It’s not uncommon for homeowners to fall behind on their mortgage payments, forcing banks to initiate lengthy foreclosure proceedings.
In many cases, the homeowner has long since moved out, leaving behind a vacant home with no one to maintain it, and the home falls into disrepair.
So, on whom does accountability fall?
In theory, it’s the homeowner. But more often than not it’s impractical for the municipality to track down a homeowner who has abandoned a property. The bank isn’t off the hook but might not be responsible until they formally reclaim the property.
Scenarios like this are nothing new. But now, with the foreclosure crisis spawning more vacancies, these occurrences are more frequent, requiring communities nationwide to tackle a problem that public policy never addressed. “The laws were for court proceedings, not for who is responsible,” said Harold Simon, executive director of the National Housing Institute, a New Jersey-based nonprofit that examines issues related to the country’s housing crisis.
New Jersey has the nation’s ninth-highest percentage of loans entering the foreclosure process during the fourth quarter of 2010. State legislators have responded with the Creditor Responsibility Law. Signed into law in 2008 and amended in January 2010, the law makes lenders responsible for maintaining properties that have become abandoned during the foreclosure process. If code violations or nuisance conditions go unaddressed and the city makes repairs itself, the law allows the city to put a lien on the property and go after the lender’s assets to obtain repayment as if the lender were the title holder.
New Jersey is the first state in the nation to have such a law. In Illinois, efforts to pass a similar law failed two years ago, but now another bill is on the table. House Bill 1109 would hold responsible beneficiaries, which could mean lenders, banks or trustees of mortgage-backed securities, for maintaining vacant properties on which they are foreclosing or even before they initiate foreclosure, according to Adam Gross, director of the regional affordable housing initiative at Business and Professional People for the Public Interest, a public interest law and policy center in Chicago.
States across the country are considering state-level measures that would address the issue of vacant houses, but they vary, said Kermit Lind, a law professor at Cleveland State University.
Still, holding lenders responsible for vacant houses on which they are foreclosing is something that would work anywhere, said Diane Sterner, executive director of the Housing and Community Development Network of New Jersey, a statewide association of housing and community development organizations.
“We look at other states for ideas, and we steal from them, and they steal from us,” Sterner said.
Anyone who advocates holding lenders accountable for maintaining vacant houses, Lind said, should keep in mind that occupants facing foreclosure are not always responsible people. For example, some might trash the place on the way out, he said, and homeowners are responsible for their property, even if the lender is the owner.
Despite that, Lind still thinks the New Jersey law and the law on the table in Illinois are good ideas.
The New Jersey law has similarities to local ordinances that have gone into effect across the country over the past few years. The trend started in Chula Vista, Calif., in 2008 and has since spread to other cities, according to Alan Mallach, a senior fellow at the National Housing Institute.
In New Jersey, two municipalities have also passed Vacant Property Registration Ordinances, which work in tandem with the state law.
Lenders must notify municipalities when they foreclose on a house. But the ordinances—effective in the City of Orange and Irvington townships—beef up that provision by requiring lenders to pay an annual fee. The revenue is used to administer the ordinance and help defray the costs of servicing vacant properties.
Both ordinances were passed last year, and there are efforts to pass similar ordinances in other New Jersey municipalities, such as Newark.
“These laws have gone a long way toward giving municipalities a set of tools with which to combat foreclosures,” said Valerie Jackson, director of the planning and development department at the City of Orange Township.
These New Jersey ordinances were enacted after the Abandoned Property Rehabilitation Act of 2004, which expanded municipal powers for dealing with abandoned property and sped up the foreclosure process.
The idea behind the newer ordinances is to provide a disincentive for banks to let properties sit vacant for long periods, said Wayne Meyer, the former housing director for HANDS Inc., a nonprofit that carries out neighborhood revitalization efforts in Orange and East Orange, New Jersey.
The state’s municipalities are still adjusting to the new laws, Sterner said. Some of the smaller ones are doing really well, while it has been more challenging for larger cities such as Camden and Newark, where the volume of foreclosures is greater, she added. In that regard, the structure of municipal governments is also a factor, Mallach said. In a place like Orange, planning, community development and inspections are all part of one department, but in bigger cities such as Camden, that is not the case.
Some municipalities have set up public databases of vacant properties online or have created partnerships with community groups or universities to help track vacancies, Sterner said.
In Irvington, the legislation has helped the city outpace foreclosures. About six years ago, there were roughly 750 vacant foreclosed properties in bad shape, Bradley said. Now there are about 400, he said. There have been no cases where the city has had to take lenders to court, Bradley said, but the legislation has had an impact. The vast majority of the time lenders have paid the fees, he added.
Though some say that the laws are a significant step forward, advocates do not see them as a panacea. Sterner said she would like to see the vacant property registration ordinance enacted on a state level and an amendment that would make it easier to contact the lenders of vacant properties. “It’s not a free lunch anymore,” Bradley said.