Senators Booker and Menendez Call for Federal Action on Zombie Foreclosures

New Jersey Senators Bob Menendez and Cory Booker wrote a letter last week to leading federal agencies on housing and finance calling for them to take action to address the problem of “zombie” or “walk-away” foreclosures, citing a 29 % increase in such foreclosures in their states in the past year. The senators explained the problem as follows:

A zombie foreclosure is characterized by homes where banks have initiated the foreclosure process, and homeowners have made the painstakingly difficult decision to leave their home, and yet the bank then chooses to walk away from the foreclosure because the value of the property is not worth the cost of maintaining the home and completing the foreclosure process.  Often with no notice to the homeowner and based on a profit-driven determination, the bank decides to turn its back on the homeowner, on the property, and on the community at large.

They added what sounds like a call for more vacant property registration (VPR) requirements:

When a bank or mortgage servicer takes stock of their options and determines that the cost of maintenance and the duration of the foreclosure process for a particular home outweighs any potential return on the property, the servicer should be required to take steps to notify the homeowner, contact local authorities, and make arrangements for alternative disposition of the property.

I’ve argued before that the federal government should step in on vacant property registration issues. Maintaining an effective database of these properties is typically too costly for local governments, and the private companies that offer assistance often have troubling ties to the mortgage industry, which is generally opposed to registration requirements.

I proposed the following initiative in a 2010 paper on this issue:

While the MERS Initiative proved the benefit of a national electronic platform for VPR, a federally generated system would provide the same benefit while minimizing the dangers associated with the industry-run MERS. The federal government should develop a standard internet-based platform for registering and tracking vacant properties and then maintain a webspace where local governments can use the platform to create individualized webpages for their VPR officials to use while registering and tracking properties within their jurisdiction. The federal government would not keep a nationally available list of vacant properties, but merely establish a standard platform local governments can use to register properties within their jurisdiction. This type of standardized system would eliminate the mortgage industry’s objection to compliance with varied local procedures. This type of system would also allow local governments to retain control of the contents and enforcement mechanisms of VPR ordinances, since local governments have a better understanding of local markets and conditions. Additionally, a federal system would make it easier for the federal government to establish special programs utilizing the database. For example, Joseph Schilling suggests that the federal government “establish special phone lines between local government officials and lending institutions and perhaps set some standards about call-backs within twenty-four to forty-eight hours.” Of course, such a system would require political will since the public would view it as a federal endorsement of VPR. It would also require initial funding to establish the system and continuing funding to monitor that the system is working properly.

It looks like the first steps of the “political will” part is coming around. Moreover, the technical side of things, the ability to track and present this type of data, have greatly advanced since I wrote that article, as seen in the success of open data initiatives nationwide. In short, perhaps the time is ripe for this type of reform.

New Article on “Eradicating Zombie Mortgages”

Andrea Clark has posted an interesting article on SSRN entitled “Amidst the Walking Dead: Judicial and Nonjudicial Approaches for Eradicating Zombie Mortgages.” A version of the article will be published in an upcoming edition of the Emory Law Journal. Here is the current abstract:

The collapse of the residential housing market in 2007 brought with it a wave of foreclosures. Subprime borrowers, who were once elated by loans they secured from lenders, suddenly found themselves strangled by the predatory terms of their newfound loans and ultimately became unable to pay their outstanding loan balance. Amidst a growing number of residential foreclosures, lenders discovered the financial downside of foreclosing on residential properties – though this realization often surfaced after the foreclosure proceeding had commenced – and began to delay, or halt, foreclosure sales altogether. These purposeful maneuvers by lenders resulted in borrowers’ continued legal liability for a residential property, one which borrowers believed they had lost as a result of the lender’s foreclosure; in other words, a “zombie mortgage.”

This Comment analyzes the different circumstances under which lenders can foster the creation of “zombie mortgages.” Particularly, this Comment focuses on stalled and incomplete residential foreclosure sales and failures to execute the deed of sale, all which serve to maintain legal liability of the mortgaged property on a borrower. Notwithstanding a lender’s right to foreclose on residential property to satisfy the obligations that it is owed under a promissory note, this Comment argues that strategic delays in completing a foreclosure sale entitles courts and legislatures to either (1) force a lender to complete a sale or (2) divest a lender from its right to foreclose and security interest. Though some other solutions for “zombie mortgages” have been proposed, this Comment urges courts and legislatures to look outside criminal sanctions and nuisance abatement actions to develop strategies that target lenders’ security interests. Through judicial intervention to force the completion of the sale, coupled with the creation of maximum statutory time frames for the completion and execution of the sale, lenders would be forced to finish the foreclosure proceeding, or risk losing their security interests in the mortgaged property.

