Federalism and Municipal Innovation: Lessons from the Fight Against Vacant Properties

I have a new paper out this week in The Urban Lawyer.  It is an essay that touches on many of the things discussed on this blog over the past few years. It can be downloaded on SSRN. Here’s the abstract:

Cities possess a far greater ability to be trailblazers on a national scale than local officials may imagine. Realizing this, city advocates continue to call for renewed recognition by state and federal officials of the benefits of creative local problem-solving. The goal is admirable but warrants caution. The key to successful local initiatives lies not in woolgathering about cooperation with other levels of government but in identifying potential conflicts and using hard work and political savvy to build constituencies and head off objections. To demonstrate that point, this Article examines the legal status of local governments and recent efforts to regulate vacant property through land banking and registration ordinances.

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.

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”

Are cities America’s greatest laboratories of government innovation?

In 1932 Supreme Court Justice Louis Brandeis famously wrote, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” And indeed, the States remain a powerful laboratory, able to innovate constrained only by the U.S. Constitution.

But the quote applies ever more to cities. Although they sometimes lack deep pockets, and their authority to regulate is derived from the state, they offer many advantages over state and federal government. I’ll list four. First, as Benjamin Barber recently argued, cities tend to be more pragmatic and less ideological than other levels of government, meaning real innovation gets done in a practical way. Second, as Edward Glaeser points out in “Triumph of the City,” cities are smaller geographically and dense with human potential, which accelerates the spread of ideas. Third, comparatively minimal bureaucracy allows cities to respond quickly to changing technology. Four, if an initiative fails, it doesn’t affect a whole state (or the whole country).

Put differently, cities are the tech start-ups of government; the federal government is Microsoft. As Arianna Huffington recently wrote, “It’s our cities, not the nation’s capital, that are the real idea factory of our country.”

I’ll give two examples.

First, one many people are familiar with: open-data initiatives. In 2007 Vivek Kundra, then Assistant Secretary of Commerce and Technology for Virginia, became Washington D.C.’s Chief Technology Officer. He created the D.C. Data Catalog, making government data available for open-source application development. He also instituted an app contest, using a pot of money to crowdsource innovation. When Obama became president, he drafted Kundra as Chief Innovation Officer, where he created data.gov, an initiative to provide an accessible online catalog of data from federal agencies. The idea has spread like wildfire, with more and more cities creating open-data sites and sponsoring app contests. And the data.gov model has now caught on in more than 13 countries. The world has been changed, with momentum generated by a city that was willing to embrace new ideas and showcase on a small scale what would eventually become a worldwide movement.

Second, an example from an area of interest to me: vacant-property registration. In 2007 Chula Vista, California, enacted an ordinance that took a novel approach in the fight to maintain vacant properties. Rather than simply requiring property owners to register vacant property, the city required mortgage lenders to register property when it went into foreclosure and then to maintain the property to stringent code guidelines. Chula Vista’s code enforcement officer, Doug Leeper, was particularly vigilant, and during the program’s first year of operation, Chula Vista raised $77,000 in registration fees (at $70 per property) and imposed around $850,000 in administrative citations. The program was such a success that Leeper was called to testify before the House of Representative’s subcommittee on Domestic Policy in 2008 in the wake of the foreclosure crisis. Again, one city’s program spread like wildfire. By my count, nearly 100 municipalities had enacted a similar ordinance by 2009, and that number has continued multiplying ever since. Recently, even Chicago modified its registration ordinance to target lenders.

This type of innovation comes only from local thinkers (and doers) living in communities, seeing local problems, and testing solutions in perhaps America’s greatest laboratories for government innovation—our cities.

 

Featured Website: LOVELAND Technologies

loveland technologiesLOVELAND Technologies is a neat project out of Detroit, Michigan, that is selling micro-lots of land in “microhoods” for $1 per square inch that people can track online. They focus on making these microhoods exciting by generating artsy urban-renewal projects. According to their website, they “aim to provide a fun, game-like ownership experience while creating entertainment fundraising, community collaboration, and social mapping tools that work at any scale.” They got started a few years ago through Kickstarter.

They have a few other projects. There’s online mapping projects (in collaboration with Data Driven Detroit) and a “LoveTax” system, a creative way for people to fund projects. They also have a cool online app called “Why Don’t We Own This?” that tracks more than 40,000 vacant properties owned by the city, state, or county. The Huffington Post recently reported that this year’s Code for America fellows in Detroit will be building off the momentum that project has created. Overall, a great Detroit project to check out.

For more info, the founders gave a presentation at a TEDx conference in Detroit in 2010 that I’ve embedded after the jump.

Continue reading “Featured Website: LOVELAND Technologies”