Robert Klein Looks Back at VPR Ordinances
In its October issue, Servicing Management published an article authored by Robert Klein, founder and chairman of Safeguard Properties, titled Vacant Property Ordinances: A Look Through The Rearview Mirror.
Vacant Property Ordinances: A Look Through The Rearview Mirror
To minimize the impact of vacant and abandoned properties, municipalities have been enacting vacant property ordinances.
Major national news outlets and mortgage industry trade media often refer to 2008 as the beginning of the housing market crash, without citing a particular flashpoint. Signs of a market slowdown certainly were apparent before then, primarily in the subprime market. But by 2008, the meltdown had expanded to the prime market, and that year, Congress responded with its controversial bailout package with hopes of stemming the problem.
Of course, we know the housing crisis didn’t subside; it got worse. Through 2009 and beyond, the fallout continued as credit tightened, businesses cut spending and unemployment climbed to more than 10%. Homeowners with historically strong credit scores began to fall behind on their mortgages and faced foreclosure. Borrowers whose home values fell below their mortgage balances abandoned their homes. New construction of homes and condominium units, especially in seasonal communities, went unsold. Even lower-value homes with no mortgages were abandoned when owners and heirs found them to be more expensive to maintain than they were worth.
All of this contributed to even greater numbers of vacant and abandoned properties across the country. How many is anybody’s guess, as estimates range from 10 million to 18 million, depending on the source and the timing of data. Regardless of the actual number, what is not in dispute is that municipalities across the country continue to struggle under the weight of vacant and abandoned properties, even as the housing market begins to stabilize.
In many municipalities, these properties stress municipal budgets, negatively impact home values, and thwart government, community and private-sector efforts to revitalize once-thriving neighborhoods.
Among the strategies to minimize the impact of vacant and abandoned properties has been the enactment of vacant property ordinances. In 2008, a vacant property registration committee was created for the Mortgage Bankers Association, where the concept for this type of ordinance was fully developed. The committee brought together industry representatives to discuss the impact of these rules on the property preservation world and recommend more workable alternatives for both cities and servicers.
Five years ago, we began tracking the existence of 50 to 60 municipal ordinances. Today, we track more than 1,300 separate ordinances, as well as statewide vacant property registries in the states of Maryland, Georgia, Connecticut and New Jersey.
The degree to which vacant property ordinances and registries have been effective is open to debate. The answer depends on many factors, including the specific requirements of each ordinance, the fees generated and what the municipality hoped to achieve by enacting an ordinance in the first place.
The entire field services industry understands the value of vacant property ordinances to protect communities from the blight that untended properties can create. Every day, we witness firsthand the damage, criminal activity, safety issues, neighborhood decline and other problems associated with vacant properties, even among vacant properties that receive regular inspections and maintenance services.
Not only do we work to assure that our mortgage servicing clients comply with all local ordinances, but we have provided input from a field service perspective to numerous municipalities that were crafting vacant property ordinances.
It is useful to look back at the evolution of vacant property ordinances over the past five years in an attempt to understand what this evolution means for the mortgage industry and communities alike.
The evolution of ordinances
Five years ago, we witnessed municipalities enacting vacant property ordinances to address the most basic problem for code enforcement officials: the inability to locate a responsible party when issues arose because county property records, tax databases and other sources often were out-of-date or inaccurate. Vacant property ordinances allowed for the creation of registries and databases with updated contact information on individuals and entities responsible for vacant properties. The fees and penalties that were levied for failure to comply with the ordinances covered the administration costs.
As the housing crisis grew, so did the economic problems for cities across the country. Greater numbers of vacant properties further taxed the fragile resources of police, fire and city service departments responding to crimes, neighbor complaints and other problems at vacant properties. Compounding the problem, tax revenues fell as more residents lost jobs and property values declined.
Some cities considering vacant property ordinances began to view them as a potential source of new revenue. As a result, in 2009 and 2010, we began to see more ordinances with higher registration fees and stiffer penalties for failure to comply.
Today, annual registration fees for each vacant property a servicer has in a particular city can range from $10 to $500, and penalties can reach $1,000 per day or more for failure to comply with ordinance requirements. One city in Ohio recently began requiring mortgage companies to post a $10,000 bond for each vacant property – not only “bank-owned” properties, but also defaulted properties still in title to the homeowner.
