What role do banks have and what responsibilities do they bear in the process of property registration? Plenty, in the eyes of municipalities and local governments. And potentially now, the federal government, when it comes to responding to widespread mortgage foreclosures, an outfall of the housing market crash of 2007. Currently, Senate Bill 3146 is working its way through the Senate Committee on Banking, Housing & Urban Affairs.
Legislating Property Registration
Sponsored by Sen. Robert Menendez (D.NJ) and titled, “Preventing Abandoned Foreclosures and Preserving Communities Act of 2016,” the bill is designed to limit damage done to communities as the result of widespread “zombie” mortgages. It has been read twice and referred to the Senate Committee on Banking, Housing and Urban Affairs. The intent of Bill 3146 is similar to the desired results of some 2,000 Vacant Property Registration Ordinances (VPROs) adopted and enacted around the country in the past decade since the bottom fell out of the housing market. Those ordinances require banks, mortgage companies and mortgage servicers to register abandoned, vacated and foreclosed properties and pay municipalities and local governments registration fees, renewal fees if necessary, and maintain code enforcement standards and minimum maintenance and public safety standards. The overlying rationale behind both the Senate Bill and local ordinances is to provide municipalities mitigation and management tools to effectively deal with defaulted and vacated properties as they work their way through a convoluted foreclosure process that can sometimes take up to two years to complete.
Proposed VPRO Language Decoded
As is typical with government language, the Senate Bill can get bogged down in “legalese” and a bit hard to follow. A synopsis and cleaner read of what the Bill would accomplish if passed and signed into law is available at the webpage of New Jersey/New York law firm Fein, Such, Khan & Shepard.
In a nutshell, the bill is designed to eliminate legal uncertainty about these types of properties. Local VPROs strive to essentially do the same thing by establishing the first step in the critical process of legally identifying property ownership. As noted in the article by Fein Such attorney/authors Ashleigh Marin and Mario Serra, Jr., Senate Bill 3146 focuses on three specific aspects of defaulted mortgages and vacated properties, and makes special note of mortgages backed by federal lenders. In brief those three highlighted areas:
- Mortgage servicers will be required to notify borrowers at the beginning of the foreclosure process that they can remain in the property until state law requires that they leave and that the property owners will remain responsible for the payment of any taxes, assessments or other fees during the pendency of the foreclosure process;
- If and when a lender chooses to cease foreclosure efforts, the mortgage servicer will be required to promptly notify the borrower and the municipality where the property is located that it is doing so;
- Mortgage servicers on loans backed by Fannie Mae and Freddie Mac and those insured by the Federal Housing Administration (FHA) will be prohibited from “walking away” from a foreclosure unless the servicer releases the lien on the property and provides proper notice to the borrower and municipality (ostensibly this could be accomplished through local ordinance compliance).
The article goes on to explain that there are some uncertainties in the present language of the proposed federal legislation in that it may conflict or contradict language and specifics contained in some local VPROs already in place in countless municipalities.
Ironing Out Potential Conflicts
Regardless of those uncertainties and potential conflicts between federal language and local ordinance language, the potential Senate Bill and the existing VPROs agree on this much: banks and mortgage servicers should be required to take a more fiscally responsible role in navigating the complexities of foreclosure “triggering events” which often lead to long and drawn out resolutions to foreclosed and abandoned property issues. Many of those issues deal with the negative impact on communities to include:
- Spreading neighborhood blight.
- Declining property values of foreclosed and abandoned properties due to neglect, lack of maintenance and code enforcement issues.
- Declining property values of adjacent properties aggravated by multiple foreclosures and abandonments, contributing to urban decay.
- Loss to municipalities of property tax revenues and eroding local tax bases, with long-term implications to municipal budgets.
- The associated costs to local municipalities for code enforcement, public health risks and local police and fire protection of said properties.
The size, scope and myriad problems of foreclosed and abandoned properties, and the role banks and mortgage servicers need to play in resolving these issues cannot be understated. A pair of related articles illustrates just how devastating foreclosed properties can become to communities when left unattended and neglected for extended periods of time. They also point to the “Catch 22” situations many borrowers find themselves in once the foreclosure process begins, but gets bogged down. The contradictions between local ordinance requirements and potential federal remedies are indicative of what role banks play as these events continue to unfold in numerous communities around the United States. Check out the articles The Latest Foreclosure Horror: The Zombie Title and Why It’s a Problem and What N.J. is Doing About It.
Proactivity Is Beneficial
Whether dictated by potential federal legislation, or enforced by current VPROs, this much is clear. Banks and mortgage servicers can play either a proactive role in registration or a reactive one. The benefits of the former are clear. Proactive property registration compliance by banks and mortgage servicers results in overall lower fiscal costs of compliance to them, shortens the often-lengthy time frame of foreclosure resolution, and reduces multiple negative impacts to municipalities. When banks and mortgage servicers drag their feet or neglect property registration compliance, they drive up the long-term cost to themselves, to borrowers and to the municipalities where foreclosed and abandoned properties exist.