Safford: Financial Regulation Bears Consequences

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In 2016, New York state legislators, in their infinite wisdom, passed a new law to, in the most basic terms, force banks to move through the foreclosure process more quickly, or pay the taxman.

That sounds good. Nobody wants to see properties hanging out there in limbo.

And I’m sure it made for good press releases. But like any other feel good law with, it had unintended consequences that, naturally, caused problems.

The law created new costs for banks to secure and maintain properties that they have begun the foreclosure process on. The idea of the legislators was to light a fire under the banks and force them to do monthly checkups and maintenance to keep the condition of the homes up…but that’s not what happened.

Banks hate variable costs.

Big banks forecast everything from projected quarterly losses to the number of rolls of toilet paper HR goes through in a month. I’ve always found it rather ironic that banks that live and breathe by selling variable rates actively avoid dealing with variable rates themselves.

Unintended Consequences

This aversion to variance has led banks to do the opposite. Instead of maintaining these properties they are instead looking for ways to run from them.

Instead of securing and maintaining homes in NY, the banks have changed origination numbers and created a goldilocks zone for new mortgages. This change clears the road for future problems…but how do they deal with what’s already in their portfolios in NY? Definitely not the way the NY legislators had expected them too, that’s for sure.

The new variable costs for securing and maintaining properties in NY have led to new lending agreements. Banks are now averaging the variable costs…then rounding up and reducing their recovery to support a foreclosure.

Before this new law, banks only needed $30k worth of equity after all expenses were paid to foreclose…but now? Now they need more money in equity due to the new maintenance contracts. That’s like throwing money out the window from the bank’s perspective. They are reducing the recovery by yet another cost of business and in most cases looking for closer to $50k of equity to foreclose. Why is this bad?

Instead of securing and maintaining properties the banks are simply walking away and releasing their liens. They are cutting their losses and moving on.

The banks are not bound by law to inform the home owner they released their lien. So they don’t. In almost all of these cases the homeowners have vacated the property. All that does is lead to blight.

This is the exact opposite of what this New York law was meant to put a stop to!

So who wins? In this case, nobody.  

The municipalities will eventually reclaim these properties, I suppose. But that is no real prize as they will need to sit there until enough time passes for a tax seizure to take place. That could take years. Wild animals and squatters could move in. Homeowners could move back and enter mediation with the town. Regardless, the property becomes an eyesore.

So how can RI do this better?

NY legislators left the securing of the property and maintenance up to the individual banks to manage.

Yet with no county tax assessors in RI a local version of this law could force banks to deal directly with the individual municipalities.

The municipalities would be able to negotiate costs directly with the bank and handle these properties with closer care. County assessors aren’t as connected to each individual community in their regions. That’s something that we wouldn’t have to deal with here in Rhode Island.

I am a firm believer in Civic duties. If you own a home maintaining that property and paying your mortgage and taxes should be considered one of them. Not paying your mortgage is one thing, but letting it fall apart negatively impacts your community.

If a homeowner does not pay their taxes and mortgages on time while at the same time letting their home fall apart where do we draw the line between ownership rights and societal failure?

A Better Plan

My improvements would be beneficial for everyone else and would only expedite the inevitable to reduce the negative impact that surrounds defaulted loans and neglected properties.

By creating a new process, in which the municipalities work alongside banks by releasing liens and cutting other red tape measures, this could readily rectify this problem. It would be a win/win for all parties involved.

The answer, in short, is removing regulations, not creating more. That would make things go smoother and better for all involved.

James Safford
James Safford is a member of the Scituate Land Trust and Conservation Commission. He has authored multiple books and sees politics though a bipartisan viewpoint. Send him email at jamessafford@yahoo.com.
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