Originally published on Law360 (subscription required) on July 11, 2016
On June 23, Gov. Andrew Cuomo signed into law legislation passed just days earlier that, among other things, is designed to tackle New York state’s “zombie property” problem. The term “zombie property” refers to a residential property abandoned by a homeowner after the initiation of a foreclosure action but prior to the completion of such action. They have been on the political radar in New York for the past number of state legislative sessions. The new law will take effect on Dec. 20, 2016.
The zombie property issue had been especially prevalent in upstate New York cities and in suburban counties and towns, largely as a byproduct of the devastation to these areas caused by the 2008 financial crisis. Prior to the passage and enactment of the zombie property legislation, New York law required that the mortgagee maintain the vacant residential property only after a judgment of foreclosure and sale had been entered. Since the bank or mortgage servicer did not have the duty to maintain the property until the judgment entry, the law incentivized mortgagees and loan servicers to delay the foreclosure process. As a result, it was left to the local government of a municipality where the property was located to maintain the abandoned property. The cost of such maintenance was ultimately passed along to the local taxpayer.
The problem of zombie properties and their impact in New York has been the subject of a number of government reports and private studies in recent years. A report released in January 2016 by the State Senate’s Independent Democratic Conference (IDC) and Mount Vernon Mayor Richard Thomas focused on zombie properties located in suburban Westchester County. The report examined 107 such properties in Westchester and determined that they resulted in a loss in value to neighboring properties totaling $10.8 million. The report advocated for creation and passage of legislation requiring banks who initiate foreclosure actions against a home to maintain zombie properties from the time they are vacated, rather than the time ownership is transferred to the banks. Additional policy recommendations in the report included the creation of a database of bank-owned, foreclosed properties to track the properties and to allow the state attorney general to impose fines.
Other studies revealed the extent of this problem to upstate New York municipalities. A report released by Buffalo Assemblyman Michael Kearns, D-Buffalo, disclosed the existence of nearly 800 zombie homes located in Erie County alone. The report indicated that such properties had a collective assessed value of $58 million, or an average value of $72,500 a house. The report also contended that the local municipal burden associated with maintaining these abandoned properties had cost taxpayers more than $1 million.
Another report issued by RealtyTrac.com in the fall of 2015 presented a broader view of the state’s zombie property problem as compared to the rest of the United States. The report ranked the state third in most vacant “zombie” foreclosures (after New Jersey and Florida), with 3,365 properties in limbo. New York’s rank moves up to No. 2 when evaluating the states with the highest share of vacant “zombie” foreclosures as a percentage of total vacant properties. New York’s 8.2 percent is bested only by New Jersey. The report also revealed that three of the top four major metropolitan areas in the country with the highest share of vacant “zombie” foreclosures as a percentage of all vacant properties are in New York. Rochester was ranked first (14.3 percent), New York City third (10 percent) and Albany fourth (7.9 percent).
In 2015, Attorney General Eric Schneiderman proposed legislation to address the issue of the state’s zombie properties. The legislation, introduced by Assemblywoman Helene Weinstein, D-Brooklyn, and Sen. Jeffrey Klein, D-Bronx, (who heads the IDC), set out numerous requirements intended to alleviate the zombie property problem. The legislation sought, among other things, to require that the mortgagee or its loan servicing agent provide written notice to homeowners that they are legally entitled to remain in their homes until ordered to leave by a court, make it unlawful for a mortgagee or loan servicing agent to enter a property that is not vacant or abandoned to intimidate or harass the occupant to vacate, and would have required mortgage lenders to take over the responsibility for properties soon after they are vacated — and not, as the current New York law had required, at the end of the foreclosure process.
The attorney general’s bill garnered widespread support from upstate New York mayors, 29 of whom, including the mayors of the four largest cities in upstate New York, penned a letter to legislative leaders urging support for the legislation. The legislation was not acted upon in the 2015 legislative session but was ultimately passed by the Assembly in May of 2016. The Senate never acted upon this bill in either the 2015 or 2016 session.
While members of the state Legislature renewed their calls and efforts to secure passage of a zombie property bill during the 2016 legislative session, legislation did not see momentum until the closing days of the legislative calendar. First, on June 7, 2016, Gov. Cuomo announced the release of more than $100 million in funds to help new homebuyers purchase and renovate zombie properties. New York State Homes and Community Renewal agency will disburse the funds through a new Neighborhood Revitalization Program by providing grants to not-for-profit organizations and municipalities in specific areas of the state. The program is expected to subsidize and finance the purchase and renovation of up to 500 foreclosed and abandoned properties for low- and middle-income residents of the state. Almost one-quarter of the $100 million fund will be provided through settlement proceeds obtained by New York in connection with the residential mortgage-backed securities settlement.
