Governor Charlie Crist of Florida recently signed into law Statute 501.1377 (HB 643/SB 992) or what has since been called Anti-Fraud Legislation. The second part of this legislation targets certain types of foreclosure-related transactions including the purchase or acquisition of a property that is going into foreclosure or is already in foreclosure. This part of the statute covers what are called Equity Purchasers and defines them as anyone who acquires a legal, equitable or beneficial ownership interest in any residential real property as a result of a foreclosure rescue transaction. Once again, a foreclosure-rescue transaction is any type of transaction or action that stops or postpones a homeowner's foreclosure.
These Equity Purchasers may or may not be investors and their efforts are focused on stopping or postponing a foreclosure for the homeowner whether or not they collect a fee. One ambiguity that has not been explained is whether a person who buys a foreclosure property before it becomes bank owned (REO) but wants to homestead the property falls under this category. This will be defined by the court system or by the State's Attorney General ("AG") at some future date. It is likely that some unscrupulous investors will say they are buying every property to live in and changed their minds later, but only the courts or the AG's Office will decide this.
About 85% of homeowners do not want to lose their homes by foreclosure and many are financially able to afford a monthly payment in the amount of their original mortgage before it "reset" its interest rate or before they got so far behind in their payments. In Florida, as in many states, some individuals have taken advantage of these homeowners by taking title to their property, reinstating their mortgage so the foreclosure is postponed or stopped, and leasing the home back to the homeowner. This is a quick solution for the homeowner's foreclosure problem but it can be a double-edged sword.
If the new owner is unwilling to allow the homeowner sufficient time to cure a late lease payment the homeowner can be quickly evicted instead of following the foreclosure route. In some well publicized cases, the new owner/landlord has evicted the homeowner when he was one day late. This was the intent of the landlord from the start and the lease made it easier for the new owner/landlord to get the homeowner out of his property. Besides the inducement to stop the foreclosure, the homeowner/tenant signed over the deed because he got an option agreement allowing him to repurchase his own home in one or more years at some predetermined value.
In Florida's new legislation, these lease option transactions are regulated in a number of ways. The most important is that the purchaser is only allowed a 17% profit per year over the established price he paid the investor for the property which is often the loan amount plus thousands of additional dollars. The well-meaning legislators missed the boat on this one by allowing too much of an annual profit as the usual in the industry is 5% per annum. Ironically, they had originally considered a 25% annual profit before it was changed to a mere 17%. The most onerous mistake of the legislators is they allow the landlord/owner to make the monthly lease payment a maximum of 60% of the tenant's gross wages. It is unconscionable to believe that anyone can spend 60% of his/her gross income and have any money left over for basic necessities. In addition, the tenant is allowed a 30 day cure period for late payments and three attempts to cure a default on their lease payments.
Covered properties include residential real property of one to four family units where at least one of the units is occupied by the owner in foreclosure. Any property over four units is considered a commercial property and exempt from this legislation whether the owner lives there or not. The owner must be the "title owner" in the public records to fall under the benefit of the statute.
A very common technique used by investors to acquire foreclosure properties is to reinstate the delinquent loan amount and continuing making monthly mortgage payments on the homeowner's original mortgage. The new legislation forbids this type of transaction and any outstanding loans must be paid at the time of the title transfer. This was designed to protect the homeowner from the mortgage payments stopping and his having no recourse to reinstate the loan or make payments that wouldn't benefit him since he was no longer the owner of the property.
This is a brief overview of the second part of Florida Statute 501.1377 (HB 643/SB 992) and is for educational purposes only and not meant to be legal opinion or advice.