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Long Island

Financial companies have no legal responsibility to maintain abandoned homes

A boarded-up house in Brentwood seen on Dec.

A boarded-up house in Brentwood seen on Dec. 18, 2014. It is among the zombie houses on Long Island, according to California-based RealtyTrac. Photo Credit: Chuck Fadely

Responsibility for Long Island's exploding abandoned house problem is being placed mainly on the financial institutions seeking foreclosures on thousands of properties caught up in the financial crisis of the late 2000s.

When the homeowner walks away, towns and villages look to banks that issued the mortgages to maintain properties, but the financial companies have no legal obligation to do so. As a result, the properties, known as zombie houses, fall into a gray area that often leads to disrepair.

New York's judicial foreclosure process averages 934 days, leaving many houses vacant for years, slowly decaying and cultivating infestations that range from mold to rats. The problems spread to nearby homes and ultimately drive down property values for entire neighborhoods.

A yearlong Newsday analysis found that with no one maintaining the properties, municipalities had to spend at least $3.2 million in 2014 to clean, board up and demolish thousands of abandoned homes.

Municipal leaders said it's simply not fair for banks to place the burden of property upkeep on local governments.

"Our goal is not for us to be maintaining properties but for banks to be taking some social responsibility in our neighborhoods," said Babylon Town Deputy Supervisor Tony Martinez.

Representatives of banks and mortgage companies said the blame for zombie homes is misplaced and the problem lies with the state's lengthy foreclosure process. Zahra Jafri, president of the Empire State Mortgage Bankers Association and owner of Lynx Mortgage Bank LLC in Westbury, said the issue boils down to the lender not wanting to spend money "to maintain a home that is not theirs."

"I feel that if someone is to buy a home and take a mortgage out, they should be responsible for maintaining that home," Jafri said. "Lenders do not own the home. I see a fundamental disconnect with who has the responsibility to maintain that property."

Newsday tried to contact more than three dozen homeowners who abandoned properties in foreclosure but they could not be reached, did not return phone calls or declined to be interviewed.

The zombie house epidemic was years in the making, tied to the housing crisis that was fueled by high-risk loans that led to record foreclosures. During the boom years of the early 2000s, lenders scrambled to make loans that they could repackage and sell to investors under what the U.S. Justice Department has said were careless or sometimes deceptive practices.

Years later, the housing crisis had seeped into all income levels across Long Island. Median home prices, not counting the East End, plummeted by 23 percent to a low of $339,000 in late 2011 from their peak of $442,380 in fall 2007, according to data from the Manhattan appraisal firm Miller Samuel.

"We've known the tsunami was coming," said Martinez. "We've known that it was just a matter of time before all of these homes would be in our neighborhoods."

Foreclosures are declining across the country, but the numbers continue to rise in New York. The state had 47,612 foreclosure filings on record last year, a 39 percent increase from two years ago, according to California-based RealtyTrac, which compiles real estate data.

New York's average foreclosure time is down about 100 days from a year ago, but remains the fourth-longest in the country, said RealtyTrac vice president Daren Blomquist. The lengthy process is linked to state law requiring a lender to sue to take back a home. In other states such as Texas where lenders do not need court approval to foreclose, the process can take as little as three months, according to RealtyTrac.

"I think the foreclosure process was extended in a well-intentioned but perhaps not very effective effort to provide additional protections for homeowners," New York State Attorney General Eric T. Schneiderman said. "In fact, what it's ended up doing is penalizing both sides because it drags on and on."

The length of time needed for a foreclosure to work through the New York judicial system increases the possibility that a homeowner will walk away, Blomquist said.

Valley Stream Village clerk Robert Barra said banks need to find a better way to manage the long process. "They can't just point to the courts and say 'well it's in the court for three years and so you have to live near a boarded-up house with raccoons in the chimney.'"

Bank officials said they encourage homeowners to remain in the home and maintain it during foreclosure.

"We do try to have that conversation with them," Tyler Smith, real estate owned and community development manager for Wells Fargo in San Francisco, said of homeowners facing foreclosure. "We don't want to take the property back. If it's not good for the customer, if it's not good for the neighborhood, it's not good for us."

State law had only required banks to be responsible for maintenance once they took ownership of a home. That changed in 2010 when a new law forced banks to take on that duty as soon as a court issues a judgment of foreclosure, which allows them to eventually take ownership, said Bruce Bergman, a Garden City-based attorney who represents banks.

