Thursday, June 14, 2018

Homesteads and Dual-use properties

The June 11, 2018 edition of Massachusetts Lawyers Weekly reports on a recent Bankruptcy Court decision that interprets the Massachusetts Homestead law (MGL c.188). The facts of the case were that the debtor owned a two family house, lived in one half of the house with his family, and rented the other half to tenants. The debtor also ran a landscaping business on the property.

A creditor moved for an evidentiary hearing to determine whether the property “was predominantly used” for residential or for something else. This “predominantly used” language came from an earlier Bankruptcy decision which held that if a property was not used predominantly as a person’s primary residence, then the Homestead did not apply.

The judge in this new case, In re Shove, reached a different conclusion. She ruled that as long as the property met the definition of a “home” as set out in chapter 188 and also served as the primary residence of the Homestead declarant, then the Homestead applied to the entire property regardless of how the rest of the property was used.

While I am happy with this pro-homeowner ruling, Bankruptcy Court rulings are of limited weight when it comes to interpreting Massachusetts law. Until the Appeals Court or SJC issues a decision on this issue, we won’t know how state courts will rule.

Thursday, June 07, 2018

A Few Observations on Local Real Estate

I recently posted the Lowell Real Estate Report and the Middlesex North Foreclosure Report on the Real Estate Reports page of the registry of deeds website. Based on these reports and on others I’ve prepared, I have a couple of observations about the local real estate market:
The number of sales from January through May 2018 is about the same as in Jan-May 2017, but prices seem to be up by 10% or more (based on our deeds excise tax collections and on median deed prices I've calculated). It's a good time to sell but not many people are selling, likely because they couldn't afford an upgrade to their current homes.

There are still a lot of foreclosures: Jan-May 2018 there were 106 versus 92 for the same period in 2017 (again, district-wide). The bulk of the mortgages being foreclosed originated during the real estate bubble (2003-2008). I don't know why after 10 years these mortgages are being foreclosed now. Have the people not been paying all along and the banks just failed to foreclose, or did the homeowner suddenly encounter some financial crisis like divorce, illness, job loss and lose the house to more recent causes? 

One thing is clear: almost all the bad mortgages were by national lenders. It's very rare to see a local bank doing a foreclosure. Their performance now and during the foreclosure crisis is a positive story that may not have gotten the attention it should have.

Also regarding foreclosures, the foreclosing lenders are increasingly willing to sell at auction to a third party whereas traditionally the lender was the purchaser at foreclosure. This suggests that auction bids are higher which makes sense given rising values. Quite a few of these third party foreclosure buyers are LLCs which are likely in the business of either (1) flipping properties or (2) owning a lot of rental properties. This has some long term implications if multifamily rental properties that were once owner-occupied increasingly come under the ownership of distant investors who might be less committed to the neighborhood and the community.

Wednesday, June 06, 2018

Electronic Acknowledgements

As more and more real estate transactions move from paper to digital, many wonder whether a notary public may electronically acknowledge a signature. I think the answer is YES, as I explain in this article which first appeared in the March 2018 edition of the Merrimack Valley Housing Report:

Until recently, the thought of a real estate closing that did not involve dozens of paper documents that contained cursive signatures made in ink seemed far-fetched. However, conversations with certain brokers, bankers and lawyers suggest that a tipping point for paperless real estate closings may soon be upon us.

Electronic signatures have been legal in Massachusetts since the adoption of the Uniform Electronic Transactions Act in 2004 (Massachusetts General Laws chapter 110G). This statute opened the door to electronic document recording in Massachusetts, a technology that now accounts for 55 percent of all documents recorded at the Middlesex North Registry of Deeds. However, almost all of those electronic recordings have consisted of scanned images of paper documents that were signed in ink with cursive signatures. Few have been true electronic signatures meaning some mark or symbol made directly on an electronic device by the person “signing” the document.

One reason for the limited use of electronic signatures on real estate documents is because of uncertainty over the legality of a notary electronically acknowledging a signature. The sticking point seems to be the requirement in Massachusetts General Laws chapter 222 (updated by Chapter 289 of the Acts of 2016) that a notary affix his notary stamp to the document when taking an acknowledgement. But a close reading of that statute does not necessarily require the stamp or the document to be tangible objects.

A notary who made the imprint of his notary stamp on a blank piece of paper and then photographed it, could then insert that digital image into an electronic document on which he was taking an acknowledgement. Presumably this would comply with the statutory requirement that a notary stamp be affixed to the document. In this case, both the stamp and the act of affixing it to a document would be electronic.

Electronic “workarounds” like this digital image of a notary stamp plus existing statutes and available technology make all-electronic transactions feasible today. Perhaps the hardest obstacle to overcome is the unfamiliarity people feel with a new way of doing things.

Whenever I raise the possibility of all-electronic transactions, the response typically is, “but that would increase the risk of fraud!” It’s true that all-electronic transactions are susceptible to fraud, but so is every other transaction, especially those on paper. Consider what happens when a document is recorded at the registry of deeds in the traditional manner. A person no one knows comes to the office with a piece of paper that purports to be legitimately signed and acknowledged, pays the recording fee in cash, waits for the document to be recorded, and then leaves with the original. Who prepared that document? Who signed it? Who acknowledged it? Who recorded it? We don’t know the answer to any of those questions. Neither are we bothered by the opportunity for fraud at every stage of that transaction.

The main reason for our nonchalance is that paper-based recording has been around for several centuries. Our familiarity with the process allows us to put the risk of fraud in the proper perspective. But all-electronic transactions are novel and unfamiliar to us, so it is natural for us to magnify the opportunity of fraud. Ironically, the technology needed for all-electronic transactions provides an audit trail that is unavailable with paper transaction, thereby making one who uses the technology to commit fraud easier to apprehend.

Another cause for confusion in adopting all-electronic transactions comes from complex procedures adopted in other states. Virginia, for instance, allows a notary public to take an acknowledgement by video. This permits a document to be acknowledged even though the person signing it and the notary acknowledging it are not in each other’s presence. While this has some real benefits – a service member deployed overseas, for instance, could easily execute a legal document – it is more than is required to perform an all-electronic transaction.

Nearly four hundred years ago, the colonial government of Massachusetts created the requirement that a document that conveys an interest in real estate must be acknowledged to be recorded. The purpose of this rule was to curtail fraud, either in the guise of a forged signature or of an actual signature that was later denied by its maker. That requirement and the reasons for it continue today. However, there is nothing to prevent the tools that are used to perform that task to change with advances in technology.