Lenders Forced to Maintain Foreclosed Homes
As a result of the federal Protecting Tenants in Foreclosure Act, states across the country are passing similar legislation that makes lenders obligated to maintain foreclosed properties from the time of the judgment of foreclosure through the closing of the sale.
“I do believe that we are seeing a number of laws to protect tenants and blighted properties,” said Nanci Weissgold, a partner with the Washington law firm K&L Gates. “I am seeing these types of laws not only at the state level but also at the locallevel. The shear number of these laws (new and amended laws as well as laws currently on the books) coupled with the potential liability will raise a huge compliance problem for servicers.”
In New York, Gov. David Patterson signed the Mortgage Foreclosure Law which takes affect on April 14. The law applies when the property is vacant or if it’s been abandoned by the mortgagor but is rented by a tenant. The law is enforceable by the tenant, any HOA or municipality. If the property is occupied the law states it must also be in a safe and inhabitable condition. This includes the cost of heat.
“Effectively, lenders are now responsible for the maintenance and repairs,” said Heather Rogers, an attorney with Davidson Fink LLP in Rochester, at the New York State Bar Association’s annual meeting here.
“The intent of the statute was clearly to fight blight and properties that were being abandoned and bad for neighborhoods and property values. However, anybody who does foreclosures should know it can be a very long time between judgment and recording of the deed,” Ms. Rogers told conference attendees.
“That’s when a lot of mortgagors decide to pull their head out of the sand and maybe try to do something. Bankruptcy is filed. The process can be very lengthy.”
It’s unclear as to whether the costs of maintenance and repairs can be added to the debt, she added. “It would depend on the mortgage documents, but this is a huge cost and liability for lenders.”
This law has many other areas that impact foreclosures, added Ira Goldenberg with Goldenberg & Selker LLP in White Plains. It creates a hardship for condominiums, he said at the conference.
“There is no way to force a bank to speed up its foreclosure process. Many times, the condominium is being doubly punished because the unit owner has already stopped paying the common charges and may have abandoned the unit. The bank doesn’t pay those common charges. So, it puts the condominium in a deeper hole.”
On top of that, if the unit is unsafe or unclean, the condo board steps in as a common expense to maintain the unit. “This statute makes some change. So, the question is whether the obligation to pay this maintenance is in fact a common charge. I think the answer from the statute is a resounding that it’s not clear.”
Another element of the law requires that all foreclosures are now subject to mandatory settlement conferences effective Feb. 13, applying to every single home loan. Prior to this statute it was only subprime loans that were subject to these.
The only “out” is if the property is not owner-occupied, said Ms. Rogers. “But in practice that’s not always true. A lot of the judges are issuing them anyway. Just because the statute says one thing doesn’t mean that’s how we are going to proceed.”
Any foreclosure filed prior to Jan. 14, 2010 that wasn’t already subject to the settlement conference and has not yet reached judgment is subject to a conference at the request of the defendant. The court is required to send a notice to the defendant telling them they have this option.
“There is nothing mentioned about how long you have to wait until you hear back,” she said. “The whole process is a work in progress. The statute does not set forth how these settlement conferences should be held. Every county is different. Some counties have a system put in place and things are going a little more smoothly than others. Other counties are leaving it up to individual judges. Counties are trying to work with the judges to see if they can put forth a some streamlined process.”
The state is also requiring 90-day preforeclosure notices for home loans, including the newly added condos and co-ops. This notice, which lists HUD-approved agencies that can assist borrowers, cannot be sent with any other notice. One of these notices must be sent every 12 months if the borrower is not already in foreclosure.
Lenders are required within three days of sending the notice that they must make an electronic filing with the New York State Banking Department stating the name of the borrower, their address, last known telephone number and the amount due on the mortgage.
The banking department has 180 days or “such time as they determine” to put the system in place. “As you can imagine there is no system in place at this time,” Ms. Rogers said.
“The problem is the statute must also contain a further allegation that the lender complied with the statute. I’m not sure if this was an unintended consequence or an intended consequence, but the argument could be made foreclosures will have to cease until the ability to make the filing with the banking department is completed,” she said.
Mimicking the federal Protecting Tenants in Foreclosure Act, a 90-day notice for properties sold at a foreclosure sale must be sent to any tenant telling them of a change in ownership to the property. Here, tenants are informed they may remain in the property for 90 days or their lease term.