Mortgagees and servicers of residential mortgage loans will be required to inspect and maintain mortgaged properties on defaulted loans before acquiring title through foreclosure under final regulations issued by the New York Department of Financial Services ("NYDFS") pursuant to New York's "zombie" property act (located at Part Q here). Both the act and regulations become effective today, December 20, 2016.
The act applies to mortgagees and servicers that either hold or service first-lien loans on one-to-four family residential properties in New York. "Mortgagee"1 and "servicer"2 are each defined broadly and so institutions that merely hold loans as trustees of residential mortgage backed securities trusts, or merely hold mortgage servicing rights, should consider the act's ramifications. The act imposes certain inspection and maintenance obligations in connection with defaulted loans and vacant and abandoned properties, which need to be carefully considered in connection with servicing practices. Although servicers are charged with the act's inspection and maintenance obligations, civil penalties may be imposed on "mortgagees" as well. Penalties for failure to comply with the act and new regulations include fines of up to $500 per day, per non-compliant property.
Below is a brief overview of the inspection, maintenance and reporting obligations.
- Inspection: Servicers must begin exterior inspections of properties to determine occupancy status within 90 days of a borrower's delinquency. If three subsequent inspections, conducted 25-35 days apart, indicate no evidence of occupancy, then the property is deemed abandoned. A property also may be deemed abandoned if (1) a court or other governmental entity formally determines that a property is abandoned; or (2) a borrower has issued a sworn written statement expressing his intent to vacate, and an inspection of the property shows no evidence of occupancy.
- Maintenance: Servicers must take steps to maintain abandoned properties including: (1) replacing one lock to provide access to the property; (2) replacing or boarding up broken windows and doors; (3) winterizing plumbing and heating systems and providing utilities to operate basic items such as sump pumps and dehumidifiers; and (4) removing or remediating any health and safety issues, including outstanding state or municipal property code violations. These obligations continue until (1) the property, or loan securing the property, is sold or assigned to another entity, or the investor releases its lien on the property; (2) the borrower files for bankruptcy; (3) a court orders the upkeep to stop; or (4) a homeowner's association cuts off access to the property, or an occupant re-asserts its right to occupancy or threatens violence.
- Reporting: Once they learn, or "should have learned," that a property is abandoned, mortgagees or servicers are required to begin reporting basic information on the property (e.g., mortgagee contact information, whether foreclosure has been instituted, last known contact information for mortgagor, etc.) to the NYDFS within 21 business days. Mortgagees also are required to provide regular quarterly reporting to the NYDFS on all properties for which a borrower has been delinquent for 90 or more days. This reporting is to include, among other things, the date(s) on which the above-referenced inspections occurred, the date on which a determination is made that a property is vacant and the identification of actions taken to secure and maintain the property and to foreclose on the subject loan.
Under the regulations, the above-described obligations apply to all New York properties regardless of when the mortgage was originated or became delinquent or when the property was abandoned. The regulations provide that mortgagees or servicers have until February 1, 2017 to comply with the act for those properties for which the loan is already 90 days delinquent or the property is already abandoned.
1 "Mortgagee" is defined by the regulations as
"the holder of a mortgage and/or note secured by residential
real property, including, as applicable, the original lender under
a mortgage, its successors and assigns, and the holders of credit
instruments issued under a trust indenture, mortgage or deed of
trust pursuant to which such holders act by and through a trustee
2 "Servicer" is defined by the regulations as an entity engaged in "mortgage servicing." "Mortgage servicing" is defined as "receiving any scheduled periodic payments from a borrower pursuant to the terms of any mortgage loan, including amounts for escrow accounts .... The term includes making or holding a mortgage loan if such activities directly or indirectly include holding the mortgage servicing rights or having been delegated servicing functions for the mortgage loan."
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