Municipal leaders said they feel the most frustration in that period before the bank takes possession.

"If the house is in foreclosure, and the bank doesn't really own it, we're in limbo there," Hempstead Village Mayor Wayne J. Hall Sr. said.

Federal Department of Housing and Urban Development regulations require companies that own or guarantee mortgages, such as Fannie Mae and Freddie Mac, to have their "servicers" perform basic maintenance on a home in the foreclosure process. Those servicers -- often large banks such as Chase or Bank of America -- hire national property preservation companies to oversee maintenance. The property preservation company then hires local contractors to perform work such as mowing the lawn and removing trash.

When homeowners sign mortgage documents, they agree to maintain the home and are held legally responsible for it, Bergman said. But the mortgage documents also give the lender or the servicer it hires the right, if it chooses, to secure the home if its value is in danger of eroding. Fannie Mae and Freddie Mac, which hold or guarantee roughly half of all mortgages, require servicers to secure properties within seven days of learning they are vacant. The servicer must change the lock, check for damages, do necessary work to preserve the property and post contact information for the servicer or vendor, according to Fannie Mae's guidelines for servicers.

A lender only has a lien on the home, not an ownership interest, and it does not make sense to impose the responsibilities of ownership without the rights, Bergman said.

"Winterizing the premises they typically will do because the effect on value is very significant," he said. "As for mowing the lawn, they will often do that just to maintain the value of the property. But if they choose not to, it's a business decision on their part."


Expensive to maintain

And lenders often decide not to invest money in a property they do not own, Jafri said.

"In most cases they are maintaining the taxes and insurance and then to also expect a lender to maintain the property, I think that's quite expensive for a lender," said Jafri, whose company has about 400 mortgage customers.

According to RealtyTrac, the top 10 leading lenders for zombie properties on Long Island are Wells Fargo, Bank of America, Chase, Citigroup, HSBC, Deutsche Bank, U.S. Bank, Nationstar Mortgage, OneWest Bank and Bank of NY Mellon.

Citigroup, OneWest Bank and HSBC declined to answer specific questions about their property preservation practices. U.S. Bank, Deutsche Bank and Bank of New York Mellon representatives said they only oversee mortgages on Long Island properties as trustees and do not service them.

But trustees of homes that become part of their inventories can be held responsible for property maintenance. In 2013, Deutsche Bank settled for $10 million with the city of Los Angeles after being sued over its failure as trustee to maintain their real-estate-owned properties -- those that have been through the foreclosure process with the banks taking title -- in minority communities.

The Washington D.C.-based National Fair Housing Alliance has sued some banks, alleging that they routinely allow homes in minority communities to decay while maintaining homes in less diverse neighborhoods.

Municipal leaders on Long Island reported that some minority and working-class communities were the ones hardest hit by the housing crisis and have become home to the largest numbers of zombie properties. Babylon's Martinez said his town, as a largely blue-collar area, has felt the impact.

"Usually banks take better care of properties in high-class communities than in working class communities," he said.

Chase spokesman Jason Lobo wrote in an email that in the first two months of this year, the company conducted more than 2,000 inspections on homes in Suffolk County and more than 1,300 in Nassau County. "Our property preservation inspectors provide detailed reports of maintenance activities, including photos, every 25-35 days," he wrote.

Bank of America spokesman Rick Simon wrote in an email that he could not provide "specific proprietary detail" about the company's preservation measures, other than to say that they order regular inspections to determine if a property is vacant. He also stated that Bank of America takes "routine maintenance and preservation measures to protect the collateral value of the loan and mitigate neighborhood impact."

Officials with Ohio-based Safeguard Properties, one of the largest property preservation companies in the United States, declined to answer questions about their practices, including how often they inspect properties. They noted in a statement that there are "industry standards for property maintenance, however banks, as well as cities and counties, can impose additional and varied guidelines, which we work within when inspecting, securing and maintaining properties."


Hiring local contractors

Ronnie Ory, president of Florida-based preservation company Cyprexx Services LLC, said he has 500 employees in a call center who hire local contractors. Nationally, the company has about 20,000 contractors and uses 4,000 to 5,000 of them each week, he said. On Long Island, Cyprexx uses about 40 to 50 companies for property cleanups.

