Here?s One Way to Fight Zombie Properties
Updated 6/29/16: The New York Law Journal published an article titled Legislative Assaults on Mortgage Holders.
Link to article
It comes as no surprise to mortgage lenders that elected officials are worried about mortgage borrowers and continue to promulgate borrower-friendly legislation. These sundry acts contribute to both extending the duration of the foreclosure process and making it more expensive for the foreclosing party. While a few of these do afford some comfort for limited borrowers in need, lenders and their counsel will opine that the post-mortgage crisis laws offer fertile ground for wily borrowers to interminably delay the foreclosure process.
It is apparent that proliferation of these new laws are continuing apace. An alert about two—of more than a few others—which need to be recognized follows.
Deposit for Vacant Parcels
A genuine jolt applies to mortgages in New York’s Town of Hempstead because a new law “in relation to Foreclosures, Undertakings and Maintenance of Premises” was just passed in May, 2016.1 (Code of the Town of Hempstead Chapter 128, subsection 128-61-1). How about a $25,000 advance for every action upon an abandoned parcel!
Note immediately that the town is no backwater—it is the largest town in the nation and has a population in excess of 760,000. So there are mortgages galore within its borders.
Despairing that vacant homes are an eyesore and a nuisance to neighborhoods, the town has shifted the burden of maintaining such premises from the owners of the property to any party which initiates a foreclosure on that property. And rather than wait for the moment that a foreclosure judgment may be entered (as RPAPL §1307 law inadvisedly already does2) it mandates that the foreclosing party shall deposit a $25,000 undertaking with the town within 45 days of commencement of any foreclosure against a residential property (single-family, two family or multiple family residence) that “has become vacant.”
Definitionally, the party obliged to make the deposit is any person, business, organization, bank or lender. Residential property in turn is recited to be improved by a single-family, two-family or multiple family residence. The stated purpose is to secure the confirmed maintenance of the property free of violations (as in turn delineated in Section 128-61) for the duration of the vacancy—all as determined by the Commissioner of Sanitation. It is then declared to be unlawful for any such foreclosing party to fail to make the required deposit.
If the Commissioner of Sanitation determines that there is violation at the property, the deposited money can be used to remediate the condition (in addition to any other enforcement). When such monies are drawn down, the foreclosing party must restore the account to the full amount within 15 days after written demand down from the town. Failure to replenish the fund is likewise declared unlawful.
Should the initial deposit or the replenishment not be made, the town can serve a 10-day notice, pursuant to the process service requirements of CLPR Article 3, demanding the money. Failure to comply then elicits a fine up to triple the maximum in Section 128-65(A) of the chapter together with a minimum fine of $500 each day of noncompliance, or by imprisonment for not more than 15 days or by both fine and imprisonment. Increasing the scope of penalties, each calendar day of failure to comply constitutes a separate additional offense.
Although the cited sections pointedly apply to residential properties, its own subsection G inexplicably states that “This section shall apply to all non-residential foreclosures commencing after the effective date…” (emphasis supplied). While editorially it can be suggested that the reference to non-residential is a typographical error, until corrected, the possibility exists that this encompasses any vacant property.
Problems With the Legislation
In addition to being tough—indeed oppressive and chilling—the statute is imprecisely written. In a nutshell, here are some of the major problems with this legislation:
- There is at least one critical definition unstated. The characterization of a single family or a two family residential property is understandable, but without the statute referring to a definition within its terms or elsewhere in the code, presumably a multiple family residence could be up to any number of units. Whether that means, for example, that the foreclosure of an apartment building incurs the requirements of this statute is unclear and presents an immediate issue.
- When property is vacant is an elusive contemplation. If an owner abandons property, it is a question of fact as to whether he has left with no intention of returning. It is not necessarily easy to determine. Did he take all of the furniture? Perhaps not. If some of the furniture is still there, does it suggest that the people might return? Practitioners can readily confirm why this is a difficult concept to glean with certainty and it presents obvious difficulties for the foreclosing party in establishing whether the property is vacant, thus eliciting the $25,000 undertaking.
- When the vacancy has occurred sufficient to elicit the requirement is another murky assessment. It is apparent that if the property is vacant at the inception of the action, the undertaking is required. But if it becomes vacant during the course of the foreclosure, the responsibility is fuzzy, although it may very well be that the town would determine during the action that there is a vacancy and make a demand for the undertaking.
- A lender only has a lien. The property is owned by, “the owner.”3 That is not the lender. It is the borrower who owns the premises and the responsibility to maintain property should be with that person. But the town has elected to shift responsibility and therefore makes this demand of the foreclosing party. A lender, holding only a lien—not ownership—would posit that it should not be responsible for this obligation and it is certainly not anything that the mortgage ever contemplated. This is interference with a contractual relationship.
