New York Assembly Bill A3081, signed by Governor Kathy Hochul on November 21, effectively preempts any local law that would require mortgage lenders to register mortgages in default at any point prior to the filing of a notice of pendency in foreclosure proceedings. Many local governments in New York have put in place these registration requirements designed to prevent blight by shifting the burden of maintaining distressed properties to mortgagees. For example, the Town of Brookhaven on Long Island required mortgage holders to take action within 10 days of declaring a mortgage in default, including such obligations as retaining a local property manager, performing weekly inspections of the property if it is occupied, and paying semiannual fees. However, New York’s legislature has also addressed the issue at a statewide level through the so-called Zombie Property maintenance law, administered primarily by the state Department of Financial Services. Local zombie property laws duplicate the state-level effort and impose additional costs and administrative requirements on mortgages, often months before a property actually becomes vacant or enters foreclosure.
The new state law addresses the redundancy by prohibiting municipalities from requiring “registration of residential mortgages in default prior to a mortgagee filing a notice of pendency in a court of competent jurisdiction.” In New York, a notice of pendency must be filed at least 20 days before a final judgment directing a sale of a foreclosed property. See N.Y. Real Prop. Acts. Law § 1331. In other words, even though the state law still allows for local default mortgage registration requirements, they cannot kick in until much later in the process of moving from default to foreclosure. The law also caps the fees local governments may impose for default mortgage registration at $75 annually. In addition, the new law protects consumers by prohibiting lenders from passing along any of the costs associated with registration. Local governments also may not work around the new state law by attempting to shift the registration requirement to homeowners in default.
The combined impact of the new law is likely to be reduced administrative costs for lenders holding mortgages in default, as well as for defaulting borrowers, who may be relieved of additional burdens associated with the local inspection and maintenance requirements, particularly where those requirements applied to still-occupied properties. With the residential property market facing increasing uncertainty, other states may follow New York in legislative and regulatory efforts to balance the impact on borrowers, lenders, and communities.