Judge Stalls Foreclosure As Homeowner, Allegedly Duped Into Signing Away House In Equity Stripping Deal, Claims Violations Of NY Home Equity Theft Law

In Nassau County, Long Island, the New York Law Journal (appearing at Law.com) reports:

• Applying a recently passed New York state law to a "questionable" transaction, a Nassau County judge has halted a foreclosure to give the homeowners a chance to prove they were tricked into selling their house. In Washington Mutual Bank v. Sholomov, [...] Supreme Court Justice Daniel R. Palmieri denied a motion by Washington Mutual to foreclose and sell the Glen Cove, N.Y., residence of Frank and Vincenza Dizazzo.

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• Here, the decision required Palmieri to apply New York's Home Equity Theft Prevention Act, which went into effect on Feb. 1, 2007. In doing so, the judge weighed "the rights of both homeowners claiming to have been duped out of their home and the lending institution now seeking to foreclose on a mortgage made to the party the homeowners claim was part of the scheme."

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• Frank Mitchell Corso of Jericho, N.Y., represented the Dizzazos. In an interview, Corso characterized the decision as important to banks that lend money to purchasers who may be involved in mortgage fraud schemes, as delineated in the state act. "The banks now have to be extremely careful as far as following procedure because they may become a party to the fraud," Corso said.

For the entire story and details, see Foreclosure Halted for Couple Who Say They Were Tricked Into Selling Home.

For the case, see Washington Mut. Bank v. Sholomov; 7/10/2008, 2008 NYSlipOp 28250.

Go here for the statute in question, the New York Home Equity Theft Prevention Act, or go here for consumer information on the law (available online courtesy of the New York State Banking Department).

For other posts on homeowners using Federal & state consumer protection statutes to try and undo bad mortgage loans, Go Here, Go Here, and Go Here.

Editor's Note:

The issue of whether the straw buyer involved in the equity stripping arrangement (Sholomov) and the lender providing the financing in the transaction (Washington Mutual) were "bona fide purchasers for value" was raised in the case, according to this excerpt in the article:

• It is "certainly questionable" that Sholomov, who also was in default, was a "bona fide purchaser for value," wrote the judge, as the Dizzazos continue to reside in their Glen Cove home, and the transaction only required a down payment of $1,000 for a home worth roughly 600 times more.

• In turn, while Washington Mutual "is not directly implicated as 'equity purchaser'" because of its loan to Sholomov, Palmieri held the bank "still must be charged with knowledge, through its agent, of the possible application of the statute and of its violation."

I would point out that the New York Court of Appeals (the state's high court) decision in Phelan v. Brady, 119 N.Y. 587; 23 N.E. 1109; (NY 1890) supports the proposition that, because the homeowners (the Dizazzos) were in possession of the home at the time Washington Mutual acquired its mortgagee's interest in the property, it (WaMu) is deemed to be on notice of the homeowners rights, and therefore, is not a bona fide purchaser for value, without regard as to whether WaMu had an authorized agent involved in the deal from whom knowledge could be imputed to it.(1) Accordingly, its mortgagee's interest in the home would arguably be inferior to any interest that the homeowners can establish.(2)

(1) Excerpt from Phelan v. Brady, 119 N.Y. 587; 23 N.E. 1109; (NY 1890):

At the time of the execution and delivery of the mortgage to the plaintiff, the defendant Mrs. Brady was in the actual possession of the premises under a perfectly valid but unrecorded deed. Her title must, therefore, prevail as against the plaintiff. It matters not, so far as Mrs. Brady is concerned, that the plaintiff in good faith advanced his money upon an apparently perfect record title of the defendant John E. Murphy. Nor is it of any consequence, so far as this question is concerned, whether the plaintiff was in fact ignorant of any right or claim of Mrs. Brady to the premises. It is enough that she was in possession under her deed and the contract of purchase, as that fact operated in law as notice to the plaintiff of all her rights.

It may be true, as has been argued by the plaintiff's counsel, that when a party takes a conveyance of property situated as this was, occupied by numerous tenants, it would be inconvenient and difficult for him to ascertain the rights or interests that are claimed by all or any of them. But this circumstance cannot change the rule. Actual possession of real estate is sufficient notice to a person proposing to take a mortgage on the property, and to all the world of the existence of any right which the person in possession is able to establish. [emphasis added] ( Governeur v. Lynch, 2 Paige, 300; Bank of Orleans v. Flagg, 3 Barb. 318; Moyer v. Hinman, 14 N. Y. 184; Tuttle v. Jackson, 6 Wend. 213; Trustees of Union College v. Wheeler, 61 N. Y. 88, 98; Cavalli v. Allen, 57 id. 517.)

(2) For a dissenting view from one in the title insurance industry, see Rifkin, Bernard M., Chicago Title Insurance Company, "Possession as Constructive Notice of Rights of Tenants:Arcane, Possibly Archaic" - last visited July 24, 2008. undo mortgage loans TILA batallion