Vacant Properties: Forging Solutions Through Communication

by Wes Kozeny
on October 03, 2008 No Comments
Categories : E-Features

Abandoned and vacant properties present a variety of challenges for local governmental units, including the inability to identify a responsible contact for these properties and the added burden on public resources these properties represent. Similar challenges exist for our industry in effectively responding to the myriad registration ordinances enacted (or to be enacted) by local governmental units.

The national dialogue that is occurring on this issue between our industry and local governmental officials is improving communications and generating new and innovative approaches in finding common ground.

Within our industry, we are all experiencing the challenges presented by the record number of foreclosures across the nation. It is important for us to remain cognizant of the broader impact across the nation. That impact is acute at the local governmental level.

Foreclosures and the vacant properties left in the aftermath of foreclosure translate into lower tax revenues (both directly for the vacant property itself and indirectly for homes in close proximity to the foreclosed properties), and increased costs to local government through the cost of government itself, housing court administration, and the provision of police, fire and EMS services, as well as the direct costs of weed cutting, boarding/securing and demolition.

Local governmental units have an existing remedy in place to recover some of these added costs via the imposition of liens against affected properties. Historically, these liens remained on the property until collateral disposition, at which time they were paid.

The challenge that this method of recovery presents for local government in the context of the current environment is cashflow and availability of resources (both human and material). The aforementioned services must be provided as required in real time, and hard dollars must be expended and carried pending recovery on these liens.

In an effort to address the growing problem presented by vacant properties, many cities, counties and other local governmental units are enacting registration ordinances. Although there are vacant and abandoned properties that result from causes other than foreclosure, the properties that have been touched by the foreclosure process are at an all-time high.

Dissecting ordinances
The core problems that are sought to be remedied by these registration ordinances are the need to identify a responsible contact person with whom to communicate about issues pertaining to the vacant properties (including but not limited to hazardous conditions), and the need to have hazardous conditions remediated.

With these general goals, many local governmental units have enacted registration ordinances that typically have the following common characteristics:

  • Definitions, including ‘mortgagee,’ ‘owner,’ ‘vacant’ and ‘securing.’ These definitions can be extremely important in interpretation of and compliance with these ordinances. At times, the mortgagee is lumped into the category of owner – a situation that can be problematic for a variety of reasons.
  • Registration requirements imposed variably upon the owner and/or mortgagee. Some governmental units require recordation of a document in the land records, and some have Web sites where registration may be done. The timing of this requirement may include a pre-foreclosure obligation on the part of the mortgagee.
  • Requirement for a local contact. Many of the ordinances require designation of a local contact, sometimes specifying a geographic proximity to the subject property. This is problematic and inconsistent with the current model under which field services are delivered in the industry through national vendors.
  • Payment of a registration fee. This can range from fairly nominal amounts up to hundreds of dollars per property.
  • Obligation to secure and remediate various conditions, up to and including full code compliance under some ordinances.
  • Enforcement and penalties for non-compliance.

There are a variety of challenges that our industry faces in its effort to comply with these ordinances, including the lack of uniformity across jurisdictions.

Although our industry must necessarily comply with the laws of each state as well as federal law as part of its daily business, the challenges in dealing with potentially hundreds or thousands of local ordinances will be nearly impossible without some degree of uniformity in approach developed through a mutual dialogue between industry members and local governmental officials.

Most of the existing ordinances were enacted with little or no communication with our industry nor much of an understanding about the architecture of our industry – specifically, how property preservation is administered on a national basis.

Ordinances pose problems
Because of the constraints that surround how our industry conducts its business, there is some degree of impossibility or impracticability of compliance by servicers/investors and their property preservation vendors.

Some mechanisms for registration will not permit submission of a national contact for the vacant properties, which all but assures non-compliance with the ordinance.

Some requirements substantially increase the risk and burden upon servicers/investors and their property preservation vendors. There are instances where the ordinances may take servicers and field services vendors into the danger zone as far as statutory and case law is concerned.

Specifically, ordinances that require pre-foreclosure action in the nature of an exercise of control over a property may, in some cases, place the servicer and field representative in violation of other laws, potentially subjecting them to liability to mortgagors or occupants.

Frequently, registration requirements are imposed that run at cross purposes with the intent of the ordinances. Many of the ordinances that have been enacted require conspicuous signage, lighting of the property, and boarding/securing in various forms.

These matters must be handled carefully and generally may tend to invite vandalism, because they emphasize the vacant status of the property. This result is obviously contrary to the best interests of both the governmental entity and the owner of the asset.

Overly broad ordinances illustrate another challenge to compliance. Many ordinances go well beyond requiring securing of the property or remediation of hazardous conditions. Some ordinances require that property be brought into full compliance with local codes.

The responsibility for securing and remediating hazardous conditions has historically been undertaken by our industry. Imposition of the much greater obligation to bring properties into full code compliance goes too far and makes the cost too great.

Moreover, there is rarely any mechanism to cleanly terminate obligations under these ordinances upon disposition of the real estate owned (REO) asset.

In our industry, the investor on the loan quickly progresses from being a lien holder to an owner to a disinterested party after the REO is liquidated. It is desirable at the end of this process for the property to be deregistered once it is recycled out of the default process.

Cost of registration is yet another hurdle. Now more than ever, assets that run all the way through the default process represent a loss to our industry and to the economy in general. Although default servicing and REO disposition have necessarily gotten as efficient and cost-effective as they possibly can, the costs are still substantial.

If servicers consider their existing field services budget for REO properties and then add anywhere from $20 to $100 per asset, the increase is significant. If you then extend the effect of this to loans that are in pre-foreclosure status, the number is even more staggering. This added burden on an already overextended system is problematic.

Open conversation
The good news is that a dialogue is occurring between our industry and various local governmental officials toward the objective of understanding the concerns and needs of local government and to convey to governmental officials the challenges and issues our industry faces in complying with registration ordinances. This dialogue is yielding greater understanding both ways and is resulting in compromise that is beneficial to all concerned.

As with many issues our industry faces, there is neither a simple answer nor one approach that is all-encompassing. Recent efforts from a number of parties have had a positive effect, but the need for further participation is clear.

Registration ordinances represent the best response that local governmental officials have been able to envision in regard to addressing the very real operational and fiscal challenges presented by vacant properties left in the aftermath of sustained high foreclosure volumes.

Those ordinances have proven to be less than optimal to the extent that many have been enacted without participation or input from our industry.

Through the collaborative efforts mentioned above, our industry has exhibited its desire to squarely meet the challenges presented by vacant properties and engage in a dialogue with local governmental officials to fashion solutions that are both effective from the perspective of local government and manageable from the perspective of our industry.

All participants in this conversation are receptive and open to any ideas that may lead to effective and mutually palatable solutions. There is no single solution that encapsulates a comprehensive fix, but solutions seem to be forming in several areas.

For example, development of a uniform format for registration ordinances will facilitate compliance by servicers and field services vendors. Voluntary and less formal approaches to the issue through cooperation among servicers, field services vendors, attorneys and local government will reduce the cost to the industry and the local government.

Also, local attorneys can better represent their clients by taking a coordinated approach to liaison with local government. By ensuring local governments understand the constraints faced by our industry and by facilitating the flow of necessary information and communication between local government and servicers, attorneys can provide considerable assistance.

Communication and greater understanding are truly the keys to effective solutions on this issue.

Wes Kozeny is a principal with law firm Kozeny & McCubbin LC and can be reached at wkozeny@km-law.com.

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