CODE ENFORCEMENT AND FORECLOSED PROPERTY REGISTRATION: LENDERS’ (AND SERVICERS') EVOLVING AND PERIPATETIC FORECLOSURE NIGHTMARE

Roger D. Schwenke

In the aftermath of the subprime mortgage meltdown, and in the context of the extensive array of foreclosures which have confronted property throughout the United States, cities and states have been left with a burden of dealing with dramatic increases in the number of foreclosed and abandoned blighted properties. It is outside the scope of these materials to analyze in any detail the consequences of rising foreclosures and abandonments on many American communities, but in general it has become "accepted wisdom" that abandoned properties substantially decrease the value of neighboring properties, which in turn has lowered the tax revenue cities, counties and other municipalities can collect. In other instances, abandoned property, especially abandoned homes, have become public nuisances such as fire hazards, or drug-growing and drug distribution locations, which can endanger the entire community.1

In response to this massive increase in abandoned, vacant and neglected properties linked to foreclosures and loan obligation defaults, cities, counties and states throughout the United States have developed a variety of approaches to try to force lenders to contribute to what are seen as the costs (both financial and societal) of often protracted foreclosure procedures. Even before the problems arising from the recent severe economic downturn, cities and counties had been confronted with properties which were unsafe or in need of maintenance or repair.

Until recently, the traditional governmental response was to rely on building codes in an effort to compel maintenance. Sometimes mortgage lenders and servicers were served with complaints and allegations that property had gone through foreclosure and was now in REO status. Governments argued that the lender, as the property owner, was responsible for the property. But where the property had been abandoned by its owner or was the subject of a foreclosure proceeding, the lender was not yet in possession of the property. In those instances, even though mortgagees often were named as defendants in housing court and other code enforcement cases, generally cities and counties did not attempt to impose liability upon lenders if such lenders were not yet in possession of the property. If the question came up about why the governmental entity was naming lenders as defendants (but then not aggressively pursuing recovery) -- which was a question which rarely arose – local government counsel would usually respond that lenders needed to be on notice of the governmental action since the lender’s rights could be affected, but also acknowledged that the city or county would not expect the lender to be responsible for violations occurring on a property the lender did not control.

1 For a more detailed discussion of these issues, see, Left Behind: Troubled Foreclosed Properties and Servicer Accountability in Chicago, p. 4, (January 2011), Woodstock Institute, at www.woodstockinst.org., which commented on and referred to a report by the United States Government Accountability Office entitled Mortgage Foreclosures: Additional Mortgage Servicer Actions Could Help Reduce the Frequency and Impact of Abandoned Foreclosures, Washington D.C., 2010. See also Keith Hirokawa and Ira Gonzalez, Regulating Vacant Property, 42 Urb. Law 627 (2010). (Hereinafter referred to as “Regulating Vacant Property”).

1 As local governments confronted a massive increase in the magnitude, detriment and expenses arising from vacant properties, and while those same governments have seen their tax revenues drastically diminishing, they have become much more willing to expect mortgage lenders and servicers to contribute even before the lenders have a legal right to possession. Local (and sometimes even state) government has turned to new strategies and causes of action. These materials attempt a brief review of these evolving strategies, and include a prediction of some further techniques now under increasing consideration.

Vacant Property Registration

One of the newest approaches by local governments to address the problems posed by vacant and abandoned properties is the requirement that such properties by "registered" with the local government. Most such ordinances are applicable only to residential real estate. However, some – such as the Deerfield Beach ordinance discussed below - also include commercial properties. However, one of the problems with even those which claim to be applicable to “residential” properties is that the term frequently is defined to include “any property that contains one (1) or more dwelling units used, intended or designed to be occupied for living purposes”.2 With such a definition, and even after review of the City’s list of “Frequently Asked Questions”, often it is unclear whether the registration and maintenance requirements apply to only homes, or also encompass apartment units, condominium or town home units and the residential parts of mixed use projects.

In 2006 the City of Chula Vista, California, became one of the first municipalities to pass an ordinance which required holders of troubled mortgages on property which was abandoned or vacant to register those locations, to pay registration fees and to post bond. The ordinance was adopted in July 2006 and took effect in October 2007.3 At the time of its adoption, the ordinance was considered to be unique because it was based not only on the physical condition of the property, but also on what the City assumed to be the probable contractual provisions in the mortgages. The City assumed that the mortgages probably contained contractual covenants in the mortgage, often referred to as “abandonment and waste clauses”, which authorize a lender (where a borrower has ceased making payments and has vacated an encumbered site) to access the property and to secure it from vandalism”. Under the ordinance, lenders must maintain the property which is undergoing foreclosure or which has been foreclosed. The registration requirement is triggered at the time of the first notice of default. When a notice of default is sent, the ordinance requires the lender to determine whether the property is vacant. If it is unoccupied, the lender must assure that the property is maintained, which often entails the retention of property managers.

