Restoring Property: The Zombie Property and Foreclosure Act

Since April 2010, a mortgagee who acquires a judgment in a residential mortgage lending action has been required to maintain the property if it is vacant and abandoned. The new law extends the maintenance requirement to the point the servicer determines (or should have determined) that the property is vacant and abandoned, even if a foreclosure action has not yet been filed. RPAPL 1308. The law is intended to cover the majority of first-lien mortgage holders on one- to four-family residential real property that is vacant and abandoned. The statute requires the servicer to conduct an inspection within 90 days for delinquency and thereafter every 25 to 35 days at different times of the day to determine if the property is vacant and abandoned.

Once the property is determined to be vacant and abandoned, the servicer must post a notice that includes the servicer's contact information. If the servicer is not contacted for seven days after the posting of the notice, the servicer must maintain the property, including providing basic utilities and removing code violations. The servicer is subject to civil penalties of up to $500 per day for each day a violation persists. The statute also establishes an expedited process that mortgagees may elect to use when bringing a foreclosure action on a vacant and abandoned property. RPAPL 1309.

A lack of information regarding vacant and abandoned properties has been a great obstacle for the state and for municipalities trying to address “zombie properties.” RPAPL 1310 provides for the creation of a statewide registry, accessible to municipalities to determine who is responsible for a property and whether the property is in foreclosure. The Department of Financial Services (DFS) is required to maintain an electronic database, and a lender must submit information within 21 days of the time it “learns, or should have learned, that such property is vacant and abandoned.” Although information in the registry shall be deemed confidential, DFS may release the information if it is deemed to be in the public interest, and must release information to public officials regarding their district upon written request. DFS must also maintain a toll-free hotline for neighbors and community residents to report concerns regarding vacant and abandoned properties.

Timelines

In an attempt to ensure that foreclosed properties are being brought to sale timely rather than languishing as “zombie properties,” chapter 73 instills timelines for when properties must be sold post-foreclosure judgment. Chapter 73 amends RPAPL 1351 to require that a property be sold within 90 days of the date of judgment. It also amends RPAPL 1353 to require that if the purchaser is the plaintiff in the foreclosure action, the purchaser must place the property on the market for sale within 180 days, or, if repairs are being made, within 90 days from the date the repairs are completed. A court may grant an extension for good cause.

Enhanced Protections for Homeowners in Default and Foreclosure

Legislation passed in 2006, 2008 and 2009 created protections for homeowners in default and foreclosure. Chapter 73 updates and provides enhancements and additional protections, and provides for the creation of a “Consumer Bill of Rights” for homeowners. The new statute amends the notice lenders must send to homeowners at the time a foreclosure is filed. The new notice must include language to let homeowners know they have the right to remain in their home until the foreclosure and sale are completed.

Since 2009, lenders have been required to send a prescribed notice to borrowers with home loans at least 90 days prior to the initiation of a foreclosure lawsuit. A list of at least five non-profit housing counseling agencies serving the geographic region (now county) of the borrower must be attached to the notice. RPAPL 1304.

Chapter 73 includes a number of technical and substantive amendments to the RPAPL 1304 90-day pre-foreclosure filing notice. In particular, it clarifies that the notice must be sent one time, per loan, in a 12-month period in connection with a delinquency, but if a borrower cures and then re-defaults, even within a 12-month period of the first notice being sent, the lender is obligated to send a new 1304 notice in connection with the new delinquency. The new statute also requires that the notice list the Attorney General's Homeowner Protection Program consumer hotline.

CPLR 3408, passed in 2008 applicable to “high cost,” “subprime,” and “nontraditional” home loans, and amended in 2009 to cover all “home loans,” requires courts to hold mandatory settlement conferences to see if the parties can reach a mutually agreeable resolution to avoid foreclosure. The settlement conferences have had a tremendous impact on keeping families in their homes. Chapter 73 amends five existing provisions and adds six provisions in an effort to clarify the statute and instill efficiency in the conferences. In particular, the statute sets forth a “good faith” standard, to be determined based on the totality of the circumstances, and measured by:

• compliance with CPLR 3408, local court rules, and other directives;
• compliance with mortgage servicing rules, regulations, guidelines and standards for loss mitigation including loan modification, short sales, deeds in lieu of foreclosure;
• conduct regarding efforts to reach an agreement, not causing undue delay and providing accurate information to the court.

New section 3408(j) provides that if the court finds that the plaintiff mortgagee failed to negotiate in good faith, the court shall at least toll interest, costs and fees for the duration of any undue delay, and may also impose a $25,000 civil penalty to go to the state. The statute also permits the court to award damages, fees, attorney fees, and expenses. If the defendant fails to negotiate in good faith, the court shall remove the case from the settlement conference part.

Finally, a severability clause is included to state that if any section or portion of the act is determined to be invalid, the rest of the act shall remain valid.

Kirsten Keefe is a senior staff attorney at the Empire Justice Center. A more comprehensive description of the new statute discussed in this article appears at http://bit.ly/29QaEFB.