Vacant-Property Fees Add to Mortgage Firms’ Woes

As home foreclosures continue to rise, a growing number of local governments are imposing stiff fees on mortgage companies responsible for the vacant properties.

Local officials say the levies are intended to offset the cost of maintaining and policing abandoned homes and to keep these properties from becoming blights on neighborhoods. The tougher rules also are adding to the financial burden on mortgage companies grappling with a surge in foreclosures, which some economists estimate may reach three million by the end of this year. And the new rules may raise costs and lower returns for investors who hold bonds backed by pools of mortgages.

“These ordinances are popping up every single day,” said Robert Klein, chief executive of Safeguard Properties in Brooklyn Heights, Ohio, which maintains vacant homes for mortgage companies nationwide. Mr. Klein said his office is tracking more than 60 local ordinances that deal with foreclosed properties. Local governments taking a tougher stand span the country, from Providence, R.I.; to Cincinnati, Ohio; to Chula Vista, Calif.

Keeping up with so many different regulations and changes is a challenge for the mortgage industry, said Chad Neel, president of FIS Field Services Inc., a Lender Processing Services Inc. unit that helps lenders manage defaults and foreclosures. In some cases, he added, “they force you to maintain the property at a standard that’s higher than the one for homeowners.”

The Mortgage Bankers Association says that mortgage companies are committed to maintaining vacant properties.

City officials complain that local taxpayers can’t continue to pick up the cost of cutting lawns, draining swimming pools, boarding up windows and policing vacant properties. In October alone, Louisville, Ky., spent $106,000 maintaining properties owned by major lenders, said Mayor Jerry Abramson, who has been talking to banks about reimbursement for property maintenance. “The cities are shouldered with the financial cost when they receive a complaint from a neighbor,” Mr. Abramson said.

Some municipalities are responding to the challenge by doubling or tripling existing fees and stepping up enforcement of existing ordinances, while others are adding fees and penalties. Registration fees on vacant or foreclosed properties can range from $35 to $500, said Diane Pendley, a managing director at ratings firm Fitch Inc., with annual fees sometimes topping $700 and penalties as high as $1,000 a day.

In June, California Gov. Arnold Schwarzenegger signed a bill that lets local governments in the state impose a $1,000-a-day fine on financial institutions that fail to maintain vacant properties if problems aren’t fixed within 14 days. The new law allows cities “to go in, abate the problem and tack [the cost] on to the tax bill” without having to enact a local ordinance, said California state Sen. Don Perata, the bill’s sponsor.

Chula Vista, Calif., went a step further last fall by requiring that mortgage companies register and take responsibility for vacant homes even if a property hasn’t yet been the subject of a foreclosure action. The program is designed to keep vacant homes from falling into “a black hole” between delinquency and foreclosure, said Chula Vista’s code-enforcement manager, Doug Leeper, who drafted the measure.

Under the program, property owners can face fines as high as $1,000 a day if a vacant home is improperly maintained; unpaid levies are tacked on to the lender’s property-tax bill. Chula Vista already has imposed $296,000 in fines and penalties, Mr. Leeper said. He said he has fielded inquiries about the program from about 250 communities in Arizona, California, Colorado Florida, Illinois, Missouri, Oregon and Tennessee.

Providence, R.I., recently enacted a “vacant property penalty” that lets the city impose a fine equal to 10% of assessed value if a vacant property remains unoccupied and becomes a blight on the neighborhood. “We have inspectors out there now inspecting every neighborhood in the city and identifying every property,” said Providence’s planning director, Thomas E. Deller, adding that his department already has inspected more than 950 vacant properties.

Other municipalities are beefing up existing statutes. While Cincinnati has had a vacant-property ordinance for more than a decade, in 2006 it increased the application fees for vacant properties to as much as $3,500 a year after five years from a flat $300. This year, the city began obtaining civil judgments against property owners who don’t pay their fees. It also is putting together a program that will let the city repair, demolish or barricade abandoned homes and then, to recover the cost, put a tax lien on the property. City officials say they have collected about $192,000 in fees so far this year compared with roughly $265,000 in all of 2007.

Many of the vacant properties “are owned by lenders, and we are having a difficult time of getting them to step up to the plate,” said Edward Cunningham, Cincinnati’s division manager for property maintenance and code enforcement, adding that the money collected by the city goes into a fund used to deal with vacant buildings.

The registration programs are also designed to make it easier for cities to determine whom they should contact if the neighbors start to complain.

“The idea is to get some responsibility so these buildings don’t sit there and have a negative impact on the community while people argue about who is responsible,” said William Good, commissioner of inspectional services for Boston, which recently began requiring that properties be registered with the city as soon as a foreclosure notice is issued. To increase accountability, Boston is requiring that owners of vacant properties hire a local property manager to be responsible for inspecting the property monthly and maintaining it.