Municipalities are using vacant property registration and code enforcement systems to cut back unprecedented foreclosure inventory management expenses.

According to mortgage market veteran Diane Gozza, an executive vice president of business development for Integrated Mortgage Solutions, a Houston-based company specialized in mortgage collateral protection and foreclosed property management services that include loss mitigation, inspections and preservation, hazard claims processing, property repair, default management and consulting—local government budget restraints eventually generate regulatory pressures for lenders, servicers, investors and outsourcing companies.

Out of necessity, Gozza says, municipalities are embracing “a more strategic approach to nuisance prevention and abatement” as they look for new regulatory enforcement codes that address the needs of distressed communities. These codes have “a whole new importance,” because REO management costs eventually trigger down to the smaller municipalities that unlike large metropolitan areas are “ill equipped to handle the problems vacant foreclosed properties.”

“It is an especially daunting environment in which to remain compliant,” she says. Typically local nuisance ordinances are broadly written, vary widely from place to place “and are in a constant state of flux” challenging lenders, servicers and REO investors who in turn are ill equipped to handle local government requirements and tend to use national or regional platforms. Local ordinances have a wide variety of provisions, specific requirements, fee structures and new code enactments that require careful monitoring “to assure compliance and avoid costly fines.”

Data released by the Census Bureau in March 2011 show the national residential vacancy rate is 11.4% and many of their owners cannot be located.

Depending on local conditions preservation costs vary state-to-state and neighborhood-to-neighborhood. Data from “The Municipal Cost of Foreclosures: A Chicago Case Study” conducted by William Apgar, Mark Duda and Rochelle Nawrocki Gorey for the Homeownership Preservation Foundation, a single foreclosure can impose up to $34,000” in direct costs on local government agencies, including inspections, court actions, police and fire department efforts, potential demolition, unpaid water and sewage, and trash removal.

Direct costs alone, however, do not assess overall costs. If losses in value to a foreclosed home and its surrounding properties along with potential fees incurred by the banks are added to direct municipal expenses the average cost on a national level is $80,000, according to “Sheltering Neighborhoods from the Subprime Foreclosure Storm,” a report by the U.S. Congress Joint Economic Committee.

Costs may be even higher, Gozza says, if indirect losses suffered due to long-term property tax erosion, the negative effect of changes in the neighborhood aesthetics and “the added burden of disproportionate need for police and fire protection” are factored in. As a rule “municipalities have either statutory or common-law authority to enact property maintenance codes” about property maintenance needs such as lawn maintenance or trash removal. Local vacant property registry data—for which a registration fee and the contact information of the responsible party is required and is also shared with the police and fire departments—is designed to encourage owners to upkeep the property as fast as possible.

Gozza has found that some localities require registrants to develop a detailed plan to transition the property to productive use, but they also may grant waivers for vacant property registration if the building is actively undergoing rehabilitation or other “special circumstances” apply. In an effort to reduce blight some municipalities require the financial institution with an interest in the property to register, secure and maintain the property even if the foreclosure proceedings have not been completed nor the title transferred.

She says owners who own housing solely for speculation and business operations often are are short-sighted and reluctant to spend on complying with housing and building codes because “there is no explicit prohibition” against selling houses in “as is” condition allowing these owners to simply hold properties even if they are unfit for habitation. The result is downward pressure on property values and an incentive for intentional default as shown by the increasing number of abandoned properties. So municipalities “have taken a much stronger approach to seeking out and levying fines, attaching liens, filing civil lawsuits and in certain cases taking the properties over completely to drive their point home,” Gozza says, and have expanded public-private level collaboration initiatives that focus on solutions. 

Public discussion about how the government can reduce the stock of foreclosed properties owned by the Federal Housing Administration, Fannie Mae and Freddie Mac is in full fledge. Various entities, such as the Center for American Progress, support the “particularly promising approach” of renovating and converting REOs into affordable rentals that can help improve the recovery of losses, stabilize local home values, and, “if designed well,” improve the quality and energy efficiency of the government’s housing stock in hard-hit areas.

Gozza says some worthy solutions are taking shape in the City of Chicago, "a microcosm that illustrates challenges faced by many municipalities" with foreclosed, distressed and abandoned properties.

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