Just a week later — as a result of a behind-the-scenes legislative push from municipalities, the governor and state legislators long-engaged on the issue, in particular Sen. Klein — the state Legislature introduced and passed a new bill to resolve the zombie property problem. The new legislation, SB 8159, included several of the key provisions seen in previous incarnations of the legislation.
The heart of the new law can be found in the newly created sections 1308, 1309 and 1310 of the Real Property Actions and Proceedings Law (RPAPL). Section 1308 of the RPAPL places a duty to maintain zombie properties on the servicer of a mortgage who has the first lien on the property. This section sets forth certain timetables and requirements for a mortgage servicer to ascertain whether a property is vacant and abandoned, as well as a very comprehensive list of obligations and requirements to ensure the maintenance of the abandoned property. These obligations include, among other things, securing, replacing or boarding up broken doors and windows and winterizing plumbing and heating systems. This duty, however, will only apply to one-to-four family residential properties that the servicer has a reasonable basis to believe are vacant and abandoned. The duty to maintain applies to the servicer until the occupant has asserted their right to occupy the property, the borrower has filed for bankruptcy, a court has ordered the servicer to stop any maintenance, the property has been sold or transferred, the servicer has released the lien or the mortgage note has been assigned, transferred or sold to another servicer. Section 1308 will also:
Allow the state Department of Financial Services (DFS) or the municipality where the real property is located, to bring an action against a servicer failing to maintain a property. DFS must provide seven days notice of a violation to the servicer before action may be brought. A municipality must provide DFS with 10 days notice prior to initiating the action. Courts may impose fines of up to $500 per day, per property.
Allow municipalities to recoup costs for any maintenance work they do on a property not properly maintained.
Critically, section 1308 carves out banks, savings banks, savings and loan associations and credit unions that originate, own, service and maintain their own mortgages and originate less than 0.3 percent of mortgages in New York. Although the bill does not contain a defined term, this exemption is understood to cover primarily local community banks. Moreover, section 1308 now precludes any municipality from enacting local legislation that would impose a duty to maintain the zombie property inconsistent with the state law duties established under this law.
Section 1309 of the RPAPL sets forth a new judicial relief for the foreclosing bank. In this instance, section 1309 would permit a plaintiff to expedite the foreclosure process for properties proven to be vacant and abandoned. Section 1309 defines “vacant and abandoned property” to include proof that no occupant was present in the home and no evidence of occupancy on the property during certain inspection periods and the property was not maintained in a manner consistent with certain sections set forth in Chapter 3 of the New York property maintenance code. Section 1309 sets out what shall constitute as evidence of a lack of occupancy, which includes, overgrown or dead vegetation; accumulation of newspapers, circulars, flyer or mail; past due utility notices, disconnected utilities or utilities not in use; or one or more boarded, missing or broken window.
Section 1309 allows a lender, once the defendant’s right to answer the initial foreclosure proceeding has expired, to make a motion or order to show cause that a property is vacant and abandoned. The lender, however, is obligated to provide the defendant notice of this action, and the court is also mandated to send its own notice that such an action is being taken. The lender must also provide evidence with its motion that a property is vacant and abandoned. The new Section 1310 requires DFS to create and maintain a statewide vacant and abandoned property electronic registry. Information in the database will be considered confidential, although the DFS superintendent is afforded the discretion to release information if deemed to be in the best interest of the public. Any released information will continue to be treated confidentially by the parties. Local and state officials may also request data from the registry for their own districts.
Critically, this new section also obligates lenders, assignees and servicers who become aware that a property is vacant or abandoned to submit information about the property to the registry within 21 days of learning about the vacancy or abandonment. DFS is also charged with creating a toll free hotline for individuals to call and report vacant or abandoned properties, or any hazards, blight or concerns related to such properties.
The Legislature passed the bill in the closing hours of the legislative session. Gov. Cuomo signed it five days later, an indication of its priority. The governor held a series of ceremonial bill signings across the state on June 23. During these signings, he said that state has at least 7,000 zombie properties, a much larger number than seen in previous reports.
As highlighted above, oversight and enforcement of the new zombie property law are now under the purview of DFS. Whether DFS has the financial and personnel resources to take on this new responsibility will certainly impact the law’s effectiveness. Stakeholders in this issue may want to look to the fiscal year 2017-18 state budget when it is released by the governor in January 2017 to see whether there is an increase in funding provided to DFS related to their new obligations under this law.