A fee of $70 per property registration is required to be paid. According to the City, the fees initially had two purposes: to help Chula Vista gather property data and to provide a "big

2 See, e.g., Springfield, Mass. Ord. Chapter 7.50, infra N. 19, at Section 7.50.020 K.

3 Chula Vista, Cal. Mun. Code § 15.60.040 (2008).

2 stick" that would force mortgage servicers to fix homes that were in disrepair. Chula Vista reported that in the first year of this ordinance the City raised $77,000 in fees and levied $850,000 in citations.4 The Enforcement Manager for the City has also reported that some lenders and property servicers have resisted compliance with the requirements in the ordinance. In his Congressional statement he reported that he had received a call at home one weekend from someone he identified as a “high-level lending industry representative”, telling him that the manager was “making too much fucking noise” about the ordinance.5

The Director of Code Enforcement for the City of Chula Vista was asked in this same Congressional hearing to discuss the consequences of the "mortgage meltdown" on his and other communities. Here is how he responded:

“ Although the collapse of the housing market and lending industry has been widely reported, the ripple out effect of the collapse has yet to be adequately addressed. There have been discussions on who is to blame and how to prevent this from happening again, but little attention has been paid to the true, innocent victims – the neighbors and local jurisdictions that are left to cope with and clean up the mess.

If a ship's captain recklessly pilots his ship into a hazard and spills oil, the damage isn't contained to just the ship. The oil spilled from that ship leaks into and spreads over miles of ocean, beaches and coastline. It seeps into every nook and crevasse. It covers every rock, every train of sand. It coats unsuspecting wildlife and damages the environment for decades to come. Such is the case with the record number of financially distressed properties (foreclosures) we are experiencing across the Nation.

The SS Mortgage has run aground at the hands of reckless captains. The crude oil of foreclosures and abandoned properties has leaked into and spread over the entire country, neighborhood by neighborhood. Unsuspecting residents are being covered in the oil of diminishing home values, blight and unmarketable real estate. They find themselves mired in a situation they didn't create and yet can't free themselves from.

With shipwrecks and oils spills, the damage can be minimized by fast action and containment. There are federal, state and local laws that require response crews be trained to react. There are action plans and drills to prepare for the worst. Even with this training and response, the impacts are only "minimized". The damage can't be undone. And when all is said and done, it can take decades to

4 Doug Leeper, City of Chula Vista Code Enforcement Manager, Written Testimony before the House Oversight Government Reform Subcommittee on Domestic Policy, “Neighborhoods: The Blameless Victims of the Sub-Prime Mortgage Crisis 2 (May 21, 2008). A copy of his statement appears at (http://democrats.oversight.house.gov/images/stories/documents/20080522110137.pdf )

5 Id.

3 calculate the cost of response, containment and recovery. But, with a single spill, at least there is someone to hold accountable.

This is not the case in the situation we find ourselves now, this "mortgage meltdown". While ships’ holds were filled to overflowing with mortgages, some very questionable loading crews (brokers and originators) were hired in record number, and little, if any, thought was given to training response crews, preparing action plans and conducting drills. In short they didn't prepare for this disaster; they didn't feel they needed to. If a gallon or two of oil sloshed over the gunwales there would be someone there to scoop it up. In real estate terms, you could always "flip it", sell the house or mortgage, and save yourself from the "spill". You could, that is, until too much of the oil spilled over at once and there was no one there to scoop it up anymore. 6

Chula Vista is not alone in the adoption of such ordinances. A national property maintenance firm called “Safeguard Properties” maintains an online database of vacant property regulations throughout the United States. 7 The chief executive officer of Safeguard, Alan Jaffa spoke on these issues at a February 2012 Mortgage Bankers Association conference. Based on the Safeguard database, he reported that in the past six months the number of municipal ordinances requiring owners, lenders and mortgage servicers to register vacant or foreclosed properties has risen over 50% to 980. What he referred to as “the troubled-home epicenters of California and Florida,” each had passed more than 100 such ordinances.8

One analysis of such ordinances observed that although such ordinances vary based on local political and economic “realities”, there are common themes and issues addressed in all jurisdictions:

