San Diego Union Tribune – City under gun to ease blight fight
Robert Klein, CEO of Safeguard Properties and chair of the Mortgage Bankers Association’s vacant property registration committee, was quoted in an article about the aggressive code enforcement of vacant properties in Chula Vista, California.
City under gun to ease blight fight
Lenders squeezed by Chula Vista’s fines, penalties
Chula Vista’s tough anti-blight ordinance has become a national model for requiring lenders to maintain vacant foreclosed homes before they fall into disrepair, but the city is under mounting pressure to reduce the measure’s stiff fines and give lenders more time to improve properties.
The city broke new ground in the fall of 2007 by enacting regulations that allowed it to issue citations for blighted dwellings after lenders filed notices of default, which mark the start of the foreclosure process.
So far, Chula Vista has levied fines totaling more than $1.3 million and collected about $752,000. Registration fees for vacant homes under the program have reached about $183,000.
Some critics say an unintended consequence of the ordinance may be to delay the recovery of the local real estate market. Faced with large fines, some banks may become reluctant to do business in the city, they say.
Initially, some lenders expressed shock at fines that on occasion can exceed $10,000. Officials say the large penalties were necessary to force a change in lender behavior.
Traditionally, cities have waited until lenders have taken formal possession of abandoned foreclosed homes before issuing citations. That can take months in some cases, forcing municipalities to address blight issues on their own. Typically, they remove weeds and drain swimming pools, seeking reimbursement later. Chula Vista has used its measure to place the burden on lenders.
The program requires banks and loan servicers to inspect foreclosed properties to confirm they are occupied. If they are abandoned, the lenders must register the properties with the city and secure and maintain them.
Under the ordinance developed by Doug Leeper, the city’s code enforcement manager, lenders are responsible for upkeep, even if ownership hasn’t formally been transferred to them through foreclosure.
With fines that can reach $1,000 per day, the measure has pushed Chula Vista to the forefront of a national drive to maintain neighborhoods hit hard by the mortgage market meltdown, said Peter Lemos, code enforcement field manager for Stockton.
Stockton is one of more than 200 communities nationally that have adopted anti-blight measures based on Chula Vista’s regulations, Lemos said.
“It brought to light that the lender or the bank is responsible for the vacant properties,” he said. “Before, until you had a new homeowner, no one was responsible.”
Real estate agents typically work closely with lenders, supervising repairs to vacant foreclosed homes and preparing them for resale. Initially, there was little opposition to Chula Vista’s abandoned-property ordinance from agents, said Pat Russiano, president of the Pacific Southwest Association of Realtors, a trade association for South County.
The group has come to believe that banks eventually may avoid doing business in Chula Vista because of the ordinance, Russiano said. With credit tight and many lending institutions struggling to maintain solvency, real estate agents say they don’t want lenders to have another reason not to approve home loans.
“They are already scared to death,” Russiano said. “Why give them one more thing to worry about?”
Large fines could affect lending decisions among banks that already are hurting from widespread home loan failures, said Dave McDonald, government affairs chairman for the San Diego County chapter of the California Association of Mortgage Brokers.
“The effect would not necessarily be redlining, but the manipulation of the foreclosure market,” he said. “If lenders think they will be fined $1,000 a day, there is a motivation to not do business in that area.”
Henish Pulickal is the former manager of San Diego-based Accredited Home Lenders’ department for properties acquired through foreclosure. Accredited, which was caught up in the subprime lending crisis, recently filed for bankruptcy protection. Pulickal said the anti-blight measure places unnecessary burdens on the lending industry.
“They were giving us violations for anything, whether it was a propped-open window, saying it was unsecured, to having dead grass,” Pulickal said.
Jay Norris, an account representative for First American Title, said he recalled a case in which an agreement to sell a foreclosed home fell apart because of a dispute between the city and the bank over a large fine. If banks perceive they are being hurt, they could think twice about how they do loans in Chula Vista, he said.
“There have been a lot of unintended consequences with this ordinance,” said Richard D’Ascoli, director of government affairs for the South County Realtor group. “It’s been a nightmare.”
Fines, in addition to scaring away banks, could end up becoming liens against defaulted properties, discouraging purchases or making lenders reluctant to approve mortgages for the buyers of foreclosed homes, Russiano said.
City officials say such outcomes are highly unlikely. Title insurance protects home buyers and lenders against errors in real estate transactions, such as an undiscovered liens.
Code enforcers stress that they aren’t placing undue pressure on lenders to comply with the abandoned-home measure. Emily Novak, a senior code enforcement officer, said her department gives lenders 30 days to secure abandoned homes and make any necessary repairs. Out of about 3,000 cases in which repairs were needed, fewer than 150 properties have been fined, she added.
Robert Klein, who chairs the Mortgage Bankers Association’s Vacant Property Registration Committee, said he supports measures like the one in Chula Vista. He said it is in everyone’s best interest to deal with abandoned properties early on, before they become blighted.
All lenders need to do to avoid fines is secure and maintain vacant homes until they are sold, said Klein, who heads Safeguard Properties, a property-management firm that represents lenders nationwide.
Alan Mallach, a senior fellow with the Brookings Institution, said the ability to levy high fines has enabled Chula Vista to protect its neighborhoods.
“That was really the important step on the part of Chula Vista,” Mallach said. “A lot of people saw that and followed their lead. It was, as far as I know, the first city in the U.S. that really took hold of this matter and said, ?Lenders, you have to take responsibility for these properties.’?”
Chula Vista Mayor Cheryl Cox said the fact that the ordinance has drawn praise as a national model shouldn’t stop the city from taking a look at how well it works or how it affects the real estate and lending industries. A proposal for modifications from the city staff is expected to reach the City Council by the end of this month.
Chula Vista is one of the communities in San Diego County that was hit hardest by the surge in foreclosures. Cox said that with some indications showing the economy is turning around, she hoped there would be less need for the abandoned-home measure. It may be possible to reach a compromise between supporters of the measure and its detractors, Cox said.
The city staff and the Realtors group already have made progress on some issues. There is a tentative agreement to streamline the process for registering abandoned homes within the city, Deputy City Attorney Chance Hawkins said. The city also is open to a proposal to allow vacant homes to be maintained by national property-management firms rather than only local companies.
The mayor said her goal is to have an anti-blight measure that protects neighborhoods without impeding the ability of lenders and real estate agents to do their jobs.
“Lots of cities have copied our ordinance,” Cox said. “That’s always flattering. That hasn’t stopped our staff from saying, ?Is there a way to shift this a little bit, make it a little more effective, a little more palatable?’?”