Month: January 2017

Understanding and Disclosing the Homestead Declaration

Filing a Declaration of Homestead is one of those things that you might know a little about and recognize, but not really understand fully what it is and how it works. It can also be an additional recording fee required to be disclosed, and is subject to 10% tolerance, which means if your deed and mortgage recording fees equal $300, and a $35 homestead declaration fee wasn’t disclosed on the LE, then you’d be $5 over tolerance. It’s useful then to understand what the homestead declaration is, how it works, and who is qualified to file one.

Background:  In 2010, MA updated the Homestead Act (Mass. Gen. Laws, Ch. 188) to give an automatic homestead protection of $125,000 to an owner’s primary dwelling. Residents have the option to file a Declaration of Homestead with the Registry of Deeds in order to increase that protection up to $500,000 in a primary dwelling. The Act expanded on protections for the elderly and allow for homes held in trust to benefit from homestead protections.

How the Protection Works: The homestead protection protects equity built up in the home against some creditors. The protection is subordinate to mortgages and certain liens on the property though, such federal, state, and local taxes and liens. A creditor who tries to make an attachment to a home (such as by court order) in violation of the homestead can get that attachment avoided.

It also offers substantial protection in bankruptcy, and is often what enables bankruptcy debtors to stay in their home. A bankrupcty debtor who has built up equity in his or her home but has a lot of unsecured debt can keep up to $500,000 of their home’s equity out of the bankruptcy estate if they file a Declaration of Homestead properly (and up to $125,000 automatically under the new law).

Qualifications:  A Declaration of Homestead may be filed by 1 or more owners who occupy or intend to occupy a home as a primary residence. It ONLY applies to primary residences. The homestead protection applies to the owners and family members who occupy a home as a primary residence. A homestead is terminated if the home is conveyed to a non-family member though, so even if a Declaration of Homestead was previously filed on the property, the new owner will still need to file a new declaration.

It’s optional whether or not a borrower will elect to file one though, so it can be difficult for a lender or broker issuing the Loan Estimate to determine whether to disclose the recording fee for the homestead. The recording fee for a Declaration of Homestead is $35 (https://www.sec.state.ma.us/rod/rodfees.htm), so my $5 out of tolerance example is not a remote possibility. But the cost is so minimal compared to the potentially $375,000 extra protection it offers, that you could probably assume that an applicant who qualifies for filing the Declaration will do so at closing. However, there is no requirement that the Declaration be filed at closing, though there is a disclosure requirement about the homestead the settlement agent needs to provide. Thus if you have a reason to believe the borrower will opt out of filing the Declaration, then that’s fine. But if you are unsure at the LE stage, it is better to include it than not.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

The Right of Rescission and Purchasing New Interests

The right of rescission gives consumers the right to rescind, or cancel, certain transactions involving a consumer’s principal dwelling. The rule is nuanced and detailed though, which can make it confusing to apply in some situations.

Here’s a scenario to look at the right of rescission rules: Tenant A owns 50% of a property, and Tenant B owns the other 50%. Tenant A dies, and now Tenant B wishes to purchase the other 50% interest in the property from Tenant A’s estate, and at the same time refinance the original existing mortgage. How does the right of rescission apply to this transaction?

The right of rescission applies in a credit transaction where the consumer acquires or retains a security interest in a principal dwelling, subject to some exemptions. Generally, the right of rescission doesn’t apply to the initial purchase of the property. (The rule exempts “residential mortgage transactions” which is defined as the financing of the “acquisition or initial construction” of a dwelling.)

However, the right of rescission applies to “the addition to an existing obligation of a security interest in a consumer’s principal dwelling,” but it is limited to “only the addition of the security interest and not the existing obligation.” This applies here, where the borrower already has an existing interest in the property and is looking to just add to that interest. Therefore the right of rescission applies to the new credit to acquire the new 50% interest.

But it’s not just the purchase of the other half interest that is involved here; the borrower also wants to refinance the existing loan. How does the right of rescission rule affect that part?

One exemption to the right of rescission rules goes to the refinancing or consolidation of credit already extended by the same creditor and already secured by the consumer’s principal dwelling. But this only applies to the extent it covers the outstanding principal balance, and it doesn’t cover any new credit extended beyond the outstanding balance. Or, in other words, the portion of the loan that is being refinanced is not subject to the right of rescission rule, but the new credit being extended to purchase the new interest in the property is subject to the right of rescission.

So if Tenant B’s remaining balance on his loan to secure his 50% property interest was $150,000, and he now wants a $350,000 loan to purchase the other 50% interest for $200,000 and refinance his $150,000 loan, then the right of rescission applies to the $200,000 new credit and not the $150,000 loan. Note this exemption only applies if the borrower is attempting to refinance with the original creditor though. If the borrower is getting a loan from a new creditor which would pay off the existing obligation, then the whole loan is subject to the right of rescission rule again.

What are the effects of a consumer exercising their rescission rights? The full effects could take their own post, but one thing to remember is that the right of rescission rules focus heavily on the security interest a creditor takes in property and the creditor’s ability to encumber a consumer’s interest in property.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com