So as a condition of foreclosure how would a lender or servicer holding a defaulted mortgage upon property anywhere in New York City like to register with the City, obtain and post a bond and be responsible for all property maintenance for the life of the action? These are bizarre notions but are precisely the stated written intentions of the governing body.
Understandably concerned that some mortgaged properties in default are not being maintained, the City Council of New York proposes three bills to shift the maintenance responsibility from owners to mortgage lenders. These impositions, however, are draconian, confusing, of questionable legality and will assuredly render the ability to prosecute many foreclosures prohibitively expensive. How they will affect the ability to even obtain a mortgage is another profound concern.
Presented in ascending order of peril here are the three interim bills:
No. 501: Requires a mortgagee commencing a foreclosure to register with the City and supply information.
No. 494: Requires a foreclosing mortgagee to post a compliance bond for repairs and fines.
No. 500: Requires foreclosing mortgagee to maintain property from commencement to judgment.
The party obliged to register is a mortgagee that commences an action (or has commenced an action) to recover possession or title to residential real estate – of course within the City of New York. This applies if the breach is a failure to make a payment. Within ten days of filing the pleadings, the mortgagee must register with the department (presumably the Housing Preservation Department). If the action was begun before passage of the statute, then thirty days is afforded to register. Mortgagee is defined to include a mortgage servicer and any agent, servant or employee of the mortgagee as well as any successor in interest or assignee of the mortgagee’s rights.
The mandated information to be supplied is 1) the name of the mortgagee and the principal or corporate officer, together with the mailing address telephone number and e-mail address of that principal or corporate officer; and 2) the person or entity against whom the action is brought; and 3) the identification of the subject property by street address and tax map designation and 4) the date of commencement of the action and the court.
When the time comes that there is either a discontinuance of the action, issuance of a judgment in the action or sale of the property, then the mortgagee must have notified the department within ten days of such event. That in turn triggers removal of the information about the mortgagee from the website the department will maintain.
Neglect to register as the statute requires makes the mortgagee liable for a fine not in excess of $1,000.00 for each week that there is a failure to register.
Problems and Consequences
From an overall point of view, creating yet another step to be complied with by mortgage holders is, in and of itself, a burden – and the penalty for stumbling is not inconsequential. Indeed as noted, any bureaucratic miscue in registering could cost up to $1,000 per week.
The need for this extra step could be questioned too because much of the demanded information already must be given (in a home loan foreclosure) to the state (filed with the Superintendent of the Department of Financial Services). Then, too, a filed lis pendens already supplies much of this information and commercial services provided this for a fee. So why it is necessary at all is questionable.
The property for which the registration is required is recited as “residential real property”. What exactly that is remains unclear. Is it a one-family home, six-families, stores with an apartment above, owner occupied? Absent clarification, when precisely to register might in some instances be problematic.
Insisting that principals or corporate officers be disclosed – with telephone numbers and e-mail addresses – seems to create a privacy issue as well as confusion as to who precisely fits that description. That harassment of such individuals might emerge is not difficult to imagine.
Oddly, the action eliciting registration is one to recover possession as well as title to property. While the function of a mortgage foreclosure is to cause title to be divested (not the recovery of title) recovery of possession seems to suggest registration as needed for an eviction proceeding. Therefore, if a lender has already taken back a property when this statute becomes effective, registration may be required merely for the special proceeding to gain possession – again, yet another burden.
Having to register every foreclosure (where the statute applies) on a going forward basis is troublesome enough, but it will apply to all existing foreclosures as well. For some lenders that will be a handful, for others hundreds and for still others perhaps thousands – a weighty task indeed.
Mindful that mortgage servicers need to register, it remains unstated if both the mortgagee and the servicer must register. And the role of employees in that mix is also fuzzy. The statute tacitly assumes that lenders are institutions of some size. But there are smaller or casual lenders who are captured in this net. Then there are mom and pop who sell their house, take back a purchase money mortgage and find they must foreclose. They too are liable to register – and suffer a penalty of $1000 a week for failure to do so – although what knowledge they will have of this bureaucratic demand may be elusive.
When it comes to ending the registration, the lines of demarcation are also imprecise. Is an action discontinued when the stipulations are signed, or when the order is signed, or when the order is entered? It is not delineated. “Issuance” of a judgment is likewise not a precise moment. Judgments are signed and judgments are entered. What does the statute mean by issuance? Finally, sale of property should mean the minute the hammer falls at the auction, although there is enough ambiguity to suggest that it could be when the referee’s deed is delivered or even when it is recorded. No one will know for sure.
