A federal court ruling has dealt a setback to Chicago's efforts, and to potentially those of municipalities around the country, to maintain some of the vacant properties caught in the limbo of the foreclosure process.
Chicago's ordinance, which took effect in November 2011, requires not only owners of vacant buildings but also mortgage holders to promptly register them, pay a $500 registration fee and maintain certain property standards. Violations of the ordinance incur fines of up to $1,000 for each infraction.
But with Fannie Mae and Freddie Mac as two of the biggest backers of home mortgages, the Federal Housing Finance Agency, which oversees them, challenged the city's law in December 2011. It argued that the law overreached and that the registration fee amounted to a tax on the federal government. On Friday, U.S. District Judge Thomas Durkin ruled that vacant properties backed by Fannie Mae and Freddie Mac were exempt from the ordinance.
In a large city that is trying to keep track of abandoned homes and fight off neighborhood blight, the decision, in effect, creates two classes of vacant property: those covered by the ordinance and those that are not.
Community groups worry that the ruling will undo what progress has been made in property preservation and neighborhood revitalization. Cook County, which adopted a similar rule, plans to evaluate the opinion to see if its ordinance needs to be amended, said Kristen Mack, a spokeswoman for Cook County Board President Toni Preckwinkle. Local governments elsewhere — more than 1,000 across the nation have some form of a vacant property ordinance — also will have to study the decision to determine whether their rules could pass a legal challenge.
"This will either scare off communities from passing ordinances that seek to hold mortgagees accountable or lead to further lawsuits," said Katie Buitrago, a senior policy associate at the Woodstock Institute, a Chicago-based research and public policy group. "Municipalities are the ones that are dealing with the fallout when financial institutions don't live up to good corporate responsibility standards."
Ald. Pat Dowell, 3rd, who sponsored the ordinance in 2011, said she would encourage the city to appeal the decision.
"It's just appalling that banks have neglected our communities for so long," she said. "First, they've been reluctant to invest in our communities, to help us build our communities up. And they continue to ignore the real estate they own or service in our neighborhoods. Fannie Mae and Freddie Mac should be held accountable."
The two housing groups have their own property maintenance guidelines, but there is concern that without the accountability that comes with an ordinance, those standards will fall by the wayside. As of October 2011, Fannie and Freddie owned about 258,000 mortgages tied to Chicago properties, and each uses about 200 mortgage servicers for these loans.
When a mortgage falls into foreclosure, a loan servicer typically contracts with another company to secure and maintain properties abandoned by a homeowner. But the success of those efforts has been spotty, and a study last year by the FHFA's inspector general concluded that Fannie and Freddie have a difficult time managing even the vacant properties they have formally taken possession of after foreclosure.
In his opinion, Durkin noted the FHFA still has a responsibility to the city's vacant properties.
"This is not to say that FHFA can let properties where it is the mortgagee become decrepit," Durkin wrote. "Fannie and Freddie's own guidelines, not unlike the city's, require it to maintain the properties in a manner to preserve their value. This is consistent with their overall mandate to preserve the assets of Fannie and Freddie — a field into which the city of Chicago may not encroach."
The decision comes as Chicago's housing market continues to lag behind the national recovery, in part because foreclosures here can take two years to be processed through the court system. The lawsuit only involved properties still in foreclosure, not those that have completed the process and been repossessed by banks.
"This ruling will do little to stop the mayor's aggressive efforts to ensure that banks are responsible neighbors across Chicago, particularly in communities that have been hardest hit by the foreclosure crises," said a statement from Mayor Rahm Emanuel's office. "Vacant properties are a challenge for neighborhoods and a financial burden for the city, and while we are disappointed in the court's decision, we will continue to hold financial institutions responsible for maintaining properties while protecting our residents and communities from the dangers vacant properties create."
Community groups like the Southwest Organizing Project are concerned that even well-meaning mortgage servicers for Fannie and Freddie may opt not to maintain homes in foreclosure because of worries about trespassing because the property is still owned by a homeowner. Having an ordinance backed up the servicer's presence, the group said.
Incorporating mortgage holders, and not just property owners, into the ordinance in 2011 followed much discussion among the city, banks and other mortgage servicers, community groups and real estate professionals but not the FHFA.
"We're hoping that the court striking down the ordinance will open up the door for another round of very important discussions between all the stakeholders," said Brian Bernardoni, a spokesman for the Chicago Association of Realtors.
Other municipalities plan their own look at the ruling and its implications on them.
In Boston, where holders of mortgages are required to register vacant properties in foreclosure and pay a $250 fee, the housing market is on the mend faster than Chicago's, but officials plan to study the language of the decision and how Chicago's ordinance compares with its own.
"You're a lot bigger, the fees are more and it sticks out more," said Bryan Glascock, commissioner of inspectional services for the city. "But we're still committed to making sure foreclosed properties are secured and maintained."