It is more complicated to diagnose whether some potential problems exist, than to simply address them, regardless of whether the problems exist or not. It is so easy to put on a seat belt, the risk analysis of whether it is worth wile to do so is complicated, and the consequences of not buckling up are so significant, that most of us just buckle up every time. Compliance with the newly amended Foreclosure Protection Act (the “FPA”) should follow a similar protocol.
In 2006, the Colorado legislature created the FPA which regulated the terms of contracts when an “Equity Purchaser” bought a “residence in foreclosure.” Among other things, the FPA required such contracts to provide the seller with a three day rescission period. Violations of the FPA can cause criminal prosecution. An Equity Purchaser is “a person who, in the course of the person’s business, vocation, or occupation, acquires title to a residence in foreclosure [subject to certain logical exceptions].”
Under the original FPA, a property was not a “residence in foreclosure” until a notice starting the foreclosure had been recorded in the clerk and recorder’s office. This allowed real estate brokers to obtain an ownership and encumbrance report to determine whether a “NED” had been recorded. If not, then the broker writing the offer did not need to comply with the FPA.
The new FPA applies if a homeowner’s principal place of residence is encumbered by a residential mortgage loan that is at least thirty days delinquent or in default. This change greatly expands the number of investors who might be included in the definition of an Equity Purchaser. In an economy where approximately thirty percent of U.S. homeowners owe more on their mortgage debt than their home is worth, and where over ten percent of mortgages are one month or more delinquent, many investors are looking to buy property from financially distressed sellers. Further, the new definition of a “residence in foreclosure” no longer allows a broker to determine whether the FPA applies merely by obtaining an O&E report. Typically, when a bottom fishing investor makes an offer on residential property, he doesn’t know whether the home is the seller’s principal residence or whether the loan is in default. More importantly, the investor can’t count on the seller to reveal that the loan is in default and Colorado statutes prohibit listing brokers from revealing their seller’s motivation to sell (if they know).
Partially in response to the complexity of determining whether the new FPA applies to an individual transaction, the Colorado Real Estate Commission repealed its forms designed to help brokers comply with the FPA. Yet, counter-intuitively, the changes in the FPA have made the protocol for complying with the FPA simpler. Since the buyer and the buyer’s broker cannot count on knowing all the facts necessary to determine whether the FPA applies, and because the evaluation of whether the buyer is an Equity Purchaser is so uncertain, the simplest protocol is for an investor buyer to comply with the FPA every time he submits an offer on a residence. Is there much harm if an investor gives a seller a three day right of rescission that the law doesn’t require?
Some suggest that brokers should refer investor buyers to lawyers to determine (a) whether the FPA applies; and (b) require the buyer’s lawyer to write the offer (if the FPA applies). Assume, for the sake of argument, that lawyers are instantly available to address these needs. Might the delay caused by conducting the diagnosis and implementing the solution cause the diagnostically inclined investor to lose some deals? Might the expense of such a protocol tend to discourage investors from making offers on residential property? Should homeowners be forced to reveal whether their loans are in default? Wouldn’t it be ironic if a statute intended to protect sellers ended up hurting them?
A better protocol is for brokerage firms to work with their lawyers to develop contract forms, consistently with the FPA and other applicable law that brokers can complete and submit on behalf of any investor buyer purchasing residential property.