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While the subprime mortgage crisis shows no signs of abating, New York City Comptroller William C. Thompson, Jr. today urged Governor David Paterson to expand pending legislation to address potential for fraud in real estate transactions.

In a letter to Paterson, Thompson applauded the introduction of Program Bill No. 44 (A.10817/S.8143), but urged that the legislation be amended to incorporate expanded protections for homebuyers and homeowners. Full text of the letter is available at www.comptroller.nyc.gov.

“These efforts are particularly timely as our City grapples with a troubling spike in property foreclosures and a corresponding risk of fraudulent title transfers,” Thompson said. “In light of the unprecedented number of foreclosures in recent months and the growing subprime mortgage crisis, it is imperative that we act now to ensure that home buyers and home owners are provided every possible safeguard.”

Among his top concerns, Thompson noted that a common practice has developed in the mortgage industry whereby homebuyers are encouraged to use an attorney recommended by the lender. This practice urges buyers to forgo the advice and expertise of an attorney who is committed solely to representing their interests and the possible detection of attempted fraud before any damage is done.

In order to address this problem, Thompson recommended that the legislation be expanded to include creation of an affirmative duty for state-licensed participants (such as real estate agents, mortgage brokers, lenders, appraisers, attorneys, and the like) in a real estate transaction to report suspected fraud.
Another problem noted by the Comptroller is that, when the conveyance of real property occurs without the issuance of a total insurance policy, an elevated risk of fraud is present. 

“It is a sad truth that there are unscrupulous people out there who take advantage of others by selling property which they do not own,” Thompson said. “While buyers should beware of the potential for fraud, we can do more to protect them.”

In order to rectify this problem, Thompson suggested amending existing law to require any party obtaining an ownership interest in real property to either:

1. Provide proof to the county clerk or city register that title insurance has been obtained for the subject property, or
   
   
2. File a notarized statement with the clerk or register identifying the reason(s) for deciding against insuring the transfer of title.

“For cases in which title insurance was not obtained, the clerk or register might then choose to contact the last owner of record to confirm the reported conveyance and minimize the possibility of fraud,” Thompson added. “This way, buyers who choose not to pay for title insurance would be protected under the law.”

Thirdly, while not directly related to real estate transactions, Thompson expressed concern over the potential for identity theft through the attainment of homeowner signatures through real estate deeds and mortgage documents that can be accessed online. Within New York City, these documents are electronically imaged and made publicly available through the Automated City Register Information System.

“These scanned records include crystal clear images of homeowners’ original pen-and-ink signatures, which identity thieves could easily forge or misappropriate for illegal use,” Thompson wrote.

As such, Thompson suggested that the Electronic Signatures and Records act be amended to allow the submission of real estate conveyances and related documents with electronic, rather than pen-and-ink, signatures.

“It is vital that we work together to address these weaknesses for the benefit of homeowners across New York City and State,” Thompson said. 

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