As cities and towns across the country struggle to pay bills and prevent troubled properties from giving rise to blighted neighborhoods, they're turning by the hundreds to a new tactic.
It involves requiring mortgage servicers to pay hundreds of dollars in fees, post bond beginning at $10,000 per property for repairs and even register properties that are weeks or months from entering the foreclosure process.
For the depositories, investors and government-sponsored entities who own the lion's share of these homes, the rapid rise in such ordinances is already adding millions-and ultimately could add billions-of dollars in additional costs.
"It's a tax," declared Alan Jaffa, chief executive of Safeguard Properties, the nation's largest property maintenance, at a Mortgage Bankers Association conference last month.
The city of Chula Vista, in Southern California, in 2007 became the first municipality to pass an ordinance requiring holders of troubled mortgages to pay fees and post bond. The fees initially had two purposes: to help Chula Vista gather property data and provide "a big stick" that would force servicers to fix homes that were in disrepair, according to Steve Meyer, a director of high-risk and hazard claims at Safeguard. In its first year, Chula Vista raised $77,000 in fees and levied $850,000 in citations.
Since then, cash-strapped cities around the country have followed suit with a vengeance. In the past six months alone, the number of municipal ordinances requiring owners to register vacant or foreclosed properties has risen over 50% to 980, Safeguard's Jaffa said. Leading the way are the troubled-home epicenters of California and Florida, which have each passed more than 100 related ordinances.
The city council in Springfield, Mass. approved an ordinance last August requiring property owners to post bond that local officials can use to repair dilapidated homes. Albany, N.Y. did the same in December when it began requiring property owners to post a minimum $10,000 bond for repairs. Just where the money goes, and how it is accounted for, has become a hot-button issue.
"Cities are not providing an itemized list of what fees are being withheld and how they came up with a withholding amount," Meyer said in an interview. If a servicer has 100 properties and is maintaining 99 of them, it still has to post bond for all of them, he said.
Under the recently passed ordinances, it typically costs between $100 and $200 to register each foreclosed property. Such fees do not cover the cost of maintenance items, such as posting "no trespassing" signs, removing trash, mowing lawns or complying with state and local building codes.
Minneapolis, Minn. has passed the highest fees so far. It requires owners found guilty of code violations to pay $6,000 simply to register a vacant property.
Just who will pick up the tab for such levies is unknown. Most likely, it will be spread among mortgage investors in rough proportion to their property holdings.
Currently, mortgage investors own about 29% of all seriously-delinquent loans and banks 19%. Other big holders include Fannie Mae and the Federal Housing Administration, with 18% each, according to data from the Federal Deposit Insurance Corp. and the Federal Reserve.
Paying fees to register vacant and foreclosed properties has become so contentious that the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, filed a lawsuit in December against the city of Chicago claiming its vacant property ordinance is unconstitutional.
The FHFA claims Chicago's vacant property registration fee is a tax that requires Congressional approval. In a related lawsuit the agency argues that the city is encroaching on the agency's role as the "sole regulator and supervisor" of Fannie Mae and Freddie Mac.
Chicago's ordinance requires owners to pay a $500 registration fee for a vacant property, even if it has not gone into foreclosure. The city can issue fines and penalties of up to $1,000 a day for noncompliance.