Successful vacant property registration (still) requires strong local enforcement

This year, Pottstown, Pennsylvania, enacted a classic vacant-property-registration ordinance. The rule gives owners 60 days to register vacant property at a fee of $75. Every year the fee escalates, by roughly $100. According to an article by the local paper, however, even though the town “has identified more than 100 buildings since it began tracking them in 2007,” there was “only one registration form … filed in September” (when the law officially went into effect).

The only comment on the article, as of right now, calls for small-town civil disobedience: “Good, and I hope everyone continues to refuse to comply with this ridiculous ordinance.” The commentator adds, “Hey Pottstown, instead of fining private property owners for not being able to sell/rent their properties, why don’t you try and fix the reason they’re unable to?”

I don’t know anything about Pottstown, but ordinances with escalating fees are best used when a city wants vacant properties demolished: the “shrink the city” solution. Sometimes it’s just not possible to use and restore all of a city’s vacant properties. I hope that local officials are aware of and intend to create the incentive to demolish caused by this type of ordinance. Cities with no escalating fees typically focus more on maintenance requirements, in the hope of preventing deteoriation in the housing stock until the local economy recovers.

Also, I hope that local code-enforcement officials recognize that the VPR program’s success is mostly in their hands; it’s unlikely that people will comply with the law without some sort of pressure to do so. I made this point in 2010: “No matter what type of provisions a local government enacts, the best solution to the difficulties involved with VPR ordinances is robust code enforcement, requiring motivated code enforcement officials and proper funding.”

Chicago proposes stronger maintenance requirements for vacant properties

Rahm EmanuelNews broke this week that Chicago is planning to amp up its vacant-property-maintenance requirements.

The new amendments were announced by Mayor Rahm Emanuel and Alderman Jo Ann Thompson after the city received a rash of calls about maintenance problems with vacant buildings. Most significantly, the changes would require lenders and owners to secure vacant property immediately, rather than the current allowance of 30 days. Also, the proposal would allow Chicago to issue fines after just one inspection, rather than two as current law provides. According to the Chicago Tribune, this amendment “is designed to trim to two months from three the process of citing a building owner and getting the case before a hearing officer, as well as to save manpower.”

Interestingly, this announcement comes on the heels of a ruling that the Federal Housing Finance Agency doesn’t have to comply with Chicago’s registry program for vacant buildings, exempting a large number of properties with mortgages owned by Freddie Mac or Fannie Mae.

Judge says federal law preempts property registration ordinance

Old Lithuanian cinema in Bridgeport
Vacant Ramova Theater
As I’ve mentioned before, the Federal Housing Finance Agency filed a lawsuit against Chicago last year arguing that foreclosed properties with mortgages backed by Freddie Mac and Fannie Mae are exempt from the city’s vacant property registration requirement. By one count, there are nearly 200 such properties in Chicago.

Last week, a federal district judge decided against Chicago, relying on two alternative reasons.

First, the judge determined that Chicago’s ordinance was “preempted” by federal law. “Preemption” is legal doctrine, based on the Supremacy Clause, that allows Congress to displace state and local law, either explicitly or implicitly. FHFA argued that Chicago’s ordinance is preempted by the Housing and Economic Recovery Act of 2008, which gives FHFA, acting as conservator of Freddie Mac and Fannie Mae, freedom from “the direction or supervision of any other agency of the United States or any State.” 12 U.S.C. § 4617(a)(7). Because the Act doesn’t mention “local government,” the judge ruled that it does not expressly preempt Chicago’s ordinance. But the preemption is implicit, the judge reasoned, because “Congress could not have intended to preclude other federal agencies and states from regulating FHFA’s operations, but permit thousands of municipalities all over the country to impose varying ordinances and obligations on FHFA.” Moreover, the judge noted, Chicago’s ordinance conflicts with Congress’s clear intent “for FHFA to possess exclusive authority over Fannie Mae and Freddie Mac’s business operations—including their management of the homes in which they have a security interest.”

