The Daily Show on MERS

Jon Stewart took on MERS on Tuesday night’s episode of the Daily Show; watch it below. As I’ve noted in earlier posts, there is a good deal of recent ongoing litigation against MERS, and it’s not only in the mortgage-registration business; it also markets tools to local governments for vacant property registration.

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Should cities use MERS for vacant-property registration?

Nails, Gifts and MortgagesOne convenient way for a city to start a Vacant Property Registration (VPR) program is to require homeowners or mortgagees to register with the Mortgage Electronic Registration Service (MERS). MERS was created by the mortgage industry to track mortgages as they were bought and sold, but once VPR ordinances started sprouting up, MERS made its database accessible to local governments to use in conjunction with their VPR programs (this is called the MERS Initiative). Using this service lets cities track who owns loans on what properties— increasing their chances of figuring out who is actually responsible for maintaining a property. And better yet, the service is offered to cities for free.

So what’s the catch? At first glance, not much; hundreds of cities are signed on, and for each registered property MERS gives them online access to the title holder, servicer, and property preservation company (a local company hired by the mortgage company to maintain a property). But my warning is this: MERS is very closely associated with the mortgage industry—which is generally opposed to VPR—and, in the past, the company’s sloppy recordkeeping has worked to shield the mortgage industry from liability. It’s unfortunate that the most viable electronic database isn’t maintained by a neutral third-party, but essentially the mortgage industry itself.

I see three alternatives (please feel free to add more). First, cities could develop their own electronic database (or encourage private citizens to develop one for them). This approach has a glaring downside: If each city creates its own database, then compliance is more difficult for the mortgage companies, who usually must maintain vacant property across the country. Second, cities could go with another company, the Federal Property Registration Corporation, which is a private company like MERS, though less criticized at this point. The third alternative is for a non-profit or government entity to create a uniform platform that local cities could adopt as their own, essentially a freeware database. This approach has the benefit of giving local communities control over the database, while maintaining uniformity, which is essential to mortgage industry compliance. I have previously proposed that the federal government create such a platform, but now realize that any developer could do it—including folks from Code for America or using Socrata—and promote it nationally.

I discuss some of these ideas in an academic paper you can download here.

As always, ideas or comments are welcome.

What is vacant property registration?

file0001472960139As the country continues to suffer the repercussions of the mortgage crisis, one consequence to many cities is a growing number of vacant properties (other cities, like my hometown of Flint, have been dealing with large numbers of vacant buildings for years—the county where Flint is located has set up a renowned landbank to help address the problem).

Vacant Property Registration (VPR) ordinances have become an important tool in combating this rise in vacancies (and the resulting increase in costs as city governments battle blight and vandalism). The basic idea is that a local government enacts a law that requires landowners to pay a fee for registering vacant property and to maintain the property to certain standards. The fee pays for staff to monitor and enforce the maintenance of the property.

Beyond the basics, there are many differences in VPR ordinances nationwide. One distinction is when registration is required: Many cities require registration after a property has been vacant for a certain amount of time; others require registration only after a foreclosure; still others use both approaches. The foreclosure approach is aimed at mortgage lenders, who typically control a property’s maintenance when the property is in the foreclosure process (and often, the theory goes, let maintenance slip). Registration encourages them to hire local companies to maintain the property or risk incurring penalties for noncompliance.

Another way VPR laws vary is in the fine imposed. Some cities impose escalating fees for every year a property is vacant. This type of law focuses on getting rid of vacant buildings altogether. Many of these cities require property owners to submit plans to renovate or demolish buildings on the property. Other cities require a small or even no fee for registration but impose steep penalties for noncompliance with maintenance rules. The purpose of these laws is aimed more at keeping a city clean while it waits for economic recovery. Maintenance rules can be extensive, including guidelines for pools, securing a building, and the exterior of the building (even including paint colors).

The bottom line is that a city looking to manage vacant properties should consider enacting a VPR ordinance (or encouraging the county or even the state to do so), but must also figure out what the primary problems are that it wants to address:

  • For city officials facing a swell of foreclosures but confident that homeowners will return, a foreclosure-initiated ordinance (like that enacted in Chula Vista, California), may be the best bet. Those types of programs imposes strict maintenance requirements on mortgage companies when a property goes into foreclosure.
  • For cities facing long-term vacancies (like many Midwestern cities facing loss of industry) the best solution might be an aggressive program like that in Wilmington, Delaware, which imposes severely escalating fines for every year a property remains vacant.
  • Even better, many cities are adopting a combination of these approaches—targeting both longterm properties and those recently in foreclosure.

Of course, once any law is passed, the key to success is aggressive enforcement.

For a database of VPR ordinances, check out Safeguard Properties or Mortgage Contracting Services. But be aware that both these websites are associated with the mortgage industry, which is generally opposed to vacant property registration (calling the requirements unreasonable).

I will do a future post on electronic registries, such as the Federal Property Registration Corporation and Mortgage Electronic Registration Systems (MERS), and their potential pitfalls (especially MERS). For now, I wanted to lay out the basics. To see more, check out my article Vacant Property Registration Ordinances, 39 Real Est. L.J. 6 (2010), or go to the resource page for vacant property registration.