Banks give Cyprexx a list of work needed on their properties, Ory said. Debris removal "is usually on top of the list" he said, followed by cutting grass, trimming bushes and making the house exterior "look very presentable."

Lenders are "trying to do the right thing," Jafri said. "Nobody wants to have an asset or a property that's in disarray, but the question becomes at what cost? How much can a lender do and in what capacity can they get in there?"

Several lawsuits have been filed in recent years against property preservation companies for overstepping their boundaries. They include a 2013 case by the Illinois state attorney general against Safeguard for incorrectly declaring homes vacant, going inside, shutting off utilities and changing the locks.

Nationstar spokesman John Hoffmann wrote in an email that it can be difficult to determine when a home becomes vacant, a process made more problematic by varying county and city definitions of "abandonment." Even if a property appears abandoned, he wrote, "the servicer may be subject to claims of trespassing if it attempts to initiate any repairs or maintenance."


Repairs at what cost?

As a result, he wrote, it is difficult for servicers "to maintain a perfect balance between maintaining a property and honoring a homeowner's rights to possession of the property prior to foreclosure."

Wells Fargo won't send people inside homes for maintenance because it could be construed as trespassing, Smith said, and their ability to do repairs is limited. "We can do some of the exterior maintenance but we can't repair the foundation on a home we don't own," he said.

Wells Fargo works with municipalities on maintenance issues and places stickers on houses with contact information for complaints about maintenance or other issues, Smith said. "We want to know if there's something wrong with one of our properties. If there's a lawn that isn't mowed, we want to know about it," he said.

Other financial companies appeared to know little about the condition of their properties on Long Island.

Dico Akseraylian, a spokesman for PHH Mortgage in Mount Laurel, New Jersey, was given more than five months by a Newsday reporter to research three properties that had been boarded-up by Babylon Town after numerous calls and certified letters from town officials went unanswered.

Akseraylian indicated he was unaware the town had boarded up the homes. He said he did not have an answer when asked why PHH had let the properties deteriorate to the point that they had graffiti, raccoon infestations and squatters. He denied the company had been contacted by the town for two of the homes. After being given copies of the certified letters sent by the town, Akseraylian did not respond to additional requests for comment.

Shanna Smith of the National Fair Housing Alliance said the lack of awareness by servicers is a big part of the reason so many homes continue to fall into disrepair.

"Everyone seems to have good policies for taking care of the properties but they're all really lousy about making sure the work gets done," she said.

Freddie Mac and Fannie Mae representatives declined to discuss specifics about their methods but insisted that they monitor property maintenance by their servicers.

"We routinely audit servicers for compliance with our guidelines as well as insuring that they have in place good controls, policies and procedures for implementing our requirements," said Freddie Mac spokesman Brad German, adding that servicers must have photos of properties to show the work has been done. "If something wasn't done that should have been done," he said, the company would seek compensation upon foreclosure.

Cyprexx ensures compliance by its contractors by using its own inspectors to conduct random checks to make sure work is being done, Ory said. The company also requires contractors to submit before and after photos for houses they have worked on in order to receive payment.


Ensuring compliance

But those methods can be flawed.

In 2012, the Office of Inspector General for the Federal Housing Finance Agency investigated Florida-based American Mortgage Field Services, a property preservation company that was hired by Bank of America for mortgages owned by Fannie Mae and Freddie Mac.

According to the inspector general's report, the company's owners sent fraudulent reports, including using photographs from previous inspections that had the dates changed to make it appear as if new inspections had taken place. As a result, the report states, the company fraudulently received $12.7 million over three years for property inspections that they never conducted.

The report found a "problem which may be systemic throughout the industry." Two owners of the company pleaded guilty to conspiracy to commit wire fraud and served time in federal prison.

Financial institutions have paid the U.S. Department of Justice nearly $37 billion to settle charges of wrongdoing related to the housing crisis, including Bank of America's nearly $17 billion accord in August, the largest civil settlement with a single entity in the nation's history.

Banks have paid for making those bad loans and "now they've got to pay for the results and the harms to the communities of the foreclosures that are left from those bad loans," Smith of the National Fair Housing Alliance said.

"The rest of us who still live in the neighborhood, we're the collateral damage," she said. "And the banks can't get away with that."


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