By Megan Cottrell
November 3, 2011
In late July, the Chicago City Council passed an ordinance designed to clean up the thousands of vacant properties left decaying in the wake of foreclosure crisis. That ordinance would hold lender and mortgage servicers accountable for the maintenance of vacant homes, declaring them responsible for the property even before they legally took ownership when a foreclosure was complete.
Some have called it the "toughest law in the country" when it comes to holding property owners, investors and managers responsible for the upkeep. It's made Chicago a model for cities and counties around the country. But there's just one problem: Legally, lenders say, it won't stick. So the city has proposed a new ordinance, that's slightly different, but possibly more effective.
However, no one seems to be very happy about it. The advocacy groups that helped get the law passed are angry. They say the city shouldn't be giving banks an inch. The bankers say the law still puts too much responsibility on them, and, ultimately, will put a chokehold on lending. The politicians and lawyers in the middle seem to be shrugging their shoulders and telling both sides that it's the best compromise.
So, what's changed? A few things.
Old ordinance: Mortgagees, or the lenders who issued the mortgage, and the mortgage servicers, the firms hired to manage the properties, are declared the owners in the eyes of the law--even in cases where the foreclosure was incomplete or the property was abandoned.
New ordinance: If a property was abandoned, after 60 days, the maintenance for that property is the responsibility of the mortgagee and or mortgage servicer. But they're not considered the owner. Why does this matter? Because there's a state law that says that banks can't be made owners before they legally take ownership of the property.
- Commercial and residential properties:
Old ordinance: Covered both commercial and residential properties.
New ordinance: Only covers residential properties. Commercial properties will be the subject of another yet-to-be-proposed ordinance.
- Fees for registering vacant properties:
Old ordinance: For owners of four or fewer buildings, a base $250 fee was charged for registering any vacant building. That fee could increase to as much as $1,000 for building or fire code violations and for each renewal registration. For owners of more than four buildings, the base fee was $1,250 and could go up to $5,000 for each renewal.
New ordinance: The base fee for registering all vacant buildings is $500 and has to be renewed every six months--but without a fee for renewal. Fines of up to $1,000 a day can be imposed for not following regulations.
- Evicting squatters:
Old ordinance: Made it the responsibility of mortgagees and servicers to evict squatters.
New ordinance: Mortgage servicers don't have the legal ability to evict squatters. This problem will be addressed in another forthcoming ordinance unless banks agree to flag squatters and let the city do the enforcing.
Those are the basic changes. Are they better or worse? Depends on whom you ask.
The housing groups that testified at the committee meeting didn't have anything good to say.
"Our new mayor boasted, and I quote, ‘We have the toughest law on foreclosure of any city in the country,’” said Ernie Lukasik, a representative from the Northwest Side Housing Center. “It’s amazing to me that, 60 days later, we’re looking at an amendment to weaken it.”
What do the bankers think? It's a mix. The new ordinance was negotiated between the city and the bigger banks--Bank of America, Wells Fargo, PNC and JPMorgan Chase--so they're pleased.
Tom Kelly, spokesman for JPMorgan Chase, said his bank is pleased with the new proposal.
"We share the city's concern about our city neighborhoods and we worked with the mayor and his staff and the alderman to create policies that will work for everyone," Kelly told the Chicago Tribune. "We wanted to make sure it was workable for the mortgage servicers and for the neighborhoods."
But other bankers aren't so happy. I talked to Linda Koch, president of the Illinois Bankers Association. She said the new ordinance will make it too difficult for banks to make loans.
"We already have bankers calling us saying, 'How are we going to make loans anymore? How are we going to price our loans? How are we going to sell our loans to the secondary market?'" Koch said.
The problem with the ordinance, Koch said, is that it makes it impossible for lenders to estimate the risk of any given loan. Now banks will have to consider all the potential costs of keeping up and registering an abandoned property.
"The cost is the cost of unknowns. No lender could know upfront whether that mortgage is going to go into foreclosures, consequently go into abandonment," Koch said."Then add to that, when a lender is subject to penalties, fines, requirements and costs--putting a new roof, boarding up windows. All of those costs are completely unknown. That makes underwriting a mortgage and pricing a mortgage almost impossible."
Would the regulation really stop the banks from lending? I took that question to Tom Feltner, vice president of Chicago's Woodstock Institute.
"I would take those claims with a grain of salt because we've seen several other consumer protections where lenders have made similar claims and they've continued lending," Feltner said.
Koch also told me that the Illinois Bankers Association had made several proposals in place of this ordinance in an effort to help communities recover from the housing crisis and save lenders from problematic loans. One idea they proposed? Shortening the foreclosure process. Koch said the average foreclosure in Illinois takes 300 to 600 days to complete. The Illinois Bankers Association proposed fast tracking the foreclosure process to 90 days. By making the banks owners of the properties faster, they would be legally responsible for the upkeep sooner. Then, there would be no need to change the law.
"It wasn't good enough for them," Koch said. "The City of Chicago wanted the right to develop their own ordinance, to have every municipality do their own thing. They made lenders owners before we have legal rights and legal title to the property. We believe that it's unconstitutional."
Would fast tracking the foreclosure process be better for homeowners? I asked Feltner that too. He said that the current ordinance is the best thing for homeowners. When you're talking about an abandoned property sitting vacant, 300 to 600 days sounds like a lot of time. But when a homeowner hasn't left, an extra few months could buy them more time to strike a deal from their home.
"For borrowers that are still in the home, they deserve as many points in time as possible to stay there," Feltner said. "It's only for those vacant properties where increased stewardship obligations kick in."
So is the new ordinance weaker? Not quite, Feltner said. More than anything, it clarifies the city's role in holding banks accountable. One problem he foresees, however, is enforcement. "It's great to have a law on the books. But will the city be able to enforce it? That remains to be seen," he said.
"We need to begin enforcement and to make sure there aren't any unforeseen issues," Feltner said. "If it's not effective in holding servicers accountable, it's important for the city council to examine outcomes, communicate with community organizations and re-evaluate."
But Angela Caputo's November investigation, Razing Hell, revealed that Chicago taxpayers have spent $31.6 million to remediate vacant properties since 2008. A third of that money was spent in just five hard-hit communities: Englewood, West Englewood, West Pullman, Austin and Roseland. Click through our slideshow for a glimpse of the despair some Roseland residents contend with on a daily basis. With city coffers stretched to the limit, perhaps any effort to make someone else pay the price for keeping up vacant homes is worth pursuing.
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