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Amid finger pointing, problem of ‘zombie homes’ worsens

It takes an average of 2.7 years to complete a foreclosure in New York State.

That figure from RealtyTrac is more than a year longer than the national average, and it astounds and frustrates observers, particularly when home buyers are scouring the marketplace for deals.

Everyone asks, why does it take so long, especially in cases where the properties are abandoned and have come to be known as “zombie homes”?

The state Department of Financial Services found delays at different steps of the legal process, with each side blaming the other for repeated postponements. New York, like about half of all states, has a judicial process for foreclosures, meaning the cases wind through court, with a judge overseeing the proceedings.

The state Department of Financial Services calculated an average of 343 days in upstate New York cases between the end of a mandatory settlement conference – which were put into effect to help homeowners who want to stay in their homes – and the entry of a judgment of foreclosure and sale of a property.

Kate Lockhart, a paralegal and data manager at the nonprofit Western New York Law Center, said banks need to devote more attention to abandoned homes.

“What we see here in Western New York is our foreclosure process is not the problem,” she said. Lockhart said she has seen cases where a bank moved quickly to complete a foreclosure after advocates planted a sign on a home’s lawn calling out that bank for inaction. If the court system were the obstacle, she said, banks couldn’t make headway that fast.

Banks: ‘not our fault’

Michael Smith, president and CEO of the New York Bankers Association, agrees foreclosures of vacant and abandoned homes take too long in New York State, but said banks aren’t at fault.

“We do not control this issue,” Smith said. “Ultimately, it falls within the court system.”

Foreclosure is a last resort for banks, and they don’t want to see properties become blighted, he said. Plus, Smith said, banks face the “reputational risk” that comes with an unfinished foreclosure.

“No one wants to be put in a position of being accused of not caring about a piece of property or anything in their community where they’re operating,” Smith said. “The problem needs addressing with everyone on board, in terms of coming to a viable solution.”

Steven Wells, a Hodgson Russ attorney who handles foreclosures, said mandatory settlement conferences contribute to the state’s lengthy foreclosure average. Many times, in addition to those conferences, homeowners go through a loan modification process that requires lots of documentation and review by the lender.

Wells said another factor is that in some cases, a bank might not be eager to complete a foreclosure.

“Depending on the property, the bank may not push it that hard if it’s really not worth that much and they don’t want to take ownership of the property,” Wells said. “So sometimes these things just sit in foreclosure because the banks fail to prosecute them.”

For instance, he said, a bank might push to complete a foreclosure on a vacant $400,000 home with a $200,000 mortgage debt in an attractive neighborhood. But a bank might see less incentive to do so on a vacant home assessed at $30,000 with a large mortgage debt in a lower-income neighborhood, he said. That’s because a bank has to absorb the cost of maintaining a property it reclaims, with the prospect of collecting very little from bargain-minded bidders at the end of the process, he said.

“Sometimes it becomes cheaper to just let them go into in rem foreclosure,” he said, referring to city and county auctions to dispose of tax-delinquent properties.

Political pressure

Assemblyman Michael Kearns, D-Buffalo, rattles off addresses of properties in Erie County with incomplete foreclosures. Oftentimes, he said, there are prospective buyers wondering why they are blocked from making deals.

“The frustration point is that these properties have value,” he said. Kearns mentioned a foreclosed home on Woodside Avenue in South Buffalo that a police officer wanted to purchase. A bank started a foreclosure on that property in 2010 but hasn’t completed it, he said.

Complicating matters is when a zombie property’s owner is a nontraditional lender, Wells said. “These things get sold to various debt buyers or funds.” In those instances, “it’s very difficult to even get to a decision maker.”

But Wells recommended that someone who is interested in buying a zombie home look at a property’s foreclosure records – which are public information – find out who the attorney is for the lender, and make an offer for a short sale. That refers to selling a property for less than the amount owed on it.

Chaotic process

The foreclosure process can be downright baffling for homeowners like Deborah Chrzanowski who get caught up in it.

Chrzanowski called her experience “mortifying and isolating.” She watched with dismay as her home on Abbottsford Place in Buffalo transformed into a zombie.

After Chrzanowski was diagnosed with an autoimmune disease, her mortgage payments became too much of a burden. A bank foreclosed on her home in 2010. She filed for bankruptcy and moved out. Chrzanowski assumed the foreclosure would be completed in six months, and she needed to secure other housing.

