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Implications of Local Foreclosure Rules

A hot legal issue known among insiders as the “City of Chicago ordinance” transfers the burden and costs of vacant property ownership from the mortgagee to the lender clashing with some county-level foreclosure process requirements.

In July the City of Chicago passed a new ordinance about vacant properties that redefines a mortgagee’s responsibilities. “They put it in writing” that a mortgagee that has vacated the property is no longer considered the owner, says Suzanne Ball, president of Dallas-based America’s Infomart, a field services company based in Dallas.

The new ordinance has already generated a lot of buzz because it appears to bring about a set of new problems and probably unintended consequences to the foreclosure process and bank-owned property management.

It is single handedly complicating an already complex process to the detriment of the lender, and potentially even the mortgagee, since it fails to take into consideration other legal requirements—related to a property in the process of foreclosure but not yet foreclosed—that contradict or counteract this requirement.

The problem, says Ball, is that in some county courts, “some of the judges have made it known that until a foreclosure takes place the lender should not have the authority to enter into a property.”

In other words, while the property is vacated the mortgagee cannot enter because he/she is no longer recognized as the owner, while the lender or servicer also is under the same restriction because the property still is in foreclosure proceedings.

It is a known fact that unless the property is maintained, temporarily inhabited by its previous owner or rented out chances of physical deterioration escalate very fast. Furthermore, if in the interim the lender is considered the owner of the property all liability applies to the current owner.

Since the city has defined the lender as the owner, the lender can be fined anywhere from $300 to $1,000 for each property rule violation applicable, including its upkeeping, lawn cutting and other routine maintenance services.

The lender may be charged anywhere from $250-$300 just for the registration of the property. “Not only do they have to have a resolution with the borrower,” she said, but lenders have to deal with compounding liabilities coming from break-ins or other damages incurred.

Deciding what to do with these vacant assets is a real challenge because a lot of liability is associated with them, so it is wise to avoid potential problems from the onset by reaching agreements between the lender and the borrower.

In her view the Chicago ordinance is the most aggressive city level regulation passed so far. “Everyone is worried it will trickle down across the country.”

The ordinance came about as a response to other nationwide issues: city budget shortfalls and a combination of honest mistakes and fraudulent property registration.

According to Ball, the city found a way to charge $250 and up per vacant property registration to ensure code compliance with the inventory, “keep an eye on these vacant homes” and generate some additional revenue.

The Chicago ordinance may become an even larger problem for servicers if other local legislators follow suit.