Polk Law Blog

My take: Good law, but I’m not sure the problem being addressed really exists any more. 

I have a story for you… John and Sally Smith face foreclosure on their $150,000 mortgage. One day, while dropping their kid off at school and heading to work, they see a sign: “In Foreclosure? We can help! Call 863-555-1234.” They make the call. A well-dressed representative, David, visits their home and tells them about the process: we’ll make your mortgage payments for you for a few months until you get back on your feet, and then you can pay us back at the end. Its sounds great, and John and Sally really have no other options. They sign some papers, and rest easy knowing they have a few more months in their house. 

Here’s what just happened:

• The Smiths just sold their house to David for, effectively, $0. They may even pay a fee to David. They still owe $150,000 to the bank, but they probably signed a deed over to David, who has no intention of paying the bank off just yet.
• David is going to lease the property back to the Smiths for a low introductory rate for a few monthsand will (may) float the money necessary to keep the bank happy during that period. 
• At the end of the period, the Smiths have an option to buy the house back for an exorbitant price, for example, $25,000. 

Let’s say the house is worth $185,000 ($35,000 equity). In the scenario above, if the Smiths miss a lease payment or can’t come up with the cash at the end, they lose their home and all their equity, just like that. Poof! Angelo rents the house or sells it for a quick $35,000. If they manage to follow-through, and they almost never do, Angelo makes a quick $25,000. Not bad for an investment of a few monthly mortgage payments. 

Is this still a problem? Has the legislature solved it? Read on…

On October 1, 2008, Fla. Stat. § 501.1377,  will take effect. This new law is designed to protect homeowners facing foreclosure from predatory and fraudulent “foreclosure rescue” practices. The act prohibits:

• Performing foreclosure “rescue” services without a written agreement with the homeowner, which must contain a prominent disclaimer described in the statute;
• Charging a fee for “rescue” services until the services have actually been performed;
• Failing to clearly specify the services to be performed and the charges to be incurred in the written agreement.

In addition, the law requires the rescuer to:

• Give the homeowner 1 day to review and 3 days to revoke the contract;
• Give the homeowner an opportunity to fix it if they mess up (e.g. missing a lease payment) so that they don’t lose the home over a technicality;
• Promise to be responsible for payments due on the original mortgage;
• Verify that the homeowner has enough income that they have a reasonable chance of being able to make the payments;
• Charge a reasonable price for homeowner to buy back the home;
• Record the lease option agreement (or a memorandum of it) in the public record.

The act seems to be well worded and effective. But it addresses a problem that may not really exist anymore in great prevalency. The upside to the “rescuer” of one of these transactions is that they get the equity in the home for little cost. But in today’s real estate market, people in default of their mortgages don’t have any equity in their homes. There is little benefit to a “rescuer” to take title to property that is mortgaged at 125% of its value. 

I’m curious to see if this new law will be invoked with much frequency. I can think of a few situations in my practice in the past when I would have loved to have taken advantage of it, but I am not seeing many of these deals any more. On balance though, it seems like an effective law that will help eliminate the scammers from the foreclosure rescue industry without unduly burdening legitimate companies.