“ The primary aims of the ordinances include finding a cost effective means to track property vacancy (and any ill-effects that may be triggered), to finance the administration of vacant property monitoring, to ensure efficient enforcement of building codes and other health and safety regulations at or near vacant properties, and to provide authority to collect penalties to address violations. Enforcement is delegated to existing code enforcement departments or task forces assembled for this purpose.”9

6 Id at p. 2.

7 See (http://www.safeguardproperties.com).

8 Kate Berry, “Servicers Keep Getting Slammed by Foreclosure-Related Ordinances”,, National Mortgage News (March 6, 2012) (reported at http://www.nationalmortgagenews.com/dailybriefing/2010_552/vacant-property- mortgage-servicers)

9 Regulating Vacant Property at 631.

4 There are a variety of approaches to vacant or foreclosed property registration. Some jurisdictions have the registration requirement triggered by vacancies of particular lengths of time; others trigger the requirement upon a specific event such as the initiation of a foreclosure action. Foreclosure-related registrations typically trigger a mandatory inspection of the property and establish the possibility of fines and penalties for un-remediated violations. Most such ordinances are predicated on the vacant status of the property – e.g., that it is not being used. However, there are some alternative approaches which instead focus on the identity of the user. For instance, an ordinance adopted by the City of Red Bud, Illinois applies only to lenders that come into possession of a site as a result of a borrower’s default.10

One recent article analyzing and critiquing various approaches for governmental response to vacant and abandoned properties identified five different kinds of ordinances and statutes:

 Regulation Triggered by Vacancy  Regulation Triggered by Initiation of Foreclosure Process  Requirement of Registration upon Foreclosure Sale  Requirement of Insurance on Vacant Properties  Special Assessments Depending on Structure Characteristics or Length of Vacancy

The article includes with each category a listing of citations to illustrative ordinances or statutes.11

One of the most unique features of this new wave of vacant property ordinances is the imposition of financial liability on the mortgagee on the theory that the mortgage has the contractual (if not statutory) right to manage and control the property once there has been a default.

The registration fees and potential enforcement fines and penalties vary widely among these ordinances. In contrast to the $70 fee charged by Chula Vista, Minneapolis requires vacant property owners that are found guilty of code violations to pay a substantial fee, which has increased from $2,000 annually to $6,000. However, to minimize the economic impact and provide an incentive for rehabilitation, the Minneapolis ordinance also adopted a "waiver"

10 See Regulating Vacant Property at n. 28, citing and commenting on RED BUD, ILL., ORDINANCES 1195 § 6- 6-3 (2008), available at http://www.cityofredbud.org/code%20%of%ordinances/Abandoned%>/20Real%20Estate %20062309.pdf.

11 Frank S. Alexander, “Legal Strategies for Vacant and Abandoned Properties” (2010) at pp. 7-9. (This essay was prepared by Professor Alexander as part of the course materials for a three day course on Neighborhood Stabilization sponsored by Living Cities at the Kennedy School, Harvard University, March 14-16, 2010). A copy can be downloaded at (http://www.nfg.org/index.php?ht=a/GetDocumentAction/i/15719).

5 provision, which permits owners to postpone payment of the fee if they agree to enter into a Restoration Agreement with the City and bring the property up to code in a timely manner.12

A recent Florida ordinance illustrates the various issues and elements that are usually a part of such ordinances. The Deerfield Beach, Florida vacant property registration ordinance is triggered by a declaration of mortgage default:

Section 34-100 Registration of Abandoned Real Property,

(a) Any mortgagee who holds a mortgage on real property located within the city shall perform an inspection of the property that is the security for the mortgage, upon default by the mortgagor, prior to the issuance of a Notice of Default. If the property is found to be vacant or shows evidence of vacancy, it shall be deemed abandoned and the mortgagee shall, within ten (10) days of the inspection, register the property with the City Manager, or his or her designee, on forms provided by the City. A registration is required for each vacant property as well as improved property.

(b) If the property is occupied but remains in default, it shall be inspected by the mortgagee or his designee monthly until (1) the mortgagor or other party remedies the default, or (2) it is found to be vacant or shows evidence of vacancy at which time it is deemed abandoned, and the mortgagee shall, within ten (10) days of that inspection, register the property with the City Manager, or his or her designee, on forms provided by the City.