But the months turned into years. Different mortgage servicers made what she described as harassing phone calls to her for money. She lost track of what her responsibilities were for the home. She occasionally went to the home to perform basic tasks like mowing the lawn. “I was a sideline spectator in the community, watching helplessly as my former home fell into disrepair,” Chrzanowski said.

Late last year, with the Law Center’s help, she learned the bank had discharged the mortgage and abandoned the foreclosure. She finally sold the home to a new owner.

Over 16,000 statewide

Lockhart said some banks are being more cooperative than others in working with the Law Center on zombie homes. She said she hopes that greater public attention on the issue will generate more progress.

Kearns, who is working with the Law Center on the issue, said zombie homes afflict cities and suburbs alike, and involve properties across the price spectrum. “This is an epidemic and it’s been hidden for too long,” Kearns said.

The state Department of Financial Services last year reported about 31 percent of upstate properties that were the subject of foreclosures filed from the start of 2010 through September 2013 either started out or became vacant. “The longer a vacant and abandoned property remains in foreclosure, the greater the deterioration of the property, which results in a lower expected recovery upon foreclosure sale,” the report said.

Specific numbers for zombie homes are difficult to pin down, since definitions and data sources vary. RealtyTrac recently tightened its criteria for a zombie home and identified 3,200 of them in New York State as of the end of January. State Attorney General Eric T. Schneiderman last year said the state had 16,701 homes that were zombie foreclosures.

Kearns said constituents and municipalities have reported to his office about 2,000 vacant homes in Erie County; the Law Center is trying to determine how many of those are in foreclosure.

At the very least, Kearns and the Law Center want to identify a bank contact for local lawmakers and neighbors to reach out to with problems at a vacant home. But their broader objective is to bring foreclosures of vacant homes to a conclusion, so that new homeowners can take over and former homeowners can move on with their lives.

Getting worse

Everything comes back to how efficiently foreclosures can be resolved.

Richard Simon, a Bank of America spokesman, in an interview with Stateline agreed that New York has a lengthy process but said it was not in a bank’s financial interest to step back from foreclosure.

“Extended foreclosure and property preservation are quite expensive and only add to the large financial losses already being absorbed in most foreclosures,” Simon told Stateline.

Banks sometimes run into problems notifying homeowners about foreclosures.

“In a lot of cases, the banks can’t find the owner,” said Jim Rykowski, vice president of commercial lending at Evans Bank.

M&T Bank, HSBC and First Niagara Bank declined to be interviewed about the zombie foreclosure issue.

RealtyTrac said about 92,300 homes were in foreclosure in New York State at the end of January, including those known as zombies. Meanwhile, New York’s average time for completing a foreclosure was sixth longest in the country.

“It’s definitely not good for the market to have these properties sitting in limbo for this long, and it’s also resulting in this very long tail of foreclosures, where other markets have moved past the worst of the foreclosure problem,” said Daren Blomquist, of RealtyTrac.

Zombie foreclosures increased 32 percent from a year ago in New York State, but declined 4 percent nationally, according to RealtyTrac. As lenders work through a foreclosure backlog, Blomquist said, they will turn their attention to another pool of vacant properties with delinquent loans. “When they start the foreclosure process on those, all of a sudden, they show up on our radar as zombies.”

Schneiderman has called for tackling zombie homes through state legislation.

“Abandoned properties harm big cities and small towns alike as they become magnets for crime, drag down property values, and force cities to increase code enforcement efforts,” he said. “I’ve proposed legislation that would make lenders responsible for delinquent properties when they are abandoned during the often-lengthy foreclosure process. If enacted, this law would benefit neighborhoods across New York State.”

Stay put

Schneiderman said homeowners should be reminded they don’t have to move out of their house until ordered to so by a court. But if a property becomes vacant, he wants mortgage lenders and their servicers to take responsibility for the property soon after that, rather than waiting until the end of the foreclosure process. And he has called for an expedited foreclosure process for vacant homes.

Last year, the state announced 13 major banks, mortgage servicers and credit unions – including M&T, First Niagara and Bank of America - agreed to adopt “best practices” to monitor and maintain vacant properties across New York that were the subject of delinquent loans. The idea is to head off problems before they worsen.

Kearns is advocating for $100 million in funds in the state budget for nonprofits to help homeowners avoid falling into the mire of foreclosure.

“If we can prevent foreclosures,” he said, “we will not have incomplete foreclosures, we will not have zombie properties.”