title with the intention of re-selling the property (at a profit) immediately or in the near future. Flips are not illegal or improper per se. However, an increasing number of persons engaging in improper or unlawful conduct utilize flip sales as a vehicle to carry out their fraudulent schemes. A short sale occurs when a mortgagee is asked to accept less than the full amount of the debt from the proceeds of the sale of the encumbered property. The lienholder is induced to accept the lesser amount (in full satisfaction of the debtor's obligation) on the grounds that there are insufficient proceeds from the sale to pay the debt in full.
What is the connection between "flip sales" and "short sales"? In some cases a person facing mortgage foreclosure is approached by a person or entity which proposes a foreclosure rescue scheme, whereby the mortgagor sells the property to the "rescuer" for a price below market value. (The seller may remain in the property as a tenant, with an option to re-purchase his home when his financial situation improves.) The lender - having seen the below­market-value contract - agrees to accept a discounted pay-off figure. However, the rescuer may then seek to "flip" the property to someone willing to pay a greater sum of money. If the lender later discovers that the property has been "flipped", it may demand additional payment. In a variation of this scheme, the rescuer may obtain purchase-money or other mortgage financing. If he defaults in his obligations, the property will be lost through foreclosure, thereby depriving the former owner of the opportunity to re-acquire it. Either of these scenarios may lead to unpleasant litigation. See Hageman v. 28 Glen Park Assoc., 402 N.J. Super. 43 (Ch. Div. 2008); Deutsche Bank v. Mitchell, 422 N.J. Super. 214 (App. Div. 2011).
Viewed strictly from a title insurer’s underwriting perspective, foreclosure rescue, flip and short sale transactions may be insurable, although they present a higher than normal degree of risk. HUD (and many lenders) have promulgated guidelines regulating flips, Furthermore, the foreclosure rescue or short sale aspect may present certain difficulties, as discussed above. Therefore, when asked to insure a transaction involving a foreclosure rescue or flip or short sale, many insurers have adopted procedures which include obtaining the following proofs : (a) that both the mortgagee and its foreclosure attorneys agree that the short sale pay-off figure is accurate; and (b) that both the mortgagee and mortgagor-seller are aware of the impending flip sale or mortgage financing by the rescuer.
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