Mortgage Banking “An Outbreak of Ordinances”
Robert Klein, CEO of Safeguard Properties, contributed an article to the August issue of Mortgage Banking magazine regarding the increasing number of vacant properties and the needs of local government to address the challenges caused by the changing housing market.
An Outbreak of Ordinances
By Robert Klein
As the volume of foreclosures increases across the country, so do the numbers of vacant properties. Vacancies aren’t just a problem in major cities; they’re a growing problem in suburban and rural communities as well.
Particularly in urban areas, vacant properties invite criminal activity, reduce surrounding property values, create safety hazards, deteriorate neighborhoods and stress the budgets of already-cash-strapped municipalities.
In 2005, before the current foreclosure crisis hit its stride, the National Vacant Properties Campaign (NVPC), Washington, D.C., reported more than 25,000 vacant properties and 11,000 abandoned properties in the city of Cleveland; 27,000 abandoned houses and 32,000 vacant lots in Philadelphia; and 42,000 vacant houses and 17,000 vacant lots in Baltimore.
Today, in declining metropolitan markets, vacant properties comprise between 5 percent and 10 percent of a city’s housing stock, and in many cities that percentage is even higher.
NVPC reported in 2005 that the abandoned property rate in St. Louis was 17 percent-?one of the highest in the country. In the previous five years, the city had spent more than $15 million, or about $100 per household, to demolish vacant and abandoned properties.
The problem, and the cost, will only grow as foreclosures continue to increase. According to The Wall Street Journal, at the end of first-quarter 2008, foreclosures nationally were up nearly 29 percent over year-end 2007, and 140 percent over 2006.
Those of us in the mortgage services and field services industries don’t have to refer to statistics to understand the scope of the problem. We have first-hand knowledge of the very real challenges of maintaining vacant properties and keeping them safe and secure.
As an industry, we’ve seen property portfolios grow in communities where we’d expect them to, and even in communities where we wouldn’t have expected it. We’ve seen lower sale prices and properties remaining in inventory for longer periods.
We’ve seen more severe damage to properties than ever before — not only by vandals but also by desperate and frustrated homeowners. And we’ve experienced the criminal activities that occur in and around vacant properties — even those that are regularly inspected and maintained.
Because of what we’ve experienced, we can empathize with cities and understand their need to enact new vacant-property ordinances or strengthen those already on the books as they look to protect their communities from the ravages of blight.
Also because of what we’ve experienced in the field, as an industry we have much to offer cities across the country as they consider and enact vacant-property ordinances.
The servicing industry has experienced first-hand the challenges of complying with many city ordinances that were developed with the best of intentions, but that pose significant challenges to mortgage servicers and field servicers as we attempt to comply with them.
Many ordinances are vague or confusing; in certain instances they may conflict with other laws and regulations, and some actually have the potential to create consequences that are worse than the problem they are attempting to solve. As more ordinances take effect across the country, the challenges will continue to grow.
To address these challenges, mortgage servicers and field servicers have formed a National Vacant Property Registration Committee, comprised of approximately 20 individuals, under the umbrella of the Mortgage Bankers Association (MBA), to reach out to cities and offer our help, support and expertise.
In early July, the committee initiated weekly calls and invited interested industry representatives to offer their views and ask questions about ordinances under consideration and discuss specific issues with proposed or already enacted ordinances.
Among the municipalities whose ordinances are being discussed are: Chicago; Fairfax County, Virginia; City of Riverside, California; Riverside County, California; Dallas; New York City; St. Paul, Minnesota; and Boston; as well as a statewide ordinance in Rhode Island. Ultimately, the committee is preparing to create a model ordinance that would combine the best practices from ordinances around the country and offer it as a starting point for cities to consider as they enact their own legislation.
In creating this model ordinance, the committee recognizes that cities are free to enact whatever ordinances and laws serve the best interests of their respective communities. At the same time, by reaching out and offering the value of our industry’s experience and perspective, we hope to demonstrate the benefit of collaboration to create more uniformity in ordinances, and create ordinances that serve the mutual interests of municipalities and mortgage servicers.