Posting the Bond
Here, any mortgagee (no further definition) which commences a foreclosure action upon real property (undefined) must procure and maintain a compliance bond at the mortgagee’s own expense. The duration of that bond is either “issuance” of the judgment or discontinuance or dismissal of the foreclosure action. (Sale is not a factor here as it was for the registration imperative.)
The amount of the bond shall be as directed by the Commissioner (presumably of HPD) pursuant to rule establishing a formula based upon a percentage of the assessed valuation of the property – except that it will not be less than $10,000.
The purpose of the bond is to reimburse the department for repairs made in accordance with the New York City Administrative Code (§27-2125) and any fines or civil penalties imposed resulting from violations at the property during the pendency of the foreclosure.
The bond is to be submitted to the department according to such rules as presumably will be promulgated
Problems and Consequences
Because the requirement here is as to “a mortgage on real property” it seems that the bond obligation is for any mortgage foreclosure action. Exactly when the bond is to be filed is unspecified, although its duration suffers from the same lack of precision in defining the conclusion of registration, that is, pinpointing issuance of a judgment or discontinuance of an action – although dismissal of the action is yet a third concluding event.
What the magnitude of the bond might be is a mystery – other than more than the $10,000 minimum – although its use to reimburse the department for repairs to the property and to pay fines presents a rather myopic view of responsibility. Mortgaged property is owned by the mortgagor – or anyone the mortgagor sells it to. But a mortgage is a lien on property – not an ownership or a possessory interest. It is the obligation of owners to take care of their property, not lenders, although obviously this is the shifting of responsibility the legislators wish to bring about.
No one knows what bonds will cost (the word “expensive” should apply), and it will depend in part on the amount set. It appears, though, that lenders will need to obtain some blanket bonding protection because the cost of posting them in each foreclosure action might be prohibitive, each such instance being one where payment on the bond might actually be required. For a blanket bond, only those cases that actually go into foreclosure would possibly elicit a payment.
Whether the cost of the bond is recoverable in a mortgage foreclosure action is problematic too because there is no place for this on a bill of costs and it is unclear whether this is something that referees would agree to put into the compensation formula. It would certainly present a serious problem if the not inconsiderable expense of a bond were not recoupable in a foreclosure. Of course, where the value is not in the property anyway, the cost of the bond just assures that much greater of a loss to the foreclosing party – and greater deficiency liability of borrowers and their guarantors.
Although major institutional lenders will undoubtedly have bonding capacity, the small or casual lender may not. If that will be so, the cost of the bond premium will be the full amount of the bond, which will effectively bar some lenders from even being able to foreclose. Then there is the case – as noted before – of Mr. and Mrs. Jones who sell their house and take back a purchase money mortgage which must ultimately be foreclosed. Without doubt, they will not have bonding capacity, and that may prevent them from enforcing their very precious rights.
Note too the hidden concern that the bond would forever remain in place even if a lender decided to write off a loan in the event that some party opposes discontinuance of the foreclosure.
The Maintenance Requirement
It is a foreclosure action of “residential real property” which compels the maintenance obligation making the mortgagee responsible to maintain the property in accordance with multiple dwelling law, housing maintenance code and all applicable statutes relating to the provision of essential services to tenants – inclusive of maintaining the habitability and the exterior. Mortgagee is later defined as any successor of the mortgagee and is to include a mortgage servicer as well as any agent, servant or employee of the mortgagee.
Once a foreclosure is commenced (reference is also to an action to recover possession of real property) any fines or penalties against the property for violations of any of the noted laws or regulations must be paid by the mortgagee. The mortgagee’s responsibility for maintenance ceases upon the sale of the property or discontinuance of the action.
While the definition of residential real property remains undelineated, minimal guidance is found in a subsection stating that there will be no application to an owner occupied property – except where the property is also occupied by one or more tenants where an Article 7A administrator has been appointed. Another exception is when a governmental entity brings the action.
Problems and Consequences
The stated intent of this legislation is not to interfere with the rights of litigants in the foreclosure, although there is clear interference with the rights of a lender in imposing this maintenance imperative. This is not something a lender bargains for when it makes a mortgage loan. Again, it has only a lien, not an ownership or a possessory interest or a responsibility to repair. Moreover, a mortgage holder benefits by a contract which has been interpreted for at least a century and a half. Changing a contract to impose heretofore non-existent liability and responsibility upon one party would seem to be a violation of the contract clause of the United States Constitution.
