Clean It or Lien It: Dealing with Foreclosed or Abandoned Properties
Richard Lam is an attorney with Alvarez-Glasman & Colvin and can be reached at RLam@agclawfirm.com.
About Legal Notes
This column is provided as general information and not as legal advice. The law is constantly evolving, and attorneys can and do disagree about what the law requires. Local agencies interested in determining how the law applies in a particular situation should consult their local agency attorneys.
In California, 842,448 new foreclosures were filed in 2008. In November 2008 alone there were 60,491 foreclosure filings on California properties, more than in any other state. With foreclosure activity up 51 percent in the 12 months preceding November 2008, most cities in California have been designated as "declining areas."1 In fact, California’s foreclosure rate --- one in every 218 households --- is more than double the national average, which is one in every 488 housing units. According to a recent study, six of the nation’s top 10 metropolitan areas hit hardest by foreclosure are in California: Merced, Modesto, Stockton, Riverside-San Bernardino, Bakersfield and Vallejo-Fairfield.2 Furthermore, in 2008 the nation experienced the highest homeowner vacancy rate3 since the U.S. Census Bureau started tracking this statistic in 1956.
Despite these dismal figures, many experts say the current activity is merely a temporary lull due in part to recently enacted laws that have extended the foreclosure process, along with more aggressive loan modification programs and self-imposed holiday foreclosure moratoriums introduced by some lenders.4 These experts warn that another wave of foreclosures will hit in the coming months, which would not only flood the real estate market with additional properties but also increase the number of vacant homes in foreclosure. These vacant, bank-owned homes are typically not maintained because lenders are faced with more repossessed properties than they can process, much less manage. With the real estate market gone sour and property maintenance quickly becoming a visible issue in many neighborhoods, cities are left with many questions and few options.
Local Ordinances Address the Issue in Some Cities
What are the viable options to protect the safety of neighborhoods where foreclosed homes are abandoned by the owner and become unsightly invitations to unlawful activity and sources of health risks? On one hand, there is pressure on local officials to prevent neighborhood decline, attractive nuisances and potential health risks. On the other hand, lenders are faced with the need to maintain properties of which they are not the legal owners; sometimes they are required to do so by an ordinance that may not be lawful to begin with. However, it is also important to enforce these obligations in a manner that is efficient, effective and fair to all involved.
Cities such as Chula Vista and Murrieta are taking a proactive stance. Both cities recently implemented ordinances requiring trustees and beneficiaries (lenders) holding a legal interest under a deed of trust to register the property once a notice of default is filed. Then if the homeowner abandons the property, the lender must maintain and secure the property. Failure to do so results in fines and ultimately a lien against the property. Doug Leeper, code enforcement manager for the City of Chula Vista, believes the ordinance has been successful. He said, "It’s not a silver bullet, but the situation is much better than before we enacted the ordinance. With 550 properties registered at $70 each, Chula Vista has generated more than $38,000 in revenues from the fee alone. After the first round of citations was issued, most lenders complied --- they knew Chula Vista meant business."
Chula Vista ’s ordinance has drawn considerable interest, and more than 200 cities have inquired about it. According to Leeper, lenders are complying with the ordinance, although some have threatened to band together and fight it. It remains to be seen how lenders would react if every city in California had an ordinance that held them responsible for registering and maintaining foreclosed properties.
In the summer of 2008, California law-makers introduced several foreclosure-related bills. AB 2187 (Caballero) would have required lenders to attach a "borrower’s bill of rights" to any notice of default. The bill was opposed by a coalition of industry trade associations5 and defeated.6 Another bill, SB 1137 (Perata), generally requires lenders to communicate or at least try to contact borrowers before a notice of default can be filed. Although SB 1137 was initially opposed, the opposition was ultimately dropped because the law7 represents a compromise between consumer interests and the banking and mortgage industry. The Legislature passed SB 1137, and Gov. Schwarzenegger signed it into law on July 8, 2008.
However, the California Bankers Association (CBA) argues that additional foreclosure regulation is overly burdensome because state law already places significant restrictions on the foreclosure process. In addition, lenders argue the ordinance further complicates the foreclosure process where the additional costs will ultimately be borne by consumers. It is estimated that a foreclosure costs a lender about $50,000.8 From a legal standpoint --- and perhaps most importantly --- lenders argue that they cannot be held liable for property which they do not legally own and that requiring lenders to maintain these properties will require them to trespass on private property, thereby violating the law and private property owners’ rights.
If the goal is to prevent blight, one must bear in mind that lenders are not in the business of owning property but rather the business of lending money. Most lenders will take whatever steps are necessary to maintain their lending capabilities in a profitable manner and not necessarily maintain properties for the sake of the community. The CBA is an example of a large association with the financial means and motives to challenge the regulation, and it may make enforcing foreclosure regulations difficult.
The issue can be argued two ways: Cities like Chula Vista and Murrieta are either dangling a carrot to have lenders maintain the property from which they will benefit at some point; or the cities are threatening to use a stick by creating financial penalties as an incentive for lenders to maintain property. As the number of foreclosed properties steadily increases, the discussion about the viability, enforceability and constitutionality of a local foreclosure ordinance will be re-examined and undoubtedly become more controversial as the stakes increase.
