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Laws Combating Blight May Present Challenges to Servicers

Gavel Three BHSome states have issued laws to combat urban blight experienced in some communities as a result of foreclosed properties lacking proper maintenance and/or remaining unsold for an extended period of time. According to a recent report from S&P Global [1], these laws present new and different challenges to servicers.

The report notes how certain states have enacted requirements regarding property preservation including the most recent example in New York. The state has suffered for some time from "zombie" foreclosures, but in June 2016, the New York State Legislature passed a series of laws that addressed several items, including enhanced mandatory settlement conferences, a consumer bill of rights to assist homeowners in knowing their rights when their home is in foreclosure, and an expedited foreclosure process for vacant or abandoned homes.

New requirements have presented themselves from this New York law, however, that may present additional challenges for servicers, according to the report. S&P Global states that one such issue implements stipulations on the servicer to properly maintain vacant or abandoned properties pre-foreclosure rather than the previous practice of performing this later in the foreclosure process. This new requirement occurs when the servicer "becomes or should have become aware" of the vacancy. The report says the trouble comes when the respective court decides how to interpret when the servicer should have become aware. When this happens, servicers could incur large fines for not maintaining the abandoned premises. More specifically, the law may enforce civil penalties up to $500 per violation, per property, per day according to S&P.

Additionally, the report states that the New York law requires the servicer to take action to ensure that the property is reoccupied within 180 days of taking title. This presents operational issues with several complexities. S&P says that properties sell based on various factors such as condition, neighborhood, price, and others and any of these factors might keep a home on the market for more than this time period. If the property has not been reoccupied and it is approaching the 180-day mark, the report states that it is not clear whether the law requires the selling party to rent out the property or substantially reduce the asking price to sell the property in order to comply.

The state regulatory environment for the preservation of foreclosed properties is continuing to evolve, which has precipitated additional cost and resource allocation from servicers. S&P believes the industry will continue to encounter new and different regulations and approaches by state legislatures to protect their communities, but they also expect servicing costs to continue increasing, which may cause servicers to adjust their operations.