Zombie ‘Cure’? Legislation in New York Puts Unfair Burden on Lenders for Fallout from Abandoned, Unmaintained Properties. And the Effects Could Be Far-Reaching.
by Kathy Fettke
N ew legislation designed to fight zombie foreclosures in New York can only mean trouble for lenders—and local proper- ty owners and investors there and in other states should take note, as well. The New York State Abandoned Property Neighborhood Relief Act of 2016 was designed to help local communities combat the problem of declining home values in communities where abandoned properties, known as “zombie foreclosures,” attract vagrants and vandals. Up to now, local governments have been responsible for the upkeep and costs of these zombies. This state Assembly-passed legislation calls for creation of a statewide registry of the properties and a requirement that banks and mortgage lenders report them. It would also create a new fund, which would use money collected by the Attorney General’s Office through enforcement actions to provide aid to these municipalities. “These zombie properties are just that – zombies that take away the vibrancy of our communities, and our local governments are being hit with the cost to maintain them,” said Assemblyman Angelo Sant- abarbara, a Democrat fromNew York. “I’ll continue to fight for this legislation until it becomes law, so that we can help our neigh- borhoods fight off the ‘zombies’ and keep them out of our communities.” While he sounds like a real hero, Sant- abarbara is really only pointing fingers at a scapegoat rather than addressing the real problem. Instead, he should turn those fingers and point to himself. Government is creating these zombies that government
now wants to fight. Let me explain.
she did by abandoning their property and financial obligation? With potential laws like this, made by politicians who appear to know little about business or economics, it’s very likely that lenders may simply leave the state. Otherwise, they would face far too much legal risk, not to mention an unfair financial burden. However, it’s entirely possible that if lenders did exit New York, the Assembly might pass a law requiring them to come back. That’s how it often works in highly regulated states. It’s simply unfair that they be forced to maintain vacant and abandoned properties that they don’t even own, for which they are receiving no payment in return for money lent, and which they cannot sell to recoup their losses because the government won’t let them foreclose. And they can’t rent them out for cash flow to cover holding costs, because again, they don’t own them. New York is not the only state with a high number of zombie foreclosures. According to Realty Trac’s Q2 2016 U.S. Residential Property Vacancy and Zombie Foreclosure Report, other states joining New York in the Top 5 States for Zombie Foreclosures are New Jersey, Florida, Illinois and Ohio. No surprise! These are all judicial states in which laws make it very tough to foreclose. There are 1.4 million vacant properties
If this law were enacted, it would require lenders and servicers to maintain properties once they become vacant and abandoned. After all, it’s the banks’ fault, right? They lent money on the properties, and they should pay for that mistake. And if they don’t, the bill suggests charging lenders $1,000 per day for non-compliance. Whoa! Wait a minute. What happened to the homeowner who borrowed the money and stopped paying it back? Didn’t the bank have an agreement that if the borrower didn’t pay back the mortgage, then the lender could take the collateral in return? Why, yes. However, government legislation prevents that, or makes it really, really hard to do so. New York is a judicial state, which means foreclosures have to go through a court system. It can take well over three years for a bank to foreclose, take back the collateral and resell it on the open market. During that time, the owner can live in the property without making payments or can just walk away from the obligation altogether. Thus, a zombie is born. How about simply allowing banks to fulfill their contracts with borrowers who stop paying? How about making the borrower pay for the damage he or
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