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A proposed ordinance, to be introduced today by Ald. Pat Dowell and supported by Mayor Rahm Emanuel, promises to hold mortgage servicers accountable for the nearly 1,900 vacant properties stuck in the foreclosure process–a problem that we estimate can cost the city approximately $36 million.
In our recent report, Left Behind: Troubled Foreclosed Properties and Servicer Accountability in Chicago, we connected data on known vacant properties in the City of Chicago to another data set of properties where a foreclosure had been initiated at some point between 2006 and the first half of 2010 in the City of Chicago. Based on an analysis of these foreclosure filings and property transfer records, we identified nearly 1,900 "red flag" properties where we were unable to determine a completed foreclosure auction or subsequent property transfer. We called them red flag properties because of the fact that they are vacant and stuck at some point in the foreclosure process. To us, this indicates a lack of effective ownership, oversight, and accountability for the maintenance, security, and possibly the outcomes of these property, and this status raises concerns that these properties are in danger of falling into disrepair and having a significant negative impact on the community.
For those properties that have been in the foreclosure process for extended periods of time and have very low or no value, we fear that servicers may be delaying the completion of the foreclosure in order to defer costs and accountability associated with taking ownership of a property at the end of the foreclosure process, or, in the worst case, we are concerned that servicers have chosen to walk away from a property, or charge it off and consider it a loss.
In November 2010, the Government Accountability Office issued a report examining the prevalence of servicers walking away from the foreclosure process and abandoning properties. They found that nationally, this is not necessarily a common occurrence. However, the incidence of servicers walking away is much higher in many Midwestern cities and, within those cities, particularly high in certain communities.
Our report showed that red flag properties were much more disproportionately concentrated in Chicago's communities of color than foreclosures or vacant properties in general. Roughly 50 percent of properties with a foreclosure filed against them between 2006 and the first half of 2010 were in communities 80 percent or greater African American, while 62 percent of the properties in our set of vacant buildings were in highly African American communities, but over 71 percent of the red flag properties in our analysis were found in highly African American communities.
These findings raised concerns about the impact that red flag properties are having both on the stability of communities that are already struggling with the foreclosure crisis and on the City, which is often the entity left to respond to problems occurring at these properties and also the entity that bears the costs of securing and, in many cases, ultimately demolishing these properties.
Some financial institutions have taken steps to address these issues, and we recommend that the proposed ordinance be adopted to ensure consistent oversight of all servicers managing properties in the City of Chicago. It is critical that the City be given the authority to set minimum servicer accountability standards, including, but not limited to: ensuring that all properties are registered with the City when the mortgage is delinquent and the property has been identified as vacant and abandoned; identifying vacant and abandoned properties in default and ensure servicers are securing and maintaining properties; using new and existing tools to move confirmed vacant and abandoned properties through the foreclosure process to completion or to have policies in place to ensure that such properties will be transferred to the City or non-profit entities at no cost; and, requiring servicers to contribute the full cost of maintaining and demolishing troubled buildings.
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