Probably not. This is startling, but true – confined to residential properties (one- to four-family, owner occupied).
The admonition comes from what is known as the Home Equity Theft Protection Act, effective as of February 1, 2007. The statute passed in the summer of 2006 and was the subject of our article on October 11, 2006 in the New York Law Journal. (Contact us if you want a copy.) While a portion of the law relates to a special notice to be served with a summons in a foreclosure case, that is more for counsel to be concerned about. The balance of the statute (there is much here) relates to title and mortgage origination issues and so it has not been our focus in alerting servicers. It is now apparent, however, that it will impact dispositively upon the deed in lieu of foreclosure – hence this alert.
Among other things, the Act imposes extensive contractual requirements upon the sale of a one- to four-family owner occupied residence from a person either in default upon his mortgage or in foreclosure. The breadth of the contractual mandates and prohibitions is substantial and includes a five day right of cancellation. In addition to the contract, there are various purchaser representations which are barred, suggesting that the equity seller (the party in default or in foreclosure) could later assert that false statements were made by the purchaser (in the instance of a deed in lieu, the mortgage holder), notwithstanding the usual principles which would otherwise prohibit introduction of such claimed statements.
Of equal or perhaps greater significance, it1 provides that where there is a material violation2 the transaction is voidable and may be rescinded by the seller (the borrower) within two years of recording the conveyance.
As a practical matter, deeds in lieu of foreclosure – certainly in the usual residential foreclosure – are seldom the subject of a formal contract. Rather, they are a matter of discussion and perhaps letters. Therefore, the requirements of the Home Equity Theft Prevention Act create an atypical situation in the first instance. More than that, whether there can be compliance with the statute becomes tenuous, mindful of possible oral representation claims.
The basis for the Home Equity Theft Act could lead to the thought that it was not intended to apply to a deed in lieu of foreclosure, directed instead to avoid third party scam artists from fleecing unwary homeowners out of the equity in their homes. But there is no verbatim exception for the mortgagee as purchaser. A deed from a referee in the foreclosure action is specifically mentioned. Excepted too is a sale by court order – but nothing about a deed in lieu of foreclosure. Even the exception for a bona fide purchaser for value may provide no comfort because of certain language specific to the unusual circumstances the statute seeks to bar.
There is also the issue of title insurance. Counsel to the mortgage holder will almost invariably recommend title insurance for the deed in lieu of foreclosure. (The reasons are quite compelling although beyond the scope of this discussion.) But just as the deed in lieu is tenuous because of all the requirements to be met and the lurking uncertainties, so too is the availability of title insurance. If obtaining title insurance becomes questionable, the deed in lieu of foreclosure becomes still more unpalatable.
It is apparent that the branches of the Home Equity Theft Prevention Act (primarily RPL § 265-a) create in the residential case both burdens and perils. Whether a mortgage holder would or should exchange the relative certainty of a foreclosure sale at the conclusion of a foreclosure action for the now arduous and possibly dangerous deed in lieu of foreclosure is problematic at best.
Here is the proverbial bottom line, the questions to ask.
Q. Does the new Act apply to a deed-in-lieu?
A. It is not clearly an exception so we must assume that it does apply.
Q. Is a lender or servicer prepared to burden a deed in lieu purchase with the type of contract the Act requires?
A. This is perhaps doubtful, but knowing that even careful effort could still create a title which could be set aside in two years, “no”.
Q. Even if a lender or servicer wanted to take a chance, is the title insurable?
A. Maybe – but if uncertain, the chance of reselling the property is just as uncertain and that defeats the purpose of taking a deed in lieu.
1 [RPL § 265-a(8)(a) and (b)]
2 of subdivision three, four, six, seven or eleven of section 265-a
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.