Whether these fees and penalties have generated sufficient revenues for cities to cover the administrative expenses of the program – and whether they have made a difference to improve or maintain the condition of a vacant property – is difficult to determine.
Anecdotally, we have heard that cities administering their own programs often find it difficult to adequately staff the function. Therefore, because they are not able to enforce the ordinance completely, they are not generating the revenues they expected.
Other cities that utilize third-party services to administer the program have earned revenues because they receive a percentage of what their provider generates. The irony, however, is that the revenues have come largely from mortgage servicers who already maintain their vacant properties and readily comply with the ordinances. Irresponsible owners remain difficult to track down, so not only are they not complying with the ordinances, but they are still not maintaining their properties. In other words, the programs may be generating income for the cities because of responsible servicers who not only comply with the ordinance but already maintain their properties. Yet, irresponsible property owners continue to fall through the cracks, both in terms of property maintenance and registering their properties with the city.
Many of these third-party services also specifically target servicers because the trigger is the filing of a notice of default. Foreclosure does not cause blight; vacancy does. Vacant property registrations with triggers of a notice of default do not address the problem.
Another development in vacant property ordinances was that, as problems with vacant properties grew, many municipalities attempted to protect vacant properties by unknowingly imposing requirements that actually had the potential to do more harm than good. Examples include suggested requirements that vacant properties be lighted, that metal covers be used instead of plywood boarding to secure windows and doors, that notices of vacancy and contact information for the property be posted on signs large enough to see from the street, and that in ground pools be maintained with fresh water, rather than covering the pool to protect it.
Fortunately, municipalities have begun to seek guidance from the mortgage servicing and field servicing industries to remove these types of requirements. More cities now understand that properties still in title to a homeowner do not have electricity because power has been turned off; therefore, lighting is not practical. Also, lighting a vacant property or posting large notices may actually attract more crime, alerting vandals to the fact that a property is empty, just as metal covers on windows and doors actually expose a vacant property to greater harm because thieves can steal the metal and sell it.
Similarly, filling a swimming pool at a property still in title to the homeowner is not viable because the water has likely been turned off. More importantly, however, an uncovered pool at a vacant property is a dangerous invitation for children and teenagers, whereas a pool cover provides a much safer deterrent.
Still, five years into the mortgage crisis, controversy remains with regard to vacant property requirements on mortgage holders that do not distinguish between pre- and post-foreclosure properties, making mortgage holders equally responsible for pre- and post-sale properties, even though they do not have legal title prior to the foreclosure sale.
In fact, the Federal Housing Finance Agency (FHFA) recently won a lawsuit against the City of Chicago, filed in December 2011, on that issue. In its lawsuit, FHFA, as conservator for Fannie Mae and Freddie Mac, claimed that the failure of the Chicago ordinance to recognize the distinction between the presale and post-sale status of properties increased the liability for those entities and potentially for taxpayers. A federal judge ruled that Fannie Mae and Freddie Mac could continue to follow their own guidelines “to maintain the properties in a manner to preserve their value” instead of following Chicago’s vacant property ordinance requirements.
Alternatives to ordinances
A major issue with vacant property ordinance requirements has been that they vary significantly from city to city. As the numbers of ordinances grow, it becomes increasingly difficult for servicers to comply with each ordinance. Today, we are aware of about 1,500 different municipal ordinances. Depending on the source and how a city or town is defined, estimates are that 20,000 to 25,000 municipalities exist across the country, so the potential for thousands of more ordinances, each with a new set of unique requirements, is very real.
A major step forward to assure that mortgage servicers and their field service representatives maintain compliance with ordinances would be the adoption of more statewide vacant property ordinances. These would allow cities and towns in each state to agree on requirements that recognize different geographical and community needs, while creating greater uniformity, both for servicers and municipalities.
In the meantime, municipalities and code enforcement departments already have access to a nationwide resource that helps connect code enforcement officials and mortgage servicers to proactively manage code violations. We developed the Compliance Connections system in response to the basic challenge that code enforcement departments lacked up-to-date databases to locate a responsible party at a vacant property when issues occurred. The system has helped hundreds of code enforcement departments work with servicers to address and resolve tens of thousands of code violations quickly and efficiently. And municipalities can use it for free.
If we learned one thing in five years since the housing crisis erupted, it is that we all need to cooperate to resolve our problems. Creating more uniformity in vacant property ordinances is a good place to start.
Robert Klein is founder and chairman of Safeguard Properties. He can be reached at email@example.com.
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Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.