New Path To Foreclosure — Delinquent Water Bills

The city has threatened to turn the water bill debts of 7,045 New York properties over to a collections agent powerful enough to usurp their property titles. And if misery loves company, those debtors can rejoice. At a Thursday City Council hearing, the Department of Environmental Protection (DEP) suggested amending the law to add thousands more to the debtors’ sad ranks.

DEP Commissioner Cas Holloway testified there that the high-stakes debt collection practice should be applicable not just to the property types covered by current law—multi-family homes, small stores or offices with no more than two apartments attached, and vacant residential land—but also to the 8,500 single family homes whose water bills are also seriously delinquent, meaning at least $1,000 has been overdue for more than a year.

Currently, the department sanctions late-paying single family homes by shutting off their service, a process that requires several man-hours of work, including excavation and other steps, that cost the city on average $3,100 per disconnection.

“If the 8,500 single-family homes were instead eligible for the lien sale, we would expect to collect $25 million with virtually no operational expense,” Holloway testified, according to a prepared statement. When DEP sells a lien, a company buys the debt and becomes the collections agent. “It is difficult to think of a more efficient way to lighten the burden on the ratepayers and increase service in the field.”

What’s At Stake?
Holloway’s proposal ironically came during a hearing called to take testimony about a Council bill that would restrict—rather than augment—DEP authority’s to subject certain debtors to a lien sale, and DEP’s proposal stood in marked contrast to some of the advocates who testified at the hearing.

Selling liens could eventually lead to foreclosures, advocates noted. “We do have many stories of people who are losing their homes,” testified Judith Goldiner, an attorney with The Legal Aid Society. Unpaid water liens do not appear to have stripped any property owners of their titles yet. But heavy water bill debts are making some homeowners vulnerable to foreclosure even before high stakes debt collection begins, advocates testified.

An elderly woman whose monthly mortgage payments had suddenly increased from $1,200 to $1,700 learned that her bank was charging her an extra $500 per month because it wanted to recoup the money it had paid to resolve her delinquent water bill, according to Stephan Dookeeram, a foreclosure counselor at Pratt Area Community Council, where the woman turned for help.

The woman had owed DEP $3,000. Her banks’ payoff helped her avoid a lien sale, but because she can’t afford the resulting higher mortgage payments, she’s fallen behind, Dookeeram said. “She went from being current to, all of a sudden, having a past-due mortgage,” he testified.

Some property owners with water liens are also in default on their mortgages and must decide which bills to pay in an effort to keep their homes—the mortgage or the water. Complicating the problem for delinquent homeowners is the fact that banks don’t like to modify mortgages—a process that helps homeowners who have fallen behind—if there are liens on the property. “A $3,000, $4,000 or $5,000 water lien can stop the modifications process dead in its tracks,” testified Michael Hickey, executive director of the Center for NYC Neighborhoods.

DEP’s high stakes debt collection practice also drew fire from Councilman Dominic Recchia.”That’s pretty disturbing that you can’t tell me how many senior citizens are on the lien sale list,” Recchia said, after learning that DEP keeps no age data on its customers.

The City Council Considers a Solution
Intro. 26, the bill the Council is considering to restrict liens, would do so by exempting more property owners from water lien sales. The bill would also lengthen the time that owners get to resolve a water bill delinquency from 1 year to three.

Holloway testified that DEP supports exempting from lien sales any two- and three-family homes receiving the Enhanced STAR Exemption. But he said he thinks giving people three years to pay what they owe will only compound that debt until it becomes unmanageable.

Why Sell Water Liens?
DEP services 834,000 accounts in a city where, Holloway said, “a small but persistent segment of property owners,” has long been notorious for not paying water bills. The authority the department gained in 2007 to sell water liens unattached to a tax lien dramatically increased the department’s 2008 and 2009 revenues. Over those two years, DEP received a total of $185 million from customers whose liens it threatened to sell within 90 days. The money was useful. Between fiscal years 2007 and 2010, DEP has been legally mandated to invest $8.4 billion on capital improvements to the city’s water and sewage system.

Without the extra $185 million, the agency would have been forced to raise water rates higher than the 48 percent it already has since fiscal year 2007 and more than the 12.9 percent it proposes to next fiscal year, according to DEP.

The 2007 law giving DEP authority to sell the liens already exempts single family homes and certain properties owned by seniors, the disabled, and the low income who are eligible for three tax credits and rebates: Senior Citizen Homeowner’s Exemption, the Disabled Homeowners’ Exemption, and the New York State Personal Income Tax. Moreover, those who fall behind on their bills are only subject to a lien sale after their delinquency has reached $1,000 and lasted one year.

Water bill debtors who are in danger of being foreclosed on for overdue mortgage payments can have their names removed from the lien sale list and defer collection of their unpaid water and sewer charges until their financial situation improves or their properties are sold or refinanced. Since DEP began offering that option, at least 533 properties have taken advantage of it.

But those who don’t get that exemption or resolve their debt – either by paying in full or entering into and honoring a payment program – by a certain time each year are warned that their debt may be sold to a company that will work to collect the money.

Once a lien has been sold, the company that buys it must give the property owner six months to pay off the debt before filing a foreclosure, but has the power to tack on more fees and interest along the way – including a one-time 5 percent surcharge and an 18 percent rate of interest, compounded daily. When the foreclosure process ends, if the property owner still owes money, the company can ultimately take his or her title.

DEP spokesman Farrell Sklerov said this is unlikely. “Almost everyone decides to pay,” he said. Eighty-nine percent of properties with liens eligible for sale resolve their delinquencies before the sale occurs, Holloway testified. But that means 11 percent are sold. “I always knew one could lose one’s home for foreclosure and for tax liens,” testified Anita Burson, who is fighting to keep her family’s six-unit Brooklyn brownstone off the sale list. “But for water?”

Impact of the Council Bill
Thirty-four city council members have sponsored Int. 26, originally proposed by Councilman Albert Vann. The bill would exempt from water lien sale one-, two-, and three-family homeowners who receive the Enhanced STAR Exemption, a tax break for seniors with moderate income. The bill would also lengthen the time that owners get to resolve a water bill delinquency from one year to three.

Additionally, it would require DEP to scrub their rolls of seniors who may be eligible for additional tax credits and rebates but don’t currently receive them. But the bill won’t help the people now threatened with a lien sale.

The 7,045 properties facing lien sales under current law owed a combined total of $33.8 million as of May 1. To avoid placement on the list of properties with liens eligible for sale, owners of those properties were required to have rectified matters—repay everything or enter into a payment plan—by Friday.