Alternatively, the judge concluded that Chicago’s ordinance impermissibly imposed a tax on FHFA, in violation of the “absolute federal immunity from state taxation.” United States v. New Mexico, 455 U.S 720, 730 (1982). The basic difference between taxes and fees is that fees are paid for services rendered and taxes aren’t, or a fee may be charged for costs incurred as part of regulating a core part of an entity’s industry. The judge thus decided that Chicago’s ordinance imposed a tax because “FHFA does not receive any service from the City in exchange for the registration fee, and . . . vacant property is not a necessary consequence of FHFA’s mortgage lending business.”

This ruling “has national implications,” notes Mary Ellen Podmolik in the Chicago Tribune, because of the many VPR ordinances nationwide, which the Tribune estimates at more than 1,000. An appeal seems likely: As one local attorney pointed out, the judge himself noted that “[t]his may not be the last court you’re in front of, once I rule.”

The problems with patchwork vacant property registration

united states mapAn article from this past winter highlights the problems caused by patchwork vacant property registration ordinances:

Several hundred municipalities have enacted some type of vacant property ordinance, with one database listing 548 of them as of March 2011. Major cities with vacant property ordinances include Los Angeles, Boston, Chicago, and Las Vegas. County-level rules may overlap with municipal requirements. For these reasons, simply identifying and tracking the ordinances are Herculean tasks.

Major mortgage servicers generally track state law developments based on services that provide updates, and must comply with fifty-one state-level foreclosure schemes. Ensuring compliance with local ordinances, however, is a far more difficult process. Systems like AllRegs, while useful for learning new state law developments, may not fare as well for tracking new local ordinances in a comprehensive manner. According to the servicing industry, the lack of uniformity in vacant property ordinances substantially raises compliance costs.

Nonetheless, the article recognizes:

Although there is a great deal of variability, and little uniformity, among their specific requirements, the ordinances generally have the following features: the mortgage lender must register with a vacant property or existing housing commission at some point in the foreclosure process; the lender must pay a fee to register the vacant property, typically ranging from $10 to $500;  the lender must inspect the property early in the foreclosure process to determine vacancy; and the lender must maintain the vacant property during the foreclosure process. Fees for non-compliance may be high and there may be criminal penalties.

See Richard Gottlieb, Margaret Rhiew, & Brett Natarelli, Reckless Abandon: Vacant Property Ordinances Create Legal Uncertainties, 68 Bus. Law. 669, 671-72 (2013).

The writers commend statewide VPR requirements. To the extent statewide legislation is necessary to empower local governments to enact VPR ordinances, I think it is a great idea. But the problem with this approach is that, for VPR to be successful, you need vigorous enforcement by local officials, and statutes tailored to local problems. As I’ve noted before, if a city wants “to get rid of vacant buildings through occupancy or demolition, the government should consider escalating fee schedules,” but cities “more concerned with maintenance of unoccupied buildings than with elimination of unoccupied buildings” should consider setting “a low registration fee to encourage lenders to register upon foreclosure, but then charge a steep penalty for non-compliance.”

I think that the best solution is increased electronic registration, with a platform that allows lenders and owners to easily keep tabs on local requirement and find local preservation companies to maintain properties. The Mortgage Electronic Registration Service has stepped in to fill this role, offering a electronic database of properties that is free to local governments and relatively easy for lenders to use. I’ve warned before, however, that the company’s close affiliation with the mortgage industry, and knack for fumbling record-keeping, should make cities think twice before utilizing the service.

In my view, the best solution would be for a state or the federal government, or a consumer-minded third-party nonprofit organization, to set up a uniform platform to track properties open to local governments, lenders, and owners. The database would ideally allow lenders and owners to easily view and track a local government rules and maintenance requirement, and contact local preservation companies. Of course, the problem is that, as VPR ordinances continue to catch on, the window of opportunity to promote a widespread database dwindles.

Ohio VPR ordinance hailed as success, though a modest one

Conneaut, Ohio
Conneaut, Ohio

A local paper in Ohio ran a story today hailing Conneaut, Ohio’s new vacant property registration ordinance as a success. The article, unlike most I’ve seen announcing new VPR ordinances, actually gives some statistics. The bottom line is that, for smaller cities, it doesn’t take much to call a VPR program a success.

