If you live in Detroit, Chicago, Las Vegas, or Phoenix, you've seen an abandoned home or six in your neighborhood. In countless other cities across the country, empty homes are a visual symbol of the nation’s economic malaise. Many of them have weeds the height of their former occupants, paint chipping off the sideboards, and broken windows that have resulted in dangerous neighborhood conditions, blight, and decreased property values for residents living nearby.
What to do?
Las Vegas recently passed a law requiring banks to register properties with defaulted mortgages at fee of $200 each. Research by the American Financial Services Association has found over 460 city ordinances around the country trying to address the abandoned property issue, though few are as harsh as a Chicago ordinance first passed last summer.
Chicago decided to hold both the homeowner and the financial institution that owns the mortgage equally liable for property upkeep and maintenance rules—even if a home is not yet in foreclosure. In Chicago it means that if a home were to be abandoned, the lender for the property would face fines as high as a $1,000 a day for not paying a $500 registration fee, mowing the lawn, fixing windows, and performing other specified regular maintenance.
The problem is that banks are not legally allowed on properties unless they have completed a foreclosure. For a lender to comply with the Chicago ordinance it may find itself then held liable for burglary, trespassing, or similar crimes.
After financial institutions cried foul on the law, Chicago changed a few terms in November that made costs more manageable for the megabanks, but they were still left high enough to threaten smaller financial institutions. The ordinance also continued to hold government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac liable for mortgages that they owned.
That’s when the Federal Housing Finance Agency—Fannie and Freddie’s regulator—decided to step in.
In mid-December, FHFA filed suit against Chicago, asking a judge to exempt the GSEs from the Chicago law and have the city repay any fees already paid out.
The argument against the Chicago ordinance, as well as similar laws, rests primarily on the fact that it creates identical obligations for property owners and mortgagees in regards to maintenance liability, but without granting equal property rights access.
The logic of this is pretty straightforward. While not a regular problem, a few people have come home to find their locks changed and possessions thrown out, even if a bank had not yet completed all the foreclosure paper work. This essentially constitutes burglary as well as breaking and entering. So, if a home has not been foreclosed on, why should a bank be expected to send people into a supposedly abandoned home, clear it out, fix it up, and maintain it if the homeowner still has the legal right to return to the property? Perhaps in the time they’ve left the lot they’ve won the lottery and have the money to pay off the mortgage before a foreclosure. It simply is not reasonable to fine a bank for not committing a crime.
Some have argued that this does not address the fact that some properties sit for years without getting foreclosed on anyway. While there is no practical way a bank can know when a property has been abandoned, and in most cases has no legal right to enter the property, banks still do have a vested interest in ensuring they get a home back in the best possible shape to then sell it and recover their investment.
Beyond this legal argument, the Chicago ordinance defies simple reason. The law is like holding an auto dealer responsible for unpaid parking tickets on a leased car. If a property owner abandons a home and starts to accumulate fines for a lack of upkeep, these debts should not pass to the lender any more than that property owner’s credit card debt or unpaid income tax debt. Just because the charges are related to the home doesn’t mean they come with the home.
FHFA also points out that the Chicago law violates the federal Housing and Economic Recovery Act of 2008, which grants FHFA preemption authority over municipal laws. The GSE regulator further points out that by subjecting Fannie and Freddie to the fines, they are essentially transferring money from the U.S. taxpayer, through the GSE bailouts, to the city of Chicago. (The simplest solution to this problem would really be to end the bailout and shut down the GSEs, but that option isn’t sitting too well with FHFA for the time being.)
Of course if a bank or the GSEs have foreclosed on a home, then the liability for maintenance on the abandoned property certainly shifts to the financial institution. But as these stand, they are bad laws that unjustly hold banks accountable for the failures of property owners.
FHFA’s lawsuit asks for the GSEs to be exempt. But if the court finds that the city laws conflict with other statutory limitations on financial institution access to properties it has not foreclosed on, then it should overturn the entire Chicago ordinance. And hopefully, similar municipal laws would then be repealed as well.