Banks Walk Away?

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1153 St. Johns Place, Photo via Property Shark

Last night, tenants at 1153 St. Johns Place brainstormed ways to organize in order to improve conditions in their building. Even though their tenant association is active and they are represented by South Brooklyn Legal Services, tenants are in a tight spot. Their building has been in foreclosure for many years, and is currently being managed by court appointed receiver Scott Nunnally. The Plaintiff, Flushing Savings Bank, claims to have sold the mortgage over a year ago to someone named Alex Varveris.  However, he has neither substituted into the foreclosure case nor registered a mortgage transfer with the County Clerk. The court is also not moving the foreclosure case forward. It seems that it’s up to tenants to try and do that themselves – which is what they decided to do last night.

With an absentee landlord and an open foreclosure case that is dead in the water, it seems that 1153 St. Johns Place tenants are in indefinite limbo. And, the plight they are facing is not unique. According to The Real Deal, “some banks are deciding that in some judicial foreclosure states – like New York – it is more lucrative to walk away from distressed homes.” And Ed Jacob, executive director of Neighborhood Housing Services of Chicago, told CNBC:

What we’re finding in those neighborhoods is in judicial states [where a foreclosure case has to go before a judge], banks are making a decision that it’s going to take two years to complete this foreclosure, and increasingly cities are enforcing things on codes and vacant buildings. Banks are looking at what the residual values will be and then the costs they will incur and essentially saying it’s not worth it for us to go through the entire foreclosure process.

Though this article is primarily about single-family foreclosures, the emerging pattern is consistent with what we have been seeing in New York City’s multifamily housing. And it has serious implications for tenants, particularly in buildings like 1153 St. John’s Pl, where the borrower has also walked away.  This begs the question, who is responsible for the upkeep of their homes?

The practice also has implications for New York City taxpayers. As The Real Deal points out:

[Borrowers] who walked [on the property] before the bank mailed out notice of its plans to abandon the property  may have no idea that they still own their homes – or that they are liable for upkeep and property taxes.

At 1153 St. Johns Place, someone owes both property taxes and massive HPD fines. If responsible parties continue to walk away from this building, these fines will never be collected.

It’s bad policy and negligent for banks to simply walk away from distressed assets, particularly when it goes hand in hand with a note sale to a questionable party — like Alex Varversis. However, it could be an opportunity for a responsible developer – or tenants themselves – to recapture this affordable housing stock. To stop such patterns and preserve affordable housing, creating  more innovative practices is imperative.

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