(c) Registration pursuant to this article shall contain the name of the mortgagee, the direct mailing address of the mortgagee, a direct contact name and telephone number or mortgagee facsimile number and e-mail address and, in the case of a corporation or out-of-area mortgagee, the local property management company responsible for the security and maintenance of the property.

(d) An annual registration fee in the amount of $150.00, per property, shall accompany the registration form(s).

(e) This article shall also apply to properties that have been the subject of a foreclosure sale where the title was transferred to the beneficiary of a mortgage involved in the foreclosure and any properties transferred under a deed in lieu of foreclosure/sale. 13

12 (http://www.minneapolismn.gov/results/nc/vacant)

13 Deerfield Beach, Fla., Ordinance No. 2008/020, available at integratedservicesinternational.com/Documents/Ordinance-Deerfield_Beach,_FL.pdf.

6 Not surprisingly, lenders have sought to have ordinances of this type struck down as unconstitutional or in violation of the rights of a mortgagee under state judicial foreclosure statutory provisions. A recent decision by U.S. District Judge Ponsor in the District Court for Massachusetts considered arguments raised by a group of banks which held mortgages on residential property in Springfield, Massachusetts. They argued that the maintenance and registration requirements imposed under an ordinance which went into effect on December 13, 201114 were invalid under and preempted by Massachusetts foreclosure statutory provisions, violated the Contracts Clause of the U.S. Constitution, constituted an unlawful tax because of the ordinance’s cash bond requirements, were arbitrary, resulted in an unconstitutional taking, and violated procedural and substantive due process.15

The Court rejected all of the lenders’ arguments and granted the City’s Motion to Dismiss, or in the Alternative, for Summary Judgment. With respect to the arguments that the ordinance was unconstitutional because it was arbitrary, a taking, and violated due process, the Court’s opinion observed that the Plaintiffs had not even “made any arguments in support of these claims.” As a result Judge Ponsor considered each of these arguments only briefly, and then concluded that the Court would deny all of these constitutional claims. The reasons why the Court rejected the other bank arguments and granted the City’s Motion to Dismiss are clearly seen in the opinion’s comments on the argument that the ordinance impaired the banks’ contractual rights and in the opinion’s Conclusion:

“According to the ordinance’s stated purpose,

[u]nsecured and un-maintained vacant properties and foreclosing properties present a danger to the safety and welfare of public safety officers, the public, occupants, abutters and neighbors, and as such constitute a public nuisance. This section is enacted to promote the health, safety and welfare of the public, to protect and preserve the quiet enjoyment of occupants, abutters and neigh- borhoods, and to minimize hazards to public safety personnel inspecting or entering such properties.

Protecting the health and safety of the community has long been recognized as an important governmental objective that falls squarely with the City’s police powers….. The court is also convinced that the Foreclosure Ordinance is reason- ably tailored to meet this objective. It allocates the responsibilities for mainte- nance of properties pending foreclosure, helps fund the City’s efforts in the foreclosure crisis through the cash bond requirement, and increases the infor- mation in the City’s regulatory database to make enforcing mortgage regulations more efficient, all while imposing relatively minor burdens on Plaintiffs that do

14 See text at N. 20, infra, for details of and a discussion of this ordinance and the requirements imposed under it.

15 Easthampton Savings Bank, et al . v. City of Springfield, C.A. No. 11-cv-30280-MAP, Memorandum and Order Regarding Plaintiffs’ Motion for Judgment as a Matter of Law and Defendant’s Cross Motion to Dismiss or, in the Alternative, for Summary Judgment (July 3, 2012).

7 not affect Plaintiffs’ ultimate right to foreclose….

Widespread mortgage foreclosures indisputably are an issue of serious public concern to municipalities like Springfield. The modest effort made by the city to soften this crisis through the promulgation of the two ordinances violates no Constitutional provision or state statute.”16

One of the most controversial ordinances of this type was adopted by Chicago in July of 2011. Because of the notoriety of the Chicago approach, plus the fact that the upcoming meeting of ACREL will be in Chicago, it is appropriate to consider in greater detail what has happened in the Windy City. When first adopted, the Chicago ordinance imposed strict requirements for “owners” of “vacant” buildings to register those buildings with the City, to maintain those buildings, and to pay fines which could reach as high as $1,000 a day if the buildings were not maintained. In its initial form, the ordinance amended the municipal code of the City of Chicago to define as a “property owner” a “mortgagee” which holds a mortgage on a piece of property in the City. This is usually referred to as the Chicago “Vacant Buildings Ordinance”. As originally enacted, the ordinance also (at Section 13-12-125 (e)) defined an “owner” to include “any person who alone, jointly or severally with others is a mortgagee or who holds a mortgage on the property, or who is an assignee or agent of the mortgagee.” 17