Efforts to date
As a starting point, a listing of all known vacant-property registration ordinances was compiled that includes the name of the municipality, date of enactment and a link to the complete ordinance. That list is updated as new ordinances are identified, and is available at www.safeguardproperties.com/pub/vacant_registration.pdf. At press time, the list includes approximately 47 cities in 18 states, including 12 cities in California; seven in Massachusetts; four in Ohio; three each in New York, Michigan and Delaware; and two each in Illinois, Pennsylvania and Minnesota. Key points of each ordinance are summarized on the listing.
Additionally, industry calls have been held to discuss ordinances being proposed in specific cities. The purpose of these calls was to gather input and discuss solutions that could be offered by the industry as alternatives to ordinance provisions that were viewed as challenging.
As more ordinances are considered across the country, it is essential to have the highest level of participation possible from the industry. The committee will be enlisting the support of industry representatives to write letters and attend public meetings where ordinances are being discussed. Especially in larger cities, it is important to get involved, as ordinances enacted in those cities often become models for other cities to follow.
On a broader scale, committee members have begun raising awareness in forums where municipal leaders gather, describing the challenges the industry faces in complying with ordinances and offering the industry’s support and collaboration. Among those forums was the June gathering of the U.S. Conference of Mayors, where representatives from MBA and other industry representatives had the opportunity to speak on the subject of vacant-property ordinances.
Ordinance issues identified
The goal behind all of the committee’s efforts has been to identify key provisions that raise concerns and develop consensus on a set of recommendations to address those concerns. Some central issues for servicers include the following:
Uniformity in ordinances
When cities enact ordinances, they usually do not consider that national servicers must amend their procedures for each city where they have properties — potentially leading to compliance with hundreds and even thousands of different ordinances. By creating a model ordinance as a guide for cities to consider, the industry hopes municipalities will adopt more uniform ordinances across the country.
Distinguising between pre-sale and post-sale registration
Servicers are concerned about ownership liability and “mortgagee in possession” implications of pre-sale registration. It is important to help municipalities understand the distinction between the rights of servicers pre-sale and post-sale.
For example, some ordinances require registration as soon as seven days after foreclosure initiation. This provision could include occupied properties, because foreclosure proceedings often begin well in advance of property abandonment. Servicers have no control of occupied properties, and even when properties are unoccupied, servicer rights are limited prior to sale.
The industry recognizes the advantage of pre-sale registration so the municipality has a point of contact to address violations and safety post-sale registration, because servicers are recognized at that point as full-fledged owners. Because servicers are not seeking to retain properties in their inventories, the recommendation is to provide a 60-day window for registration after taking title or possession.
Pre-sale ordinance requirements
In pre-sale, servicers only have the right to gain access to the property to protect their collateral interests. Ordinances with requirements that go beyond the preservation and protection stipulations may raise potential conflicts with other laws and regulations. Some examples include provisions that call for the removal of personal property from the interior and exterior of properties, and those that require rekeying of all exits to deny access to homes. In pre-sale, lock changes can only be done to give servicers access to protect their collateral interests — not to deny access to the homeowner. Homeowners have the legal right to access and control the property.
Post-sale ordinance requirements
In general, industry representatives have no issue with post-sale registration, because servicers are recognized at that point as full-fledged owners. Because servicers are not seeking to retain properties in their inventories, the recommendation is to provide a 60-day window for registration after taking title or possession.
Defining vacancy status
Vacancy status can mean different things in different cities. Servicers would like municipalities to clarify and define the term “pre-sale,” differentiating between “vacant and maintained” and “vacant and abandoned.” The industry also supports separate registration requirements for pre-sale and post-sale properties.
Local contact requirements
Ordinances that require that a maintenance contact be located within a specific distance from the property are challenging for servicers that utilize national field service companies that have a central national point of contact. Ordinances that require a local contact may actually add a step and delay the process, because the local contact must initiate contact with the national servicer, who in turn contacts the national field service provider.
