Return of the Walking Dead
New York Attorney General Eric T. Schneiderman used a recent appearance before the New York State Association of Towns to announce that he would soon be introducing new and improved legislation aimed at making lenders more responsible for abandoned property that has not been foreclosed upon. Under this version, fines levied against lenders for non-compliance with property maintenance requirements will be given to local governments “to hire additional code enforcement officers.” According to the press release, independent Democratic conference leader Jeffrey Klein and Assemblywoman Helene Weinstein will be sponsoring the legislation.
First, a caveat. The views I express on legislation in this blog are mine and mine alone and do not necessarily reflect the views of the Association as a whole. There’s a second caveat. I understand why AG Schneiderman and the town leaders are so concerned about vacant property. According to the AG, in some areas of the State up to 42% of the properties in foreclosures are abandoned before the process is complete. The result is that property lays vacant and deteriorates as homeowners walk away from their responsibility to care for their homes and lenders are less than enthusiastic about assuming the legal responsibility for a deteriorating piece of real estate.
Schneiderman’s bill seeks to address this problem by imposing requirements on mortgagees and servicers. Specifically, Section 1307 of NY’s Real Property Actions and Proceedings Law currently imposes maintenance obligations on a plaintiff in a foreclosure action who obtains a judgment of foreclosure. The most important thing this bill will do is impose maintenance obligations on lenders and servicers whenever property is vacant and abandoned or a foreclosure action has been commenced. Among other things, vacant and abandoned property can be any property that is at least three months delinquent and vacant or the mortgagor has informed the mortgagee in writing that they no longer intend to occupy the property. Assuming your typical delinquent homeowner won’t be quite so conscientious, property can also be classified as vacant where there is “a reasonable belief that the property is not occupied.”
What frustrates me about proposals like this is that they refuse to address the core reasons behind zombie property in the first place. New York has one of the most difficult and time consuming foreclosure processes in the nation. It’s not uncommon for lenders to take four years to complete a foreclosure. Rather than imposing obligations on lenders with regard to property they don’t own, why not simply expedite the foreclosure process?
For example, we should use this legislation’s definition of vacant and abandoned property as a basis for allowing foreclosures to go through without many of the procedural hurdles that are currently in place including the requirement under New York Law for pre-foreclosure settlement conferences. In addition, any party that fails to show up in a foreclosure proceeding should be understood as having waived any and all defenses to the foreclosure.
Ironically, many of the towns supportive of this legislation are well aware of what a disaster a foreclosure in New York can be. Under New York Law, municipalities have a first-lien right to foreclose on property on which delinquent taxes are owed. It seems to me somewhat disingenuous to complain about lenders not taking responsibility for real estate they don’t own when municipalities could, in many instances, take control of the same property but choose not to. I wonder why?
And one more thought. It’s one thing for a lender who has taken over foreclosed property to be responsible for proper maintenance. It is another thing to impose on that lender the obligation to refurbish property that may not have been up to code for years before the lender entered repossession. Under this bill, municipalities would have the right to intervene in foreclosure actions to mandate that property be maintained up to code. Let’s think about this for a second. The GSEs have already complained that New York mortgages are not as valuable as in other parts of the country because of foreclosure costs. Now we are going to make the system even more expensive by allowing municipalities to impose a back door maintenance tax on mortgagees.
Finally, I personally would love to know how much of the stock of zombie property not only in New York but nationwide is owned by Fannie and Freddie. My guess is that we might find that these government sponsored entities are not particularly conscientious absentee landlords.