Lenders and servicers are in for a rude surprise for mortgages they may hold in the Town of Hempstead because a new law “in relation to Foreclosures, Undertakings, and Maintenance of Premises” was just passed.
Note immediately that the Town is no backwater – it is the largest town in the nation and has a population in excess of 760,000. So there are mortgages galore within its borders.
Despairing that vacant homes are an eyesore and a nuisance to neighborhoods, the Town has shifted the burden of maintaining such premises from the owners of the property to any party which initiates a foreclosure on that property. And rather than wait for the moment that a foreclosure judgment may be entered (as state law inadvisedly already does) it mandates that the foreclosing party shall deposit a $25,000.00 undertaking with the Town within forty-five days of commencement of any foreclosure against a residential property (single-family, two family or multiple family residence) that “has become vacant”.
This new provision (subsection 128-61-1, Chapter 128, Code of the Town of Hempstead), after listing certain scenarios and timeframes to demand the money – and require its replenishment when some or all of the funds are consumed in the Town performing maintenance – imposes draconian punishment for failure to comply: fines of up to triple the maximum set forth in another section [128-65(A)] and a maximum of $500.00 for each day of noncompliance, or by imprisonment for not more than 15 days.
In a nutshell, here are some of the major problems with this legislation:
- Definitions unstated. The definition of a single family or a two family residential property is understandable, but without the statute referring to a definition within its terms or elsewhere in the code, presumably a multiple family residence could be up to any number of units. Does that mean that a foreclosure of an apartment building incurs the requirements of this statute? It’s unclear and that presents an immediate issue.
- When is a property vacant? If an owner abandons property, it is a question of fact as to whether he has left with no intention of returning. It is not necessarily easy to determine. Did he take all of the furniture? Perhaps not. If some of the furniture is still there; does it suggest that the people might return? Lawyers can readily explain why this is a difficult concept to glean with certainty and it presents obvious difficulties for the foreclosing party in establishing whether it is vacant thus eliciting the $25,000.00 undertaking.
- When need the vacancy have occurred? It is apparent that if the property is vacant at the inception of the action, the undertaking is required. But what if it becomes vacant during the course of the foreclosure. This is fuzzy although it may very well be that the Town would determine during the action that there is a vacancy and make a demand for the undertaking.
- A lender only has a lien. The property is owned by, surprise, “the owner”. That is not the lender. It is the borrower who owns the premises and the responsibility to maintain property should be with that person. But the Town sees deep pockets and therefore makes this demand of the foreclosing party. A lender, holding only a lien – not ownership – should not be responsible for this obligation and it is certainly not anything that the mortgage ever contemplated. This is interference with a contractual relationship.
- Because a foreclosing party includes any “person”, the Town is also imposing this undertaking obligation upon an elderly couple who may sell their house and move to Florida but needs to take back a purchase money mortgage to facilitate the sale. Or there could be a person who makes a mortgage loan to a neighbor or a relative and suffers a vacant property and the need to foreclose. They too – under the language of this statute – are obliged to submit a $25,000.00 undertaking. Whether they have the wherewithal to do that may be quite doubtful.
- Any notice to be sent to the foreclosing party will go to their last known address. But that will be the address in the mortgage. If the lender or foreclosing party has changed its corporate status, or been taken over, or if the entity or person who held the mortgage has moved, the address in the mortgage itself will remain the same, not reflecting the change. Consequently, it is entirely possible that a notice demanding the payment may not be received – thereby invoking the major penalties delineated in the law.
- Can the expenditures advanced and expended by the Towns sanitation commissioner be added to the mortgage debt? The problem is that no mortgage by direct language contemplates an expenditure of monies to be deposited with a municipality to be spent as that governmental entity deems appropriate regarding maintenance. It would take some stretching to try to fit it in to standard language but it would be hardly surprising for a court to reject its inclusion. This puts the money at risk of not being recoupable. At the very least, it suggests that lenders will need to amend their mortgages to anticipate such a situation.
- While a $25,000.00 undertaking is substantial enough, it is apparent that the foreclosing party can be liable for more because the sum on deposit must be replenished as it is drawn down.
- Acknowledging that the Town is actually run efficiently and has a good record for fiscal responsibility, decisions on remedial action and expenditures devolve to the Commissioner of Sanitation. What procedures might be in place for the work to go out for bids, or who might do the work, are unknown. Mindful that the funds do not come from taxpayers, how parsimonious or profligate the dispensing party may be is a subject for speculation.
- Although the cited section pointedly applies to residential properties, its own subsection G inexplicably states that “this section shall apply to all non-residential foreclosures commencing after the effective date…” (emphasis supplied). While editorially it can be suggested that the reference to non-residential is a typographical error, until corrected, such is the provision with the possibility that this encompasses any vacant property.
In the end, this statute is laden with confusion and dangerous aspects which need attention. Even if that attention is given, the concept of causing the holder of a lien to deposit $25,000.00 for the privilege of enforcing a defaulted mortgage is a bizarre notion.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.