Respecting that the intent of this provision is to ensure that responsible parties address problems quickly, the industry is proposing that municipalities identify time frames in which to address safety and maintenance issues. The industry does not have the same concern with city ordinances requiring a local contact for the purpose of serving legal notice.
Registration fees vary significantly from city to city, ranging from a one-time fee of $35 to annual fees of hundreds of dollars. Industry representatives raised the question of whether fees are reimbursable by the Department of Housing and Urban Development (HUD) and other investors, and whether they can be added to the unpaid principal balance (UPB) if the mortgage becomes current. The committee is requesting investor guidance on this issue, and will share that with the industry when it is available.
The penalty provisions in some ordinances were considered to be confusing and potentially costly, as failure to comply could result in fines of hundreds of dollars per month per property. Ordinances are unclear as to whether a penalty could be imposed at each occurrence of a violation or upon each visit by an inspector, which could result in significant fines.
In many instances, ordinances include general statements requiring that properties be maintained to applicable building codes and local regulations. These statements are considered to be overly broad. Particularly in cases where a servicer intends to sell a real estate-owned (REO) property “as is,” these provisions may require that the property be brought up to code beyond ensuring the safety and security of the property and its surroundings — such as electrical upgrades, cosmetic repairs and other costly items.
Deregistration of properties
Deregistration of properties could become cumbersome and confusing, because many ordinances do not define a specific deregistration process. Servicers are concerned that deregistration might require inspections to establish proof of occupancy, which would be time-consuming and costly. Industry representatives also suggested that cities define a process for servicers to deregister a property after a loan is sold or reconveyed to the investor or insurer, and the servicer is no longer responsible.
Securing of windows and doors
Because boarded-up homes are unattractive, some cities are considering alternatives to boarding. In situations where metal products are being considered, industry participants raised concerns about vandalism by metal thieves, leaving the property even more vulnerable to further damage and criminal activity. Metal also is more costly. The industry believes that the current industry practice of “bolt-boarding” is the most effective method of keeping a property secure from vandalism. Bolt-boarding involves securing a window or doorway with a 10-inch bolt placed through the center of a board, with a 2×4-foot interior bar holding it in place. Bolt-boarding also does not damage window and door frames.
Certain ordinances require that properties have a sign visible from the street that displays a name, address and 24-hour contact number. The concern is that this type of sign will call more attention to a vacant property, as it advertises that it is unoccupied, and actually could invite vandalism. Committee participants also questioned how this provision would be enforced in multi-unit structures, within gated communities and on properties that are part of a homeowners or condominium association, as there may be signage restrictions.
As with signage, industry representatives expressed concern that lighting requirements also advertise that a property is vacant. Lighting also is expensive to install, and the light fixtures themselves could be targeted by thieves.
It is evident that mortgage servicers and municipalities share a common goal — compliance with vacant-property ordinances. Municipalities faced with the growing burden of vacant and abandoned properties want to ensure that the parties responsible will maintain them so they don’t deteriorate, further reduce property values, invite crime and contribute to urban blight. Servicers also want the properties in their portfolios to comply with city ordinances.
The most effective way to achieve that consensus is through outreach and by demonstrating to cities that mortgage servicers and their field servicers are committed and credible partners in efforts to address issues commonly associated with vacant and abandoned properties.
In discussions with municipalities, one of the biggest frustrations they express is their inability to reach a contact when code violations and other issues arise with vacant properties. Too often, the information they have is either outdated or lists a general contact; as a result, code-violation notices wind up in the wrong department or wrong city, and the violations remain unresolved.
When city officials learn about the Property Preservation Resource Center on the MBA Web site (www.mortgagebankers.org/propertypreservation), which lists the property preservation contacts across the country for most mortgage servicers, they appreciate it.
In fact, most mortgage servicers recognize that one of the important advantages of having vacant-property registration ordinances is that more cities will have access to accurate and updated contact information so that property issues can be brought to everyone’s attention and addressed before further damages can occur.
By working together as an industry to unify our voice, reaching out in a spirit of cooperation with municipalities across the country and keeping the channels of communication open, everybody wins.