Conneaut’s program was started last fall and has now registered 19 owners of residential properties and 13 commercial-property owners. The city accomplished this by sending out 54 letters to owners of properties identified as vacant (one method of doing this, the article mentions, is measuring water usage). This equates to registration rate per letter of nearly 60% (58% for residential owners, 62% for commercial). Since the registration fees are $200 for residential and $400 for commercial, the ordinance has likely brought in about $9,000, and all city officials had to do was identify vacant properties, send out letters, and do a property inspection for each building. Not bad. And it may bring in even more eventually, since the fee is escalating: it doubles every year the building remains vacant.

Of course, this success is modest compared to the pioneering foreclosure-initiated program started in Chula Vista, California. As I discussed in a 2010 article, that program brought in $77,000 in registration fees and $850,000 in administrative citations in the ordinance’s first year of existence. But Chula Vista is a city of nearly 250,000 people, while Conneaut has roughly 12,800 residents, so it’s unsurprising that their standards for success in this context differ.

The Conneaut article also notes, interestingly, that banks are sending in registration fees for houses they own without even being asked! Kudos to the banks for that.

Vacant property registration continues to spread

file0001899021898I’ve been following vacant property registration ordinances since the start of this blog. Earlier this month I noted a recent working paper about these ordinances spearheaded by Dan Immergluck from Georgia Tech University, who has a long-term project tracking them. In that paper, he says, “As of May 2012, there were more than 550 local VPROs in the U.S., up from fewer than 20 in 2000 and less than 100 at the end of 2007.” (There is a podcast of him discussing the project that you can download here. And I’d like to add that Immergluck wrote an excellent book, Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America’s Mortgage Market, which anyone interesting in the mortgage crisis should read. It currently has 5 stars at Amazon.com.)

This month, the number of ordinances appears to be steadily rising, as a Google News search quickly turned up eight articles from this month alone about different ordinances under consideration, in six separate states! (And not all local governments post their activities in a readily searchable form.) The municipalities considering proposed registration ordinances include Springfield, Ohio; Cambridge, OhioDover, Delaware; Riverton, Pennsylvania; Richmond, California; Kern County, CaliforniaAuburn, New York; and St. Petersburg, Florida.

I hope that these ordinances work out for these municipalities, by which I mean I hope that they can maintain their vacant property stock and generate revenue. Jersey City, for example, recently revealed that it plans to add $250,000 with its new vacant property registration program. [Editor update: Original link broken, read about the program here.] My only advice is that, as I’ve said before, vigorous enforcement of these laws by local officials is the sole way to bring in that kind of money.

New lawsuits against MERS

MERS_Logo_01_25_13I’m just catching up on a swarm of recent cases filed against Mortgage Electronic Registration Systems, Inc. (MERS), the privately owned mortgage registry that has, for some time now, been used by the mortgage industry in lieu of municipal recording systems (which were generally voluntary anyway). Gretchen Morgenson described the rationale for MERS in 2009:

For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate.

During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.

To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder.

MERS has been accused, as Mortgenson noted, of keeping sloppy records about mortgage assignments, especially in cases when it tried to assert the rights of a foreclosing mortgagee without a record of an assignment of those rights.

Apparently, there has been a number of recent legal actions against the company, and these lawsuits fall into two categories. First, cities and counties are suing MERS alleging it was unjustly enriched because, by skipping public registration, it did not pay local recording fees. MERS has successfully defended itself against these challenges in at least five state so far, and Illinois may be next. The other lawsuits have been filed by foreclosed homeowners, alleging fraud and title claims, and MERS has been winning those cases as well.

A few years ago, in 2011, things did not look quite so rosy for MERS. At that time, Morgenson and Michael Powell wrote in the New York Times that MERS had been losing its court battles:

The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-less-striking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.

And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.

I plan to cover these cases more in depth later, but as a final note, I’d like to remind readers that MERS is not only in the mortgage registration game; it also has a system for registering vacant properties. I’ve warned before on this blog that municipalities might want to be cautious about partnering with an entity so closely linked to the mortgage industry, particularly when the municipality is seeking to hold mortgage companies responsible for maintaining vacant properties. I also made this warning in an article published in the Real Estate Law Journal, which retraces the history of MERS involvement with vacant property registration. I conclude with that discussion: Continue reading “New lawsuits against MERS”

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.