After extensive complaints from lenders, mortgage servicers and property managers, on November 2, 2011 Chicago amended the ordinance.18 The current form of the Chicago "Vacant Buildings Ordinance” requires mortgagees of residential properties to pay $500 registration fee for vacant properties and also requires monthly inspections of those mortgaged properties to determine if they are vacant. The registration fee and maintenance requirements are mandatory even when a lender has not yet foreclosed on a piece of property and therefore does not have ownership. If a liable party fails to comply with the ordinance, the City of Chicago is authorized to levy fines and penalties of up to $1,000 per day for non-compliance with any provision of the ordinance. In the first three months of 2012 Chicago assessed $619,000 of fines against more than 150 financial institutions for noncompliance with the ordinance requirements. Furthermore, the ordinance set forth detailed maintenance requirements which were authorized to be revised and amended by the Chicago Department of Buildings.

16 Id. at 20-21 and 14-15. The reference here to “two” ordinances is because Springfield has enacted both the foreclosure registration and vacant property maintenance ordinance (Chapter 7.50) and a foreclosure mediation ordinance (Chapter 7.60). The Plaintiffs complaint challenged both of these ordinances.

17 The ordinance amended Chapter 13-12 of the Chicago Municipal Code. Chicago, Ill., Mun. Code §§ 13-12- 125 and 13-12-135. For a brief summary of and reaction to this ordinance, see “Chicago Amends Vacant Property Ordinance, (www.lockelord.com/files/PublicationAttachment/d64a2a02-2c0f-4252-a59b-5f93a5cf8631/2011- 08_11th_ChicagoAmends_Cunningham.pdf).

18 Amendment of Chapter 13-12 of Municipal Code Regarding Vacant Buildings, Journal-City Council – Chicago, 11/2/2011, at 11801-11809.

8 The Federal Housing Finance Agency ("FHFA"), on its own behalf and as Conservator for Fannie Mae and Freddie Mac, filed a lawsuit in the US District Court for the Northern District of Illinois against the City of Chicago to prevent enforcement of the ordinance. 19 Prior to filing the suit FHFA attempted to negotiate with the City to establish alternative solutions to what both the FHFA and the City acknowledged was a problem of vacant properties. Those negotiations were unsuccessful and the suit was filed.

The lawsuit alleged that the Chicago ordinance impermissibly encroached upon FHFA's roles as the sole lawful regulator and supervisor for Fannie Mae and Freddie Mac. As conservator of Fannie Mae and Freddie Mac, by law FHFA is charged with the responsibility to preserve and conserve the assets of Fannie Mae and Freddie Mac. The litigation claims that the Chicago Ordinance and licensing system coupled with the "supervision" created by the ordinance would, or at least could, conflict with Congressional intent relative to the responsibilities of FHFA. The litigation further argued that the registration fee represented a tax on FHFA, Fannie Mae and Freddie Mac which was expressly precluded by congressional directive.

The City sought dismissal of the suit, arguing that FHFA’s guidelines for mortgage servicers direct FHFA to comply with local ordinances. FHFA filed a motion for summary judgment, raising the arguments noted above. In early 2012 Judge Lefkow denied both motions.20 While the litigation continues, Fannie Mae and Freddie Mac have instructed agents and holders of their instruments to comply with the registration, maintenance and other provisions of the ordinance. However, they have also directed that ordinance-mandated fees be paid “under protest”, thus potentially creating a basis for a claim for restitution if the ordinance ultimately is struck down.

Other cities have adopted similar ordinances. In March 2008, the City of Boston adopted an ordinance requiring owners to register and to maintain vacant residential properties and defining “owner” as, among other things, “a mortgagee in possession of such a property.”21 In 2011, the City of Springfield, Massachusetts passed an ordinance similar to Boston’s, obligating foreclosing lenders to maintain vacant residential properties, including posting a $10,000 bond to reimburse the city for any maintenance work that it may have to perform to keep the property in compliance with the local housing code while it remains in foreclosure.

19 Federal Housing Finance Agency v. City of Chicago, United States District Court for the Northern District of Illinois, No. 11-Cv-08795, filed December 12, 2011.

20 Mary Ellen Podmolik, “Federal Judge sides with city in vacant housing case for now” , Chicago Tribune (REAL ESTATE), January 19, 2012, reported at (http://articles.chicagotribune.com/2012-01-19/business/chi- federal-judge-sides-with-city-in-vacant-housing-case-20120119_1_federal-judge-sides-mortgage-servicers-fannie- mae).

