Some new tools are being rolled out in the fight against zombie houses, but how they’ll work and how well they work remains to be seen.
New rules enacted by the state Legislature and Gov. Andrew Cuomo earlier this year target zombie properties — houses that are vacant for the long term and sometimes in a state of considerable decay — by requiring companies that hold or service the mortgages to maintain the properties and report them to a state registry.
The intent is to halt the decay before it irreparably damages the structure and blights its neighborhood. But some question whether accompanying provisions designed to speed up foreclosures will actually do so. Also, not every zombie property will be affected, because smaller banks and credit unions apparently will be exempt from the new rules.
“It’s going to be probably several years before we really understand the full nature of what it does and does not do,” said Michael J. Catalfimo, managing partner of Carter Conboy in Albany. The firm represents creditors in litigation statewide, including mortgage lenders and servicers.
Catalfimo predicted legal challenges over various aspects of the legislation, including the exemption for smaller lenders, and noted enforcement will be up to municipalities and therefore will be varied from one town to the next.
Small Capital Region-based banks and credit unions might be among those exempted from the law on the basis of holding too small a share of the overall market, but the state has not finalized that calculation, according to the New York Bankers Association.
NYBA general counsel Roberta Kotkin, who is also a lobbyist, worked to shape the legislation earlier this year. The association did not get everything it wanted, she said — the requirement that banks maintain a property as soon as they learn it is vacant, rather than after they foreclose, puts lenders in the position of trespassing on property they don’t own. Until the foreclosure is complete, the borrower still owns the house.
“We certainly expressed our deep concerns with this,” Kotkin said, adding there is a provision to waive liability for trespassing by banks.
There’s also a provision to expedite the foreclosure process on vacant properties, she said. Foreclosures can take years in parts of New York state, and the association has been fighting for years to speed that up, she said.
Catalfimo said this is a false hope — he predicted the courts where foreclosures are slow now would not suddenly speed up. In some upstate areas, he said, a foreclosure might take 10 to 14 months, but in the outer boroughs of New York City, it might take 30 to 36 months, plus an additional 18 to 24 months if the borrower declares bankruptcy.
“This law is designed to treat a symptom of an underlying problem,” he said, referring to the slow and backlogged foreclosure docket. “It does nothing to treat the underlying condition itself.”
Assemblyman Phil Steck, D-Colonie, said there are some portions of the legislation that aren’t ideal, including the part that allows a state administrative agency to decide which banks must comply and which are so small as to be exempt. He sits on the Assembly Judiciary Committee but was not involved in the negotiations that led to that compromise, which apparently was necessary to get the measure enacted into law.
But he is firmly behind the overall intent of the measure — making businesses that profit from lending money on a property responsible for maintaining it when things go wrong.
“To impose that [expense instead] on the community is not correct,” said Steck, who represents the eastern side of Schenectady.
Schenectady Corporation Counsel Carl Falotico said the city has anywhere from 500 to a thousand vacant houses, some of them merely empty, some of them decayed “zombies.” He said the new laws at the state level will help deal with them all.
“It’ll be another tool for our toolbox,” he said.
The problem municipalities face, Falotico explained, is that mortgages are often sold as investments, sometimes repeatedly, so tracking down all the paperwork establishing ownership and responsibility can be difficult.
“They’re not always going to the county clerk’s office to change their records,” he said. “A lot of time and effort is involved in tracking these people down. It’s very time-intensive.”
Falotico also said the state’s new vacant building registry could be an effective tool — the city’s own registry helped keep the blight from getting worse, once the city started enforcing the regulations.
Steck seconded this. “What’s great about Schenectady is how hard Schenectady is trying to solve its own problems,” he said.
Assemblyman Angelo Santabarbara, D-Rotterdam, who represents the western side of Schenectady, is another legislator opposed to the exemption for small banks and credit unions — a zombie house is a zombie house, he said, regardless of what institution holds the mortgage on it. He said he’ll seek an amendment to remove that exemption when the Legislature is back in session.
“The size of the bank shouldn’t matter,” he said.
In the meantime, he’s pushing ahead with his Be A Good Neighbor campaign, which has two main approaches: getting the community involved by reporting zombie properties to his office, and then shaming the mortgage holders into taking better care of the buildings
The program has logged nearly 1,000 complaints in the three communities where it has been introduced, Rotterdam, Amsterdam and Schenectady, and he’s planning to expand it elsewhere in his district.
“The laws are there, but this program is not legislative, its engaging the community,” Santabarbara said.
Community engagement is important because the people who live in a neighborhood have the best handle on which houses are zombie properties, he explained. Once they report a derelict house, the determination can be made whether it’s vacant and owned by the municipality; vacant and owned by a lender; not vacant, but occupied by an owner who is letting it rot; or occupied by hapless tenants of a neglectful absentee landlord. The approach for each scenario is different.
In the case of the bank-owned properties, Santabarbara’s office tries to contact the mortgage holder — it can take time to find the correct entity, as Falotico noted — and seek repairs. If that doesn’t work, the lender’s name goes on a sign outside the property.
“Now that the banks are getting a knock on the door, we’re starting to see activity now,” Santabarbara said. “We’re seeing progress … banks are calling my office, they don’t want to be in this program.”
Above and beyond the legality, taking care of a foreclosed property just makes good business sense, he added: Deterioration can set in very quickly once a property goes vacant, cutting whatever return the bank is likely to get on its investment.
“Just one freeze-thaw process diminishes the value greatly,” Santabarbara said.
Glenville-based Trustco bank has a lending model that limits foreclosures and makes them easier to accomplish when they do become necessary, said Vice President and Treasurer Kevin Timmons. It also acts promptly to protect its investment by not letting foreclosed houses rot, he said.
Like others who spoke to The Gazette about zombie homes for this story, he said the problem is worsened by the industry practice of repeat sales and transfers of mortgages and mortgage servicing.
“Loans and or servicing may be bought and sold in some cases many times over the course of the loan,” Timmons said. “A lot of servicing has been concentrated in the hands of a relatively few entities.”
Trustco doesn’t buy or sell mortgages; it makes mortgage loans to people it judges are likely to repay them and unlikely to default, then services those mortgages itself. So if the bank ever has to foreclose, there’s no need for a research project and paper chase — the history and paperwork are all in one place.
He declined to say how many foreclosures the bank does a year, only that it is small number that varies with the economy.
Timmons noted that banks don’t always know when a property is vacant or deteriorated — if the mortgage is being paid on time, or is on an auto-payment withdrawal arrangement, nothing appears amiss in the home office. But Trustco would want to be alerted about any zombie houses it held the mortgage on, he said — the bank doesn’t want to lose money on its investment through deterioration of a vacant property, or lose good will in the community surrounding that house.
“If something fell through the cracks, someone came to us, we would take care of that.”
Reach business editor John Cropley at 395-3104, [email protected] or @cropjohn on Twitter.