As it is with other portions of the statutes, “residential real property” is not specifically defined and maintenance appears to apply not only to a foreclosure, but to an eviction action as well. Unfortunately, the provision does not take into account the actuality that when a receiver may have been appointed, the obligation to repair is solely with that officer of the court – to the exclusion of any mortgagee. Similarly, where a bankruptcy petition has been filed, if a trustee is appointed, the trustee has control over the property – not a mortgage lender. Even in a Chapter 11, the debtor in possession – the defaulting mortgagor – has exclusive control to the exclusion of the mortgagee. How a mortgagee is to remain responsible for maintenance when federal preemption of the Bankruptcy Statute controls is an unresolved conflict. Then too, in defining the mortgagee, agents, servants or employees of the mortgagee are included, although how they might be responsible in some individual capacity is troubling.
The most insidious result of all, though, is the additional, but indeterminate cost foisted upon lenders. While the quantum of repairs and the provision of services to a one-family house might not be that large (in an aberrational situation it might be substantial), the potential for huge expenditures for an apartment building is manifest. What might that amount be? It is of course impossible to say. Lenders just won’t know. The dilemma is compounded by the actuality that mortgage foreclosures nowadays are measured in years rather than months. Even uncontested, a foreclosure within the City of New York can consume three or four years and if contested, even more. Unlimited expenses for unlimited durations befalling a foreclosing party create a problem which seems to be without a solution. It might make any particular foreclosure action absolutely untenable. In any event, the lender originating a loan would never know how to price the investment if the ultimate cost of enforcement is a number which can never be predicted.
There is yet drastically more to the expense and liability component. If lenders are forced to maintain the mortgaged premises, then they are obliged to enter and control the property – even if locked, with those in residence denying entrance. The lender may have to force its way in and encounter other conflicts.
Once in possession, the lender then meets the standards of duties to residents and guests, and the resultant tort liability. The lender will then be a defendant in every trip-and-fall case at every property. (Ever more serious tort claims could be in the offing as well.)
With immediate tort risks imposed, lenders will need substantial liability insurance (beyond the usual hazard policy) for every parcel in foreclosure – of considerable outlay to be sure.
Then there is the dilemma of a more modest loan. A small loan on a large property could still incur an enormous expense in the event of a default, quite disproportionate to the initial investment. Junior mortgagees encountering default suffer like conundrums. It could happen that there is a large senior mortgage not in default, or if in default the senior elects not to foreclose, or having begun a foreclosure, the senior stumbles and proceeds at a snail’s pace. Then a second mortgage holder might feel compelled to begin an action. Typically, though, its loan will be smaller than the first mortgage and if so, they take on a greater proportionate risk for the privilege of protecting their position via foreclosure of their subordinate mortgage. Again, when this responsibility actually ends remains indeterminate, too, just to add to the woes of the foreclosing party.
Finally, lenders suffer the same incongruous quandary as with the bond situation if the decision is to no longer prosecute the foreclosure. From time immemorial, lenders had the right to refrain from continuing a foreclosure were it to be deemed counterproductive. But if some defendant objects to discontinuance (it happens as a practical matter) the lender might be saddled with the cost of maintenance until others conclude their own crusade.
Will the Laws Pass?
At a hearing for public comment on the proposed laws, testimony as to some of the inconsistencies and definitional issues were presented and may bring some ministerial changes to the final versions. Of course, no one can foretell future events with any certainty, so nothing is sure. But the sentiment seemed very strong in favor of imposing these requirements on mortgagees – referred to consistently as “the banks”. It therefore seems quite possible that these laws will be approved.
That some buildings in foreclosure are being neglected by their owners is apparent. How many there are, and how much of a problem this is becomes philosophical. All suffer when this happens, lenders included, as the value of their security declines. The solution appears to be to create greater responsibility or accountability on the part of owners who are, after all, the parties responsible and the parties who created the situation.
If lenders facing a defaulted mortgage are forced to register, then post a bond at their considerable expense to be liable for repairs and violations, then to take on the unlimited cost of maintenance of any property in foreclosure during the immeasurable duration of a foreclosure action, the effect on foreclosures is unimaginable. Perhaps the greater danger is the one which will befall the public at large: diminution in the number of mortgage loans which will be made under circumstances where the ultimate peril to lenders cannot be quantified. To employ a cliché we have been constrained to use in the past, the medicine is worse than the disease.
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.