San Diego Union Tribune “Chula Vista forces lenders to maintain foreclosures”
A recent article in the San Diego Union Tribune talks about recent changes in Chula Vista’s property ordinances.
Chula Vista forces lenders to maintain foreclosures
By Emmet Pierce
UNION-TRIBUNE STAFF WRITER
October 12, 2008
Some lenders think there must have been a mistake when they see the hefty fines they have received for violating Chula Vista’s blight-prevention ordinance for foreclosed homes.
“I had one lender call and say, ‘I got a $13,000 bill and I want to know what you did for $13,000,’ ” said Doug Leeper, the city’s code-enforcement manager. “I said, ‘I didn’t do anything. We’re not property managers. We fined you because you didn’t do anything.’ ”
Over the past year, the ordinance written by Leeper has become a national model for communities overwhelmed by spikes in foreclosures, analysts say. Hit hard by the mortgage market meltdown, Chula Vista has taken a strong stance against lenders and loan servicers who allow abandoned houses to become neighborhood eyesores.
Under regulations enacted last October, the city makes lenders responsible for upkeep as soon as a notice of mortgage default has been filed on a vacant dwelling, even if ownership of the home hasn’t formally been returned to the lender.
The city is able to do so because the lender retains the right and responsibility to secure and repair vacant properties, Leeper said.
“That is the cutting-edge part of our ordinance,” he said.
Lenders have registered about 1,100 vacant homes in loan default or foreclosure with the city. Failure to comply with the blight ordinance can result in fines of up to $1,000 per day.
So far, the city has levied $850,000 in fines and penalties and collected a little more than $200,000. In addition, Chula Vista has brought in about $77,000 through vacant-home registration fees imposed by the ordinance. Uncollected fines become liens against foreclosed properties, payable at resale.
Notices of default launch the foreclosure process. Traditionally, lenders wait several months after a notice is filed before they take on maintenance responsibilities for vacant homes, Leeper said.
That lag often forces cities to address blight issues on their own, removing tall weeds, draining dirty swimming pools and securing open structures. Typically they seek reimbursement later, but Chula Vista has used its blight ordinance to shift that burden back to lenders.
“Lenders will respond when it costs them less to maintain the property than to ignore local agency requirements,” said Jolie Houston, a San Jose land-use attorney who has studied the issue for the California League of Cities.
Ordinances that address blight are common, but typically they don’t target lenders so directly, said Jim Brooks, director of the Community and Economic Development Committee for the National League of Cities.
Some critics say Chula Vista is playing rough with an industry that already is struggling to cope with billions of dollars in losses from failing subprime loans.
“That kind of measure will add additional costs to banks that have been hit really hard already and ultimately the cost will be transferred down to consumers and investors,” said Marc Carpenter, a San Diego real estate agent who specializes in foreclosures.
Such criticism hasn’t stopped other communities from following Chula Vista’s example. Leeper said more than 300 jurisdictions nationwide have contacted him to learn more about the ordinance over the past year. Although most are in California, inquiries have come from such distant cities as Boston, Milwaukee and Dallas.
“This is where a lot of cities are starting, with a Chula Vista-type ordinance,” Houston said. “The more vacant foreclosed homes you have, the more city council members feel compelled to do something. They can’t fix the lending problem, but they can try to prevent neighborhoods from becoming blighted.”
So far, no cities that have adopted such measures have been successfully challenged in court, Houston said. Stockton, which had the nation’s highest foreclosure rate in August, has modeled its anti-blight measure after Chula Vista’s. Coral Springs, a community in south Florida, recently did the same. Closer to home, Santee, Riverside County and Murrieta have followed the Chula Vista blueprint, tailoring it to their needs.
Wednesday, Escondido City Council members voted to tighten property-maintenance regulations to hold lenders more accountable.
Like Chula Vista, Los Angeles and San Jose require registration of abandoned homes, but only after code violations are reported, Leeper said. San Diego also tracks abandoned, foreclosed homes, said Tony Khalil, senior code-enforcement engineer. The program is less aggressive than Chula Vista’s.
“We don’t focus on trying to penalize or collect fines,” Khalil said. “We focus on returning homes to productive use.”
San Diego County, which oversees unincorporated areas, hasn’t experienced the same level of foreclosures as urban areas, but it’s examining Chula Vista’s measure to determine whether any of its elements would be useful, said Pam Elias, division chief of county code enforcement.
Although approaches to the blight problem vary, American cities have been forced to pay close attention to vacant homes as the mortgage meltdown has progressed. Some community activists have described concentrations of abandoned homes as “dead zones” that attract vandals and drain the vitality from neighborhoods.
One of the biggest challenges that cities face in dealing with such homes is determining who is legally responsible for them. That’s because lending institutions typically don’t hold onto loans. They are quickly sold to generate income to finance additional mortgages.
“We get this house,” Leeper said. “We pull the title documents. We say, ‘Look, it’s ABC Mortgage.’ We call them and they say, ‘Are you kidding, we sold that loan two months ago.’ ”
In that case, Leeper and his staff return to the title documents and send out notices to everyone whose name and address is listed. Sometimes the only way to find out who holds the mortgage on a home is to place a lien against the property. That way, the dwelling can’t be sold until the lien is paid.
During the recent housing boom, billions of dollars in home loans nationwide were bundled into securities and sold to Wall Street investors. When mortgage-backed securities were in demand, lenders lowered underwriting standards to keep home buyers in the market after real estate prices soared.
“We had people buying more house than they could afford with creative financing they didn’t understand,” Leeper said.
Within San Diego County, there were 1,979 foreclosures in August, a 1 percent decline from July, but a rise of nearly 140 percent over the previous year. The 91913 eastern Chula Vista ZIP code led the county in notices of default, with 106 filings. That area’s 94 foreclosures represented a 154 percent increase over the August 2007 figure.
Robert Klein, chief executive officer of Safeguard, a property-management firm that represents lenders nationwide, said he understands why cities are concerned about blight. Even so, Klein complains that the adoption of Chula Vista-style ordinances is complicating the lives of lenders and property managers, who now must adapt to different sets of rules.
“Every day we discover a new ordinance coming out somewhere,” Klein said.
Having to work with “a patchwork of local ordinances” will drive up the costs of lending, said Dustin Hobbs, spokesman for the California Association of Mortgage Bankers.
Hobbs said there is no need for California cities to adopt ordinances because they already have the authority to levy fines for housing blight under recently approved Senate Bill 1137.
Houston countered that unlike Chula Vista’s measure, the bill does nothing to require lenders to speed up the maintenance process.
Allan Mallach, a senior fellow with the Brookings Institution, said the Chula Vista measure is an important tool for cities fighting blight.
“This issue of holding lenders or creditors responsible from the point when the foreclosure begins rather than after they take title is tremendously important,” Mallach said.
