In an effort to increase property values and limit neighborhood blight, United States Senator Bob Menendez has announced federal legislation targeting so-called “zombie” homes. A zombie home occurs when a loan goes into default, the borrower vacates the property, and the lender, for whatever reason, does not complete a foreclosure action. Senator Menendez, through this legislation, is seeking to eliminate the legal uncertainty surrounding these properties. Under the Preventing Abandoned Foreclosures and Preserving Communities Act of 2016:
1. Mortgage servicers will be required to notify borrowers at the beginning of the foreclosure process that they can remain in the property until state law requires that they leave and that the property owners will remain responsible for the payment of any taxes, assessments or other fees during the pendency of the foreclosure process;
2. If and when a lender chooses to cease foreclosure efforts, the mortgage servicer will be required to promptly notify the borrower and the municipality where the property is located that it is doing so;
3. Mortgage servicers on loans backed by Fannie Mae and Freddie Mac and those insured by the Federal Housing Administration (FHA) will be prohibited from walking away from a foreclosure unless the servicer releases the lien on the property and provides proper notice to the borrower and municipality; and
4. The Government Accountability Office (GAO) and the Consumer Financial Protection Board (CFPB) are required to study and report on the prevalence and impact of the abandoned foreclosures.
Many things remain unclear with this proposed legislation. First, if the loan is escrowed, meaning that the loan is setup so that the lender is paying the taxes directly, will the requirement that the loan servicer notify the borrower that he or she remains responsible for the payment of taxes create unnecessary confusion and result in double-payments being sent to the local tax offices? Second, at what point does a loan servicer “walk away” from a foreclosure action? One answer to that question might be when a loan is charged off, meaning that the bank has determined that it does not make financial sense to continue with a foreclosure or seek to collect on the debt. Another answer might be when any foreclosure action has ceased for a finite period of time.
Finally, how would this Federal statute, if enacted, coincide with local ordinances already designed to target vacant properties in foreclosure? The Preventing Abandoned Foreclosures and Persevering Communities Act of 2016 is still in the early stages. This Act still must go through the extensive legislative process whereby it may see numerous revisions before it even comes to a vote before Congress. Our office will continue to monitor its progress. Senator Menendez’s office did not respond to our request for a copy of the proposed legislation.
For more information please contact via email Mario A. Serra or by phone at 973-538-4700 ext. 196.
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