- Because a foreclosing party includes any “person,” the town is also imposing this undertaking obligation upon, for example, an elderly couple who may sell their house and move to Florida but needs to take back a purchase money mortgage to facilitate the sale. Or there could be a person who makes a mortgage loan to a neighbor or a relative and suffers a vacant property and the need to foreclose. They too—under the language of this statute—are obliged to submit a $25,000 undertaking. Whether they have the wherewithal to do that may be quite doubtful.
- Any notice to be sent to the foreclosing party will go to its last known address. But that will be the address in the mortgage. If the lender or foreclosing party has changed its corporate status, or been taken over, or if the entity or person who held the mortgage has moved, the address in the mortgage itself will remain the same, not reflecting the change. Consequently, it is possible, indeed probable in more than a few instances, that a notice demanding the payment may not be received—thereby invoking the major penalties delineated in the law.
- Whether the expenditures advanced and expended by the town’s sanitation commissioner can be added to the mortgage debt is uncertain. The problem is that no mortgage by direct language contemplates an expenditure of monies to be deposited with a municipality to be spent as that governmental entity deems appropriate regarding maintenance. It would take some stretching to fit it into standard language, thus creating uncertainty in determining its inclusion. This puts the money at risk of not being recoupable. At the very least, it suggests that lenders will need to amend their mortgages to anticipate such a situation.
- While a $25,000 undertaking is substantial enough, it is apparent that the foreclosing party can be liable for more because the sum on deposit must be replenished as it is drawn down.
In the end, the new law is laden with confusion and dangerous aspects which need attention. Even if that attention is given, the concept of causing the holder of a lien to deposit $25,000 (with potentially greater liability) for the privilege of enforcing a defaulted mortgage is a bizarre notion. Foreclosing in this venue just became much more expensive.
Then there is a frightening statute just passed in the New York State Assembly providing that a borrower does not waive the defense of a foreclosing lender’s lack of standing even if that defense is not asserted in a pre-answer motion or in an answer. (This is to be via a new RPAPL §1302-a). While the senate must yet vote on it as well, it may indeed become law and it is a very serious matter for lenders and servicers. We will explain.
The supposed defense of lack of standing has for a number of years been a particular favorite of defaulting borrowers. They readily assert it—after all, it is hardly unknown to their attorneys—and this serves as a source of much delay in the foreclosure process. While it is true that on some occasions a foreclosing party has not been careful enough to have the note in its possession prior to initiating the foreclosure, or neglected to have an assignment of the note (and mortgage which goes with the note) prior to inception, most of the time there really is no issue.
But the most creative of obfuscation presents challenges in this arena: how to satisfactorily demonstrate delivery of the note, meeting claims about a missing allonge, an assignment page unstapled from the note, among a number of others. While lenders typically prevail in the end, they are subject to much agony in the process.
Perhaps because an issue of standing is or would be apparent at the inception of any case, it is a defense which if not interposed in a motion seeking to dismiss a complaint, or if not part of an answer to a complaint, is deemed waived—as a matter of statute in New York.4 Much case law over all the years has strongly supported this.5 Borrowers cause enough mischief presenting the defense in a motion or in an answer.
What if they decide to try the defense long after the summary judgment has been granted or after a judgment of foreclosure and sale has been entered? It should not surprise lenders and servicers to learn—they probably already know—that borrowers will indeed present this defense at any time in the case. But when they do, the current law is absolutely clear that it is too late—the defense is waived if, as noted, it has not appeared earlier in the case in a pre-answer motion or in the borrower’s answer.
Comes the state Legislature which believes that borrowers have great difficulty in some majority of cases in determining who is the owner of the loan to determine if the party foreclosing is the right one. So they say. This is not at all the experience of mortgage holders because, however, this is the view of the Legislature, they seek remedial action through the mentioned bill which passed in the assembly in May 2016. While a part of that law is that the defense cannot be made after a foreclosure sale (one must be thankful for small favors) it would be available even after a sale if the foreclosure action proceeded on a default in appearing by the borrower.
So what does all this mean in the end? A borrower would now be free to hold in reserve a usually illusory standing defense until sometime in the middle of the case or at the end of the action. This could be employed as a tactic to garner further delay or to force a settlement. Or, a borrower could choose to default in the foreclosure action, await a foreclosure sale and then launch the defense even after the sale.
If borrowers believe that the foreclosing lender is not really the holder of the note and the mortgage, they are free to raise that defense in an answer and in fact they do, multitudinous times, even without basis. Lenders and servicers will likely be of the opinion that the need for this new legislation is fanciful at best. And it does pose a threat to yet clog and delay the foreclosure process even more in the Empire State.