21 Boston, Mass. Ord. No. 16-52 (2008), AN ORDINANCE REGULATING THE MAINTENANCE OF VACANT, FORECLOSING RESIDENTIAL PROPERTIES, (http://www.cityofboston.gov/isd/foreclosure/pdfs/foreclosureord.pdf).

9 The ordinance also defined “mortgagees” as owners for the purposes of maintaining vacant residential properties.22

However, cities have not been alone in their efforts to respond to building abandonment and related lender and servicer delay in property maintenance. Shortly after Chicago’s adoption of its ordinance, Cook County, Illinois adopted similar requirements.23

States have also adopted statutes imposing vacant property maintenance requirements. In May, 2012, through enactment of House Bill 1373, Maryland established a statewide internet-based foreclosed property registry.24 The new law takes effect October 1, 2012. However, in contrast to many of the local ordinances already noted, the Maryland registration fees are nominal, and the registration requirement is applicable only after foreclosure sales have occurred.

Three years earlier, Connecticut had adopted Public Act 09-144, imposing requirements for vacant property registration. In 2011, through adoption of Public Act 11-201, Connecticut expanded the registration requirements to mandate registration at the point of foreclosure filing. Both the original and the amended Connecticut provisions include what is becoming a more frequent provision in state statutes – restrictions on the terms of local ordinances covering the same issue. Except for ordinances already adopted before October 1, 2009, the Connecticut statute prohibits any municipality in the State from adopting a property maintenance ordinance related to foreclosure or to the mortgagees that obtain title through mortgage foreclosure unless the ordinance has provisions comparable to what the state statute allows. 25 A similar restriction is included in a new Georgia statute which went into effect on July 1, 2012.26

Other Approaches to Respond to the Consequences of Foreclosure

22 Springfield, Mass. Chapter 7.50, AN ORDINANCE REGULATING THE MAINTENANCE OF VACANT AND/OR FORECLOSING RESIDENTIAL PROPERTIES, (http://www3.springfield- ma.gov/cos/fileadmin/forms/VFP_Registration_Packet.pdf)

23 The ordinance went into effect on February 14, 2012. (http://blog.cookcountygov.com/2012/02/14/cook- countys-vacant-building-ordinance-takes-effect/ ). The text of the County ordinance is available at (http://www.cookcountygov.com/taxonomy2/Building%20and%20Zoning/PDF/VACANT-BUILDING- ORDINANCE.pdf).

24 See (http://mlis.state.md.us/2012rs/bills/hb/hb1373e.pdf.)

25 § 10, Public Act No. 09-144 (found at http://www.cga.ct.gov/2009/ACT/PA/2009PA-00144-ROOSB-00951- PA.HTM).

26 House Bill 110, 2011-2012 Regular Session, Georgia General Assembly (found at http://www.legis.ga.gov/legislation/en-US/Display/20112012/HB/110). The law also limits property registration fees to no more than $100 per site.

10

Governmental registration and subsequent mandated property security and maintenance are not the only approaches being tried by local and state governments to allow them to fund and to respond to the consequences and costs of foreclosure, and to try to slow down the pace of foreclosure filings. San Francisco could be considering a new approach – which might be voted on just after the October ACREL meeting in Chicago. Under current San Francisco Code provisions, payment of a deed transfer tax is not required with respect to any deed or instrument transferring title from the mortgagor to the mortgagee as a result of or in lieu of foreclosure.27 Assessor-Recorder Phil Tang and Board Supervisor John Avalos proposed adoption of an ordinance known as the “Foreclosure Fairness Initiative” to the San Francisco Board of Supervisors in June of 2012.28 Under the ordinance provisions, lenders would no longer have the benefit of the foreclosure transfer tax exemption, nor (in the case of property occupied by a mortgagor as his or her principal residence) would lenders be allowed to collect such a tax from the mortgagor.

Since this would have the effect of creating a new tax, voter approval would be required. If adopted by the Board of Supervisors, the ordinance would be voted on during the November 6, 2012 election. On July 23, 2012, Mayor Edwin M. Lee, Board of Supervisors President David Chiu, and Supervisor Avalos jointly announced they have reached agreement on a consensus measure for the November, 2012 ballot. 29 As of the time these materials are being prepared, the details of the “consensus measure” are unclear, and therefore it is uncertain whether the ballot proposal would include the provisions eliminating the foreclosure tax exemption.

