Frederic Bastiat once wrote that “property does not exist because there are laws, but laws exist because there is property.” There is possibly no segment of our economy which has spawned more laws than the real estate market. Legislation, whether state or federal, however, is seldom perfect and inevitably there are going to be a few laws passed that might sound good in theory, but play out much differently in practice.
I am going to devote my next five blog posts to a discussion of five laws which, in my experience as a real estate lawyer, have gone awry. The original intents in enacting these laws may have been laudable, but the end result of each of these laws has been either an overabundance of litigation, inability to meet the original intent of the law(s), or simply the fostering of absurd results.
Now then, without further delay, let’s start with No. 5 on my list of laws that need to go: Minnesota Statutes Chapter 327N aka the Foreclosure Reconveyance Statute.
In the early to mid 2000’s, as housing prices soared, a practice called “equity stripping” received a great deal of attention. Equity strippers would contact homeowners who were in foreclosure and offer to “help” them by taking title to the property and then selling it back to the homeowner on a contract for deed or lease with an option to purchase. The structure of the resale transactions typically would lead to the homeowner defaulting on the contract or lease and losing the property to the party providing the “help.”
In 2004, consumer friendly Minnesota became the first state in the U.S. to enact a law governing these types of transactions. If the transaction is a “foreclosure reconveyance,” Minn. Stat. § 325N.11 requires that all of the details of the transaction be contained in a written contract signed by the foreclosed homeowner and the purchaser. Minn. Stat. § 325N.12 identifies a list of terms that this written contract must contain, including a recitation of the total amount of consideration to be provided to the foreclosed homeowner and a notice to the foreclosed homeowner that it has five business days to cancel the contract. The statute also requires that a form “Notice of Cancellation” be attached to the foreclosure reconveyance contract. Chapter 325N also creates other substantive requirements that must be satisfied in any transaction that qualifies as a foreclosure reconveyance. For example, before entering into the contract, the purchaser must verify that the foreclosed homeowner has a reasonable ability to pay for the subsequent reconveyance. This will be presumed if: (1) monthly payments for housing expenses (which include principal, interest, rent, utilities, insurance, taxes, and association dues) and (2) monthly principal and interest payments on other personal debt of the homeowner, do not exceed sixty percent of the homeowner’s monthly gross income. The purchaser may not rely solely upon a statement of assets, liabilities, and income furnished by the foreclosed homeowner, but instead must conduct independent due diligence.
Finally, if the property is ultimately not conveyed back to the foreclosed homeowner, Minn. Stat. § 325N.17(b)(2) requires the purchaser to pay the foreclosed homeowner, no later than 150 days following the owner’s relinquishment of possession of the property, consideration in an amount that is at least eighty-two percent of the fair market value of the property (as determined by a licensed appraiser). This “consideration” includes payments made by the purchaser to satisfy debt or other legal obligations of the foreclosed homeowner. Thus, the statute essentially caps at eighteen percent the amount of equity an investor may “strip” from a residential property in a foreclosure reconveyance transaction.
The equity-stripping statute also creates a private right of action in favor of the foreclosed homeowner for any violation of its provisions. The foreclosed homeowner may recover exemplary damages and attorneys’ fees incurred in prosecuting an action in the event of a violation of the statute by a purchaser. Additionally, a foreclosure purchaser may be prosecuted criminally for certain violations.
The equity stripping statute could have made a significant impact on Minnesota’s real estate market, but for the crash in housing values in mid-2006. With that development, the “equity strippers” experienced financial difficulties from being over-leveraged and many filed bankruptcy. Homeowners who could have benefitted from the foreclosure reconveyance statute therefore lacked a means of recovery, and found themselves out of luck.
Minnesota’s foreclosure reconveyance statute is a perfect example of legislating on special circumstances. Passed at a time when the housing market was riding high, it now serves little or no purpose in an era of depressed property values (many of which lack any equity to strip) and should be looked at for repeal.