1. Effective May 24, 2016.
2. The significant infirmities in the lender maintenance requirement are explored in “The Trouble With The Lender Maintenance Obligation,” NYLJ, Aug. 31, 2011, at 5, col 2. For further discussion see 3 Bergman On New York Mortgage Foreclosures §27.12, LexisNexis Matthew Bender (rev. 2016).
3. See inter alia, The Prudence Co v. 160 West Seventy-Third Street Corp., 260 N.Y. 2015 (1932); Holmes v. Gravenhorst, 263 N.Y. 148, 188 N.E. 285 (1933); Colter Realty v. Primer Realty Corporation, 262 A.D.77, 27 N.Y.S.2d 850 (1st Dept. 1941); Title Guar. & Trust Co. v. Feldon Realty Corporation, 149 Misc. 206, 267 N.Y.S. 48 (Sup. Ct. 1933); Goodell v. Silver Creek Nat. Bank, 48 N.Y.S.2d 572 (Sup. Ct. 1944); First Nationwide Bank v. Fouche, NYLJ, June 28, 1995, at 27, col. 2 (Sup. Ct. N.Y.Co., Lehner, J.).
4. CPLR R 3211(e).
5. See inter alia, HSBC Bank USA, N.A. v. Forde, 124 A.D.3d 840, 2 N.Y.S.3d 561 (2d Dept. 2015); Bank of New York Mellon Trust Company v. McCall, 116 A.D.3d 993, 985 N.Y.S.2d 255 (2d Dept. 2014); HSBC Bank USA, N.A. v. Pacyna, 112 A.D.3d 1246, 978 N.Y.S.2d 392 (3d Dept. 2013); Southstar III, LLC v. Enttienne, 120 A.D.3d 1332, 992 N.Y.S.2d 548 (2d Dept. 2014); JP Morgan Mortgage Acquisition Corp. v. Hayles, 113 A.D.3d 821, 979 N.Y.S.2d 620 (2d Dept. 2014). For extensive further citation see 2 Bergman On New York Mortgage Foreclosures §19.07. LexisNexis Matthew Bender (rev. 2016).
Updated 5/24/16: Newsday published an article titled Hempstead adopts law for banks to pay for zombie home upkeep.
Link to article
Ordinance No. 46-2016 (full text)
NOTE: Text begins on page 10 of document.
Hempstead Town Board (5/24/16 meeting minutes)
NOTE: Ordinance passage segment begins on page 3 (90) of document.
May 23, 2016
Local municipalities in the areas hit hardest by the foreclosure crisis have made various attempts through legislation to combat the problem of “zombie properties,” or vacant and abandoned properties in the process of foreclosure.
While the number of zombie properties has been on the decline—the most recent data reported by RealtyTrac showed 1.4 million vacant properties nationwide, with about 19,000 of those properties in active foreclosure—the question of whose responsibility it is to maintain those properties has been a major sticking point between servicers and lawmakers. The longer the properties remain vacant, the more potential they have to become magnets for squatters, vandalism, and violent crime, bringing down property values and lowering the quality of life in their surrounding communities.
Hempstead Town, New York—population 800,000, making it the largest municipality designated as a town in the United States—is proposing a solution to the problem in order to combat the zombie property problem: Hold banks and servicers responsible. Town Supervisor Anthony Santino has proposed a law that would require the servicer of the mortgage provide a $25,000 “security fund” (either by cash, cash bond, or letter of credit) to maintain vacant and abandoned properties that are in the process of foreclosure in compliance with the Hempstead Town Code.
“It’s time for big banks and other financial institutions to ‘do the right thing’ when it comes to ensuring that properties which they have seized don’t become a blight on local neighborhoods,” Santino said. “It’s unacceptable for banks to make big profits on home mortgages and then turn their backs on neighbors by failing to maintain these same properties once they foreclose on them. That’s why I have come up with a plan that puts lenders ‘on the hook,’ ensuring that they put up ‘security funding’ to guarantee property upkeep of vacant homes.”
Santino said the money would be used to provide maintenance such as lawn care, removal of debris, securing of properties by boarding up windows and doors, graffiti removal, and covering pools, among other items, in the event that “the lender fails in its responsibility to maintain the home.”
Santino’s plan for maintaining zombie properties calls for the servicer to provide $25,000 for each foreclosure initiated and also includes provisions to replenish the security fund as money from the fund is used or depleted, in order to continuously maintain the properties. The proposal from Santino also calls for penalties of up to $1,500 per day for lenders to fail to provide the $25,000 security fund under the proposed law, a Santino spokesperson told DS News.
The legislation will be heard by the Hempstead Town Board on Tuesday, May 24, beginning at 10:30 a.m. EST.
Source: DS News
Town of Hempstead (Resolution No. 48-2016 text)
Note: Resolution text begins on page 10.