San Bernardino County, California, Berkeley, California and Chicago, Illinois are contemplating what some (especially lenders) view as an even more extreme approach. Government officials there have proposed the use of their power of eminent domain to take ownership of the mortgages associated with abandoned properties as well as other ways to use eminent domain as a mechanism to restructure non-performing loans. In June, 2012, the Board of Supervisors in San Bernardino County, California unanimously approved a plan which, if implemented, could use eminent domain to seize

27 § 1108.2, San Francisco Business and Tax Regulations Code (Exemption; Deeds in Lieu of Foreclosure, Etc.)

28 Motion No. 120633, contemplating submittal of an ordinance to the voters of the City and County of San Francisco calling for an election to be held on November 6, 2012. Such ordinance will be entitled “Ordinance amending the San Francisco Business and Tax Regulations Code, Article 12-C, Real Property Transfer Tax, and would repeal Section 1108.2 to eliminate the foreclosure exemption and amend Section 1103 to relieve foreclosed homeowners from tax liability.” According to the official records of the Board of Supervisors, the motion was assigned “under 30 day rule” to the Rules Committee. See Board of Supervisors Legislation Introduced at Roll Call (June 5. 2012), (http://www.sfbos.org/ftp/uploadedfiles/bdsupvrs/introduced/2012/LI060512.pdf)

29 News Release, Office of the Mayor, City and County of San Francisco, July 31, 2012, “Mayor Lee’s Statement on Consensus Business Tax Reform Approval for November Ballot”, see (http://www.sfmayor.org/index.aspx?recordid=60&page=846 ).

11 underwater mortgages, and then restructure them for homeowners unable to sell or refinance the properties, offering the seized properties to those owners for what was claimed to be the fair market price. The plan was labeled the “Homeowner Protection Program”, and envisioned San Bernardino partnering with the cities of Ontario and Fontana. A California venture capital firm, Mortgage Resolution Partners, had proposed the concept to the County. Under the proposal, Mortgage Resolution Partners would fund the front money required to allow local governments to purchase underwater mortgages at market value in exchange for a fixed fee of $4500 per loan. Homeowners could then refinance at the newly established lower value.30 The Program has only been broadly sketched out at present. However, it is clear that the proposal was based on a June 2012 paper written by Cornell Law School Professor Robert C. Hockett, in which he explained and justified the use of eminent domain to reverse the “remarkable toll in family and neighborhood suffering, ongoing and self-worsening value and revenue loss, and consequent blight that rolling foreclosures are now actively bringing in their wake.” 31 However, even the concept immediately provoked a strong reaction from the Securities Industry and Financial Markets Association (SIFMA), the trade organization representing the securities industry, protesting the proposed actions and indicating that such an action would adversely affect the availability of loans to local borrowers. On behalf of SIFMA, O’Melveny and Myers prepared a legal memo explaining the illegality of the approach espoused by Professor Hockett and being considered by San Bernardino County.32 During a recent (August 23, 2012) webinar considering the legal issues associated with the concept, a further potential impediment was cited by Bronwyn Pollock – Proposition 99, a California law passed in 2008 in

30 “ San Bernardino Turns to Public for Foreclosure Answers, Considers Controversial Eminent Domain Plan”, Huffington Post (8/6/2012) reported at (http://www.huffingtonpost.com/2012/08/06/san-bernardino-principal- reduction-foreclosure_n_1749156.html). A Mortgage Resolution Partners presentation explaining its program is available at http://op.bna.com/der.nsf/r?Open=sfre-8wdqld and an FAQ presentation prepared for the firm is available at http://mortgageresolutionpartners.com/faqs.

31 “It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery”, Robert C. Hockett, Cornell Legal Studies Research Paper No. 12-12 (June 2012), available at (http://papers.ssrn.com/sol3/papers.cfm? abstract_id=2038029##). The Hockett proposal was strongly endorsed and supported in op-ed articles in the New York Times by Joe Nocerra (“Housing’s Last Chance?”, July 9, 2012, available at (http://www.nytimes.com/2012/07/10/opinion/nocera-housings-last-chance.html?_r=3&ref=joenocera)), and Robert Schiller (“Reviving Real Estate Requires Collective Action”, June 23, 2012, available at (http://www.nytimes.com/2012/06/24/business/economy/real-estates-collective-action-problem.html)). It was equally criticized and critiqued in an editorial in the Wall Street Journal (“An Eminently Bad Idea”, July 12, 2012 at A16).

