Just when it seems things can’t get any worse for mortgage servicers, there is a new push on the state and federal levels for them to take greater responsibility for the blight caused by zombie foreclosures.
In June, New York Gov. Andrew M. Cuomo signed legislation that requires mortgage lenders and servicers to maintain properties that are vacant or abandoned in pre-foreclosure so as to reduce community blight. (For more detail on this development, check out Bruce Bergman’s feature, on page 18.) Not only that, but servicers will also be required to expedite the rehabilitation, repair and improvement of these properties.
Several other states have passed or are considering similar laws – however, none has gone so far as to require banks or servicers to maintain vacant properties while in pre-foreclosure.
In addition to these new state laws, Sen. Bob Menendez, D-N.J., in June introduced a bill that would require mortgage servicers to tell borrowers at the beginning of the foreclosure process they can remain in the homes until state law requires them to leave. Although the “Preventing Abandoned Foreclosures and Preserving Communities Act of 2016” would not force servicers to maintain properties in pre-foreclosure, it would require them to make prompt notification to both the borrower and the municipality when the borrower walks away.
That’s not as harsh as the New York law, which requires a servicer to start maintaining the property as soon as it becomes vacant. The problem with that, of course, is that it can be difficult for a mortgage servicer to determine, with any degree of certainty, when a property has finally become “vacant.”
The other problem with the New York law, which takes effect on Dec. 20, is that it requires servicers to take action to ensure that a “zombie” property is reoccupied (i.e., sold) within 180 days of taking title. As anyone in housing today knows, properties sell based on various factors, such as condition, neighborhood and price, and there’s really no saying how long it will take to sell any given property. Making things worse, the new law does not prescribe any remedy should a property fail to sell within the 180 days.
Where is the money for these increased maintenance activities supposed to come from?
The big question facing servicers is, where is the money for these increased maintenance activities supposed to come from? The fact that servicers have basically no budget to pay for these extra expenses without either raising fees or going out of business apparently did not matter to the New York lawmakers. In the lawmakers’ view, this is being done for the altruistic purpose of improving the economic health and public safety of blighted communities.
As Bergman points out, the basic thing that is wrong with forcing servicers to maintain properties in pre-foreclosure is that the servicer is not the homeowner – and it is not the party that walked away. In a way, it makes servicers responsible for wrongful actions of homeowners who are in default – and that’s simply unfair and wrong.
If more states adopt similar laws – and if a similar law is passed on the federal level – I would think it would predicate a review and possible restructuring of the servicer compensation model. Although the number of zombie foreclosures – and foreclosures, in general – keeps falling, to force servicers to do something about the blight that exists on their books could be a recipe for disaster in that it could result in multiple servicers going out of business.
It’s high time for the industry to look at the compensation model again.
But changing the servicing compensation model is a huge, complex topic. Everyone knows the model is broken – but so far, there is no real consensus on how to fix it. The Federal Housing Finance Agency and the Federal Housing Administration tried revamping the servicing compensation model a few years ago and failed. Basically, it hasn’t changed in more than 30 years.
Now that it is becoming almost impossible for mortgage servicers to turn a profit in this current environment, it’s high time for the industry to look at the compensation model again. And this time, the industry needs to come up with solutions that work because, at this point, it is costing servicers way too much to service nonperforming loans. s