Thousands of homeowners looking to sell need to sign new paperwork asserting they’re not “distressed homeowners” under a new Washington state law that takes effect today.
As foreclosure rates climb, the new law is aimed at protecting people from scammers who offer to bail them out but end up taking the property or charging excessive fees for unnecessary services. The law mandates that companies dealing with distressed owners – people behind on their taxes or mortgage, or think they’re in danger of falling behind – use written contracts spelling out terms, including a disclaimer that they cannot guarantee to save homes.
But financially strapped homeowners may be hard-pressed to find a qualified real estate agent or broker to help them avoid foreclosure by selling a home or negotiating with a lender. An unintended consequence of the law exposes real estate professionals to the same liabilities as shady companies – a risk some may not be willing to take.
“My fear is this is going to scare off the good Realtors because they’re just going to say, ‘I don’t want to get involved in this,’” said Jan Quintrall, president and CEO of the Better Business Bureau in Spokane. “Then all you’re going to do is have those people who sort of operate on the margins getting involved and doing who knows what.”
The Washington attorney general’s office, which proposed the legislation to protect consumers but watched as it was amended, says the law is unnecessarily broad. The office will advocate during the next legislative session to exempt Realtors, and likely won’t enforce the law against real estate agents except for “substantive” violations, said Assistant Attorney General David Huey.
“There is a very real problem, and it does need to be addressed,” he said.
Huey drafted what became House Bill 2791 at the request of Attorney General Rob McKenna. It ws intended to strictly regulate “distressed home conveyances” – when an owner relinquishes control of a home under the premise he or she can stay in the property and lease it with an option to buy or receive a portion of sale proceeds. About 18 states have similar protections, he said.
Such schemes might let the owner keep a house for six months or a year, but owners typically lose, Huey said.
“It is a particularly seductive representation to tell somebody who’s facing foreclosure that you’re going to save them, that you’re going to keep them in that house,” Huey said. “For these transactions to turn out economically positive for both parties is just so difficult as to be beyond probability.”
Other scams offer phantom consulting services, which might delay owners from seeking legitimate help.After declining since 2002, the pace of foreclosures last year began to swell as the real estate market cooled and lenders tightened credit. As of Tuesday, 218 bank foreclosures had been recorded in Spokane County this year, according to the county auditor’s office. That compares with 304 last year and 269 in 2006.
While the original shorter version of the bill passed the House unedited, it was amended in the Senate to include the concept of foreclosure consultants.
“Unlike similar bills enacted in other states, this one did not exempt real estate agents,” Huey said. “Arguably just about any kind of transaction they might do with somebody approaching foreclosure runs the risk of being characterized as a foreclosure consultant, and that has some onerous consequences.”
The law lays out several specific requirements for people who would do business with distressed owners – obligations that could be the basis for a lawsuit.
Firms that participate in conveyances must verify that the owner “has a reasonable ability” to reacquire the house, including enough income to lease it back.
Conveyance participants must eventually re-convey the title to the owner, or pay the tenant at least 82 percent of the fair market value of the property by the time the resident leaves or is evicted.
Written contracts must “fully disclose the exact nature” of the services and payments involved, and include a notice that the contract “could result in the loss of your home.” Owners have five business days to cancel a contract. Distressed owners cannot waive rights under the law.
The law also dictates consultants have a fiduciary duty to “act in the distressed homeowner’s best interest and in utmost good faith.” Owners who feel they’ve been wronged could sue for actual damages, plus as much as $100,000 in additional damages, Huey said.
For Realtors, that means consulting lawyers to draft new agreements for distressed owners, or dropping them as clients.
“Some brokers and agents may choose not to represent distressed sellers, which is really in conflict with the intent of the legislation, obviously,” said Dallas Becker, co-owner of Windermere North Spokane. “We’ve been seriously training our agents over the last few days to make sure they’re comfortable with the law and they understand what the requirements are and protect themselves.”
Realtors statewide have hurried to draw up new listing agreement addendums and get them signed. There were 3,354 homes on the market in Spokane County last week, according to the Spokane Association of Realtors.
The more than 90 agents at Windermere North have been hustling to update roughly 400 clients after receiving new forms last weekend, Becker said.
The law also dramatically affects real estate investors who marketed their services to what are now considered distressed homeowners. Spokane business Empire Loss Mitigation will stop working with people facing foreclosure until it can comply with the law, according to its Web site.
Owner Chris McIntosh specializes in negotiating short sales, when a bank or mortgage lender agrees to reduce the amount of loan debt. “It’s pretty scary,” he told fellow investors at a meeting Wednesday night. “The law is really ambiguous.”
The Better Business Bureau and the attorney general’s office are looking into the equity skimming problem in Spokane County, and are “about halfway through our investigation,” Quintrall said, declining to elaborate. But the new law has so many layers and interpretations, she said, it’s just “making everything cloudier.”
“What a mess,” she said. “From our perspective, it’s just confused the marketplace even more, and frankly if they would spend more time going after the bad guys and stop punishing people who do things by the book, we’d all be better served.”
“I just hope they go back and clean it up.”
Reach Parker Howell at (509) 459-5491 or at firstname.lastname@example.org.
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