32 See July 16, 2012 Legal Memorandum on “San Bernardino Eminent Domain Proposal”, available at (http://www.sifma.org/uploadedfiles/issues/capital_markets/securitization/eminent_domain/memorandumfromo'mel venymyerstosifmaresanbernardinoeminentdomainproposal071612.pdf).

12 response to the US Supreme Court decision in Kelo v. New London, which forbids municipalities from taking property and then transferring it to a private entity.33 SIFMA submitted to the Board of Supervisors of San Bernardino a letter and detailed statement of its concerns. The thrust of the letter is that such an action as proposed in San Bernardino would significantly reduce access to credit for mortgage borrowers. SIFMA was quite explicit about what it believed would be the consequences of the Home Protection Plan and its use of eminent domain to seize private mortgages: "If eminent domain were used to seize loans, investors in these loans through mortgage-backed securities or their investment portfolios would suffer immediate losses and likely be reluctant to provide future funding to borrowers in these areas. It is essential to remember that investors in mortgage-backed securities channel the retirement and other savings of everyday citizens through their investment funds. This program may cause loans to be excluded from securitizations, and some portfolio lenders could withdraw from these markets. In other words, this program could actually serve to further depress housing values in the county by restricting the flow of credit to home buyers"34 Greg Devereaux, San Bernardino’s chief executive, has stated that he was not surprised that many banking and mortgage lenders are against the plan, but also made clear that their level of opposition has angered him:

“There is no doubt that we have a major problem that we have to do something about, or it will probably be a decade, if not two, for our economy to recover,” he said. “It’s as if this can’t even be a discussion. If they want to come and talk and propose other solutions, great, but that’s not what is happening. Instead they are just trying to kill it because they have nothing but their own interest in mind.” 35

Mr. Devereaux said he hoped to have a decision by December, 2012, as to whether the county will use eminent domain or some other strategy. On August 16, 2012, the San Bernardino

33 Kate Berry, “California Laws Could Make Eminent Domain ‘DOA’ “, National Mortgage News (8/27/2012) (http://www.nationalmortgagenews.com/dailybriefing/Eminent-domian-mortgage-seizure-strategy-1031960-1.html? zkPrintable=true)

34 Jennifer Ablan and Matthew Goldstein, “U.S. investor groups oppose "condemn” mortgage fix”, Chicago Tribune (June 29, 2012) (reported at (http://articles.chicagotribune.com/2012-06-29/news/sns-rt-us- mortgage-investors-eminentdomainbre85s1it-20120629_1_eminent-domain-mortgage-markets-mortgage- backed-securities).

35 Jennifer Medina, “California County Weighs Drastic Plan to Aid Homeowners”, New York Times (July 14, 2012) (reported at http://www.nytimes.com/2012/07/15/us/a-county-considers-rescue-of-underwater- homes.html?_r=1&pagewanted=all&pagewanted=print)

13 County Commission unanimously passed a resolution authorizing its staff to create a request for proposal to allow further consideration of this and similar concepts.36 Officials in Berkeley, California and Chicago subsequently considered similar measures. In a recent Federal Register notice, the Federal Housing Finance Agency ("FHFA"), on its own behalf and as Conservator for Fannie Mae and Freddie Mac, expressed its concern over these proposals.37 Citing its role as conservator of Freddie Mac and Fannie Mae, FHFA said its obligation is to preserve and conserve Freddie Mac’s and Fannie Mae’s assets and to minimize costs to taxpayers. The notice, signed by FHFA COO Richard Hornsby, says the agency has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of Freddie Mac and Fannie Mae or bank securities holdings. FHFA also expressed concern that the programs could undermine and "have a chilling effect" on the extension of credit by investors that support the housing market. The agency said it has determined that it might need to take action both as conservator of the GSEs and regulator for banks to avoid a risk to safe and sound operations and avoid taxpayer expense. The notice also asserted that the proposed use of eminent domain raises issues about the constitutionality of such an action, the application of federal and state consumer protection laws, the effects on holders of existing securities and on millions of negotiated and performing mortgage contracts.

36 Tomoya Shimura, “County May Buy Underwater Mortgages”, Daily Press (August 27, 2012) (http://www.vvdailypress.com/common/printer/view.php?db=vvdailypress&id=36279)

37 Federal Register, Vol. 77, No. 154 (Thursday, August 9, 2012), Notices (also reported at (http://www.fhfa.gov/webfiles/24147/77_FR_47652_8-9-12.pdf).

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