Mortgage Banking – The MERS Alternative to Vacant-Property Registration Ordinances
Robert Klein, CEO of Safeguard Properties, contributed an article to Mortgage Banking magazine about the impact that the Mortgage Electronic Registration System (MERS) is having on the management of REO and bank-owned vacant properties across the country.
The MERS Alternative to Vacant-Property Registration Ordinances
The hopeful news of 2009 is that many indicators point to the likelihood that the U.S. economy may finally have scraped bottom and could be heading upward.
The stock market has seen fairly steady gains since it hit its early-March low. The Wall Street Journal reported that the number of workers filing state unemployment claims at the beginning of June fell by its largest amount since November 2001. And RealtyTrac Inc., Irvine, California, reported that in May, foreclosure filings decreased by 6 percent from the previous month.
Now for the more sobering news. The Wall Street Journal reported that new jobless claims increased slightly from May to June. In June, Standard & Poor’s (S&P), New York, downgraded ratings for 22 banks nationwide, expecting loan losses to worsen before they improve. And the Mortgage Bankers Association (MBA) reported in late May that the level of foreclosures started in the first quarter of 2009 hit a record high.
What does this all mean? Even though the economy is showing some glimmers of recovery, high rates of default and foreclosure are likely to continue for the foreseeable future. As a result, cities around the country will continue to struggle with the challenges that vacant properties pose in their communities.
A proliferation of vacant-property registration ordinances
To address the problems associated with vacant properties — from vandalism and crime to safety and maintenance issues — cities across the country have been considering or enacting vacant-property registration ordinances.
From the municipality’s perspective, the goal in enacting ordinances is to have the ability to track down a contact to serve notice when code violations occur and to hold that party responsible when violations go unresolved for periods of time.
In part, registration ordinances attempt to fix a problem with property records across the country. In many cases those records are not up-to-date, and usually they don’t identify a property-preservation contact within the lender or servicer organization responsible for a vacant property. As a result, when cities issue code-violation notices based on public records, the notices go unheeded for long periods of time because they either fail to reach the right person or take a long time getting there.
From a servicer’s perspective, the basic notion of vacant-property registration ordinances is positive — by registering vacant properties, lenders and servicers are more likely to receive prompt notification when issues arise with properties. This allows them to address problems quickly, preserve the value of their collateral asset, and avoid both negative community backlash and potentially expensive fines for failure to comply with code requirements.
The concern with vacant-property ordinances among ser-vicers is the administrative challenge of complying with potentially thousands of different municipal ordinances around the country. The more ordinances — and more individual nuances — the more resources will be needed and the greater the risk of fees and penalties for failing to comply.
Finding common ground
Municipalities and servicers share common interests with regard to vacant properties. Both have an interest in ensuring that properties are well maintained, safe and secure. Both benefit when cities have accurate and updated contact infor-mation to serve notice when issues arise.
A few years ago, MBA took an important first step in providing contact information to cities when it posted property-preservation contacts for major mortgage servicers on its Web site for code-enforcement officials to access. While that was helpful, not enough cities were aware of the resource, and both city code-enforcement officials and servicers recognized a need to do more.
In 2008, MBA convened a Vacant Property Registration (VPR) Committee, comprised of lenders, mortgage servicers and the field servicers who represent them. The committee met by phone on a weekly basis for nearly a year, and also met with mayors and other officials in cities that were considering vacant-property legislation.
The committee listened carefully to the cities’ concerns, and offered insights regarding the challenges they face to inspect, secure and maintain growing numbers of vacant properties throughout the country.
In 2008, representatives from MBA and the VPR Committee were invited to address the U.S. Conference of Mayors, describing the challenges of securing and maintaining vacant properties in cities across the country, and listening to the feedback of mayors.
At the June 2009 U.S. Conference of Mayors’ Annual Meeting, MBA and VPR Committee representatives were again invited and had the opportunity to update mayors on their efforts.
The mayors received a briefing on the committee’s solution — now referred to as “The MERS Initiative.” This initiative is a collaboration between MBA and the Mortgage Electronic Registration System (MERS), Reston, Virginia. Working with MBA, MERS developed a process by which government entities across the country can have access to the MERS system, which contains information on more than 60 million loans through more than 2,500 lenders that use the system. The MERS system was enhanced to store property-preservation contact information for the properties registered on the system.
MERS implementation under way nationally
In the fall of 2008, the committee enlisted five municipalities to serve as pilots for the program: Chula Vista, Sacramento County and Stockton in California; Boston; and St. Louis.
Code-enforcement officials who used the system reported that they were impressed with quality and quantity of data available to them. The pilot was deemed a success and the MERS Initiative was officially launched in late spring. To date, hundreds of cities have signed on to the program.
In many cases, the cities signing on are utilizing the MERS system and their vacant-property registration ordinances in tandem. Those cities will consider a loan servicer compliant with their vacant-property ordinances if their properties are registered on the MERS system. The vacant-property ordinances remain in place for properties that are not registered on the system — primarily those in the hands of property “flippers” and non-responsive property owners who fail to act responsibly.
Even though a majority of loan servicers are members of MERS, not all of their loans are currently on the system. To motivate servicers to register all of their loans, MERS has developed special registration products and incentives for servicers to register their full portfolios on the system.
A valuable resource for cities
The MERS system is proving to be a valuable tool for resource-challenged cities, especially those with the highest volumes of vacant and abandoned properties.
With access to MERS, cities don’t have to create a registration system from the ground up. They have free access to an existing system and receive free training for their users. They have a system that is proven and uniform across the country. That uniformity helps to ensure that servicers can more readily comply with registration requirements. And the system reduces administration and paperwork, because cities can exempt the vast majority of MERS-registered lenders and servicers from additional registration requirements and target their resources to address the most challenging issues.
Those familiar with the Pareto principle recognize that 20 percent of an organization’s most challenging needs consume 80 percent of its resources, while the other 80 percent require only 20 percent of its resources. This is the advantage of resource allocation that the MERS system provides to cities.
No one expects the MERS system alone will address all of the challenges regarding vacant and abandoned properties for municipalities and servicers. But the initiative is a tremendous example of what can be accomplished when interested parties come together in a spirit of collaboration to solve a problem.
In this case, success was built on three proven strategies:
- Engaging in dialogue and identifying mutual interests. MBA took the initiative to form a Vacant Property Registration Committee that reached out to cities and code-enforcement officials to understand their concerns. In turn, the cities were open to better understanding the challenges faced by servicers.
- Building on proven success. Instead of building individual registration processes from the ground up, cities have immediate and free access to a proven system that will allow them to address vacant-property issues more immediately and effectively.
- Maximizing limited resources. By offering cities an efficient process to track properties that are being managed responsibly, code-enforcement officials can focus their attention on the properties that are the most challenging to them.
No one knows when the current housing crisis will subside, but until it does, municipalities and servicers have demonstrated their willingness and commitment to face the challenges together. As an industry, we are especially grateful to the code-enforcement community for its partnership and collaboration in producing the MERS initiative.