Nuts and Bolts of the Local Foreclosure Ordinance
The components of the foreclosure ordinance are all taken from the same basic template, using similar terms
Key Terms. The foreclosure ordinance’s definitions are a key component. The following three definitions are especially important:
- "Abandoned" refers to a vacant property under a current notice of default, notice of trustee’s sale, pending tax assessor’s lien sale or that has been the subject of a foreclosure sale where title was retained by the beneficiary of a deed of trust involved in the foreclosure.9
- "Evidence of vacancy" means any condition that on its own or combined with other conditions present would lead a reasonable person to believe that the property is vacant.10
- "Neighborhood standard" refers to the conditions that are present on a simple majority of properties within a 300-foot radius of an individual property.11
Some of the terms take on technical or legal definitions and may be challenged as vague or overly broad in a direct legal action. However, it is more likely that individual lenders will make arguments to interpret the definitions in a manner favorable to the lender. For example, in Chula Vista, one person argued that there is no "evidence of vacancy" because some small piece of furniture, such as a mattress, was still inside the property.
Registration. In many cases, it is difficult to find the party responsible for the property because the homeowner has abandoned the premises and many lenders are located out of state. To identify the party responsible for the property and ensure that contact information is on file, the ordinance requires lenders to visually inspect the property upon the home-owner’s default. Under a reasonableness standard, if the property appears to be vacant, lenders must register the property with the appropriate public department, typically the local Police Department or code enforcement. Registration consists of paying an annual administrative fee of $70 and filling out a one-page form with contact information for the lender and the property management company, if the lender has retained one. Tiffany Zimmer, office specialist with the Code Enforcement Division of the Police Department, said that since the end of April 2008 when the ordinance took effect, more than 300 properties have been registered and the remaining vacant homes will follow suit as the real estate industry becomes aware of the ordinance.
Maintaining and Securing Property. The ordinance requires properties to be maintained consistent with the neighborhood standard and has several basic guidelines, which are common to most code enforcement regimes, including:
- The landscape and yard must be decently maintained, with no excessive weeds;
- There can be no trash, papers or discarded personal items;
- There can be no visible graffiti;
- Pools or spas must be either cleaned or drained; and
- The property must not appear to be abandoned.
The property must be secured in a way that prevents unauthorized access. If the property is owned by a corporation or an out-of-area beneficiary or trustee, then the corporation must retain a local property management company to:
- Perform a monthly inspection on the property; and
- Post a durable sign with relevant contact information for reporting problems with the property.
Civil Penalties. The goals of public safety and neighborhood maintenance are achieved through penalties that provide an incentive to comply and a punishment or deterrent for not complying, making enforcement effective. The typical ordinance sets civil penalties for a violation at a maximum daily rate not to exceed $1,000 per violation or $100,000 per structure for any related series of violations. The civil penalties ultimately turn into a lien on the property if they go unpaid or a special assessment is confirmed by the city council --- perhaps the ordinance’s most effective aspect.
In addition, the ordinance allows for some flexibility in factors that determine the amount of the penalty, so as not to be disproportionate to the gravity of the violation. Some factors to consider include duration of violation; frequency; impact on public health, safety and welfare; good or bad faith; and financial ability to comply in a timely fashion.
City’s Right to Maintain the Property. The ordinance has a provision allowing the city to step in to maintain and secure the property and charge the owner afterwards and grants the city authority to remove trespassers. This provision would be enforceable after giving the property owner a fair amount of time to correct the violations on his or her own.
Thus far there are no legal challenges to the local ordinances, and it remains to be seen whether such ordinances will be truly effective in getting lenders to maintain their properties. Opponents of the ordinance argue that it is unnecessary because market forces and the desire to eventually sell the property dictate that the lender will maintain the property without the need for government intervention. Proponents of the ordinance argue that something must be done immediately to prevent or at least mitigate the neighborhood decline, lowered property values, blight, and health and safety risks resulting from a housing market that’s spiraling downward. Ultimately, it’s up to each individual city council to decide whether or not to pass a foreclosure ordinance and up to the lenders to challenge it.
1 See Realtytrac.com
2 RealtyTrac U.S. Foreclosure Market Report
3 The U.S. Census measures the home vacancy rate as the number of homes for sale that are sitting vacant. In 2008, it was 3.1 percent for the West and 2.9 percent for the nation.
4 James J. Saccacio, chief executive officer of RealtyTrac.
5 Including the California Bankers Association (CBA), the California Mortgage Association, the California Financial Services Association and the California Mortgage Bankers Association.
6 See SB 2187, on record opposition.
7 As chaptered primarily in Civil Code § 2924.
8 Congressional Budget Office (CBO), Policy Options for the Housing and Financial Markets (2008).
9 Note that this does not consider any party being out of physical possession, as a common definition of abandonment would indicate.
10 Note that vacancy is not strictly defined; it is flexible, based on a "reasonableness legal standard" and thus applied on a case-by-case basis.
11 Based on this definition, the level of maintenance will depend on the neighborhood where the property is located.