Feb. 2, 2010

Transaction and Regulatory Committee

The following is for study only and has NOT been approved by the Transaction and Regulatory Committee, Legislative or Executive Committees or the Board of Directors.

Issue
Should the legislation that C.A.R. is sponsoring regarding vacant property maintenance ordinances be clarified so that actual costs of pre-foreclosure nuisance abatement survive foreclosure?

Action
Optional.

Options
1. Specify in the C.A.R. sponsored legislation relating to vacant property maintenance ordinances that pre-foreclosure nuisance abatement costs survive foreclosure.

2. Do Nothing. In other words, the C.A.R. sponsored legislation will specify that both the pre-foreclosure nuisance abatement costs and the penalties for creating the nuisance do not survive foreclosure.

3. Other.

Status/Summary
C.A.R.'s Board of Directors has approved sponsoring legislation to address local property maintenance ordinances. This bill will ensure that liability for maintenance of pre-foreclosure property follows the legal owner and is not inherited by the foreclosing beneficiary or its agent. However, liability for the maintenance of pre-foreclosure property can take two forms: (1) penalties imposed due to creating a nuisance and (2) reimbursement of the city for the costs of abating the nuisance. Absent a change in the adopted policy, the C.A.R. sponsored legislation will not make a distinction between the two types of liability and the homeowner will be responsible for paying both the penalties for creating the nuisance and the costs of abating the nuisance. Clarifying C.A.R.’s policy will serve to (1) make the entity that receives the property in foreclosure and benefits from the abatement of the nuisance pay for the abatement and (2) eliminate a strong argument that cities will be able to make against the sponsored legislation.

Discussion
C.A.R.'s Board of Directors has approved sponsoring legislation to address local property maintenance ordinances. This bill will (1) modify the statutory Notice of Default or Notice of Sale recording to include contact information for the foreclosing entity’s designated property manager, (2) ensure that liability for maintenance of pre-foreclosure property follows the legal owner and is not inherited by the foreclosing beneficiary or its agent, and (3) make the existing statewide rule for maintenance of post-foreclosure properties pre-emptive of local ordinances and will provide an REO owner notice and opportunity to repair before fines for violation can attach.

Liability for the maintenance of pre-foreclosure property can take two forms: (1) penalties imposed due to the failure to maintain property and, thus, creating a nuisance and (2) reimbursement of the city for the costs of abating the nuisance. Absent a change in the adopted policy, the C.A.R. sponsored legislation will not make a distinction between the two types of liability and the homeowner will be responsible for paying both the penalties for creating the nuisance and the costs of abating the nuisance.

The rationale for having the penalties for the nuisance remain with the homeowner is that it was the homeowner - through their inaction - that caused the nuisance and, thus, should rightly be responsible for paying the penalties. In addition, pre-foreclosure the lender arguably does not have access to the property and, thus, it would be unfair to penalize the lender for a violation that they were in no position to correct.

Making it clear in state law that a city cannot penalize the lender for creating the nuisance will have several effects: (1) Since the city can’t hold the penalties (which, in at least one case, can increase by $1,000 per day to a maximum of $100,000) over the lender, the lender will not be compelled to close off access to the home which has been a source of a great deal of consternation to REALTORS® attempting to show the property, (2) If the city is serious about preventing blight (as opposed to simply the levying such penalties as a profit center), it will be forced to maintain the property itself and recover its reasonable costs at foreclosure, and (3) The property will not be devalued by the imposition of the penalties and, as a result, the lender will not be encouraged to simply not foreclose on the property which serves to only compound the nuisance.

With regard to the costs for actually abating the nuisance, however, cities will be in a good position to argue that the entity that receives the property in foreclosure (usually but not always the lender) will be unjustly enriched. In other words, the entity will receive a benefit (i.e., the maintenance of the pre-foreclosed property) to which it is not entitled by right or for which it has not paid. There is a long standing tradition in the law of not allowing such unjust enrichment.

As matters stand, cities are going to oppose the C.A.R. sponsored legislation because it will place parameters on their property maintenance ordinances. Clarifying C.A.R.’s policy will serve to (1) make the entity that benefits from the nuisance abatement pay for the abatement and (2) eliminate a strong argument that cities will be able to make against the sponsored legislation.