Legislative Committee
Real Estate Finance Committee
Local Governmental Relations Committee

(This material is for discussion purposes only and has not been approved by the Legislative, Real Estate Finance, Local Governmental Relations or Executive Committees or the Board of Directors)

Issue:
Should C.A.R. sponsor legislation to give foreclosing lenders the right to enter and maintain default properties prior to foreclosure, and avoid a lien by local government for nuisance or neglect prior to sale?

Action:
Optional

Options:
1. Sponsor legislation allowing lenders pre-foreclosure access, as set out below.

2. Support or sponsor legislation to pre-empt local government rules for maintenance of foreclosed properties (see Legislative agenda item VII).

3. Do Nothing at the state level, but address unreasonable maintenance rules at the local level.

4. Other

Status/Summary:
Local governments are not specifically pre-empted in their ability to enact innovative local rules for foreclosed or default properties, even though SB 1137 (Perata, 2008) put a general rule in place statewide. Some ordinances, most notably the City of Chula Vista, attempt to impose obligations and fees on foreclosing lenders even before the lender takes title in a foreclosure sale. Unfortunately, the overreaching burdens of these property maintenance ordinances can end up creating unworkable burdens for REALTORS® attempting to list or sell the foreclosed property. (Please see also the included Issues Briefing Paper, State Pre-emption of Foreclosure Property Maintenance -October 2008)

Discussion:
REALTOR® PROBLEM: Local jurisdictions are passing ordinances that require the maintenance of properties in foreclosure. Some locals are tracking notices of default (NODs) and requiring the lender who records the NOD to maintain the property, even throughout the pre-foreclosure process. Lenders complain that they cannot maintain the property because, legally, they do not have the right to go on the premises until the foreclosure sale is completed and they take the property back. Locals are imposing fines, reportedly sometimes up to $1000 a day, for properties not maintained according to the local ordinance. While these fines are for violations that occur before the foreclosure sale, and probably "wiped out" by the sale, sometimes the lien for these violations is reportedly recorded after that sale. In other words, the locals are waiting until after the lender takes the property back at the foreclosure sale so that their lien at least looks like it is not invalidated by the sale. Finally, the burden falls on REALTORS® when lenders give the REO listing to REALTORS® with a set fee for their services, which includes paying any maintenance liens. In other words, deliberately or not, lenders are "offing" the responsibility to pay these liens onto REALTORS® who have to pay them out of their commissions.

Goal of a possible legislative fix: Avoid the "fall out effect" of excessive liens on REALTORS® involved in REO transactions, but at the same time preserve the ability of local governments to avoid nuisances and neglected properties that run down neighborhoods.

One option is to develop a process, similar to the right of a landlord to enter a tenant's premises, for lenders to enter a property in foreclosure to maintain that property pursuant to a local ordinance mandating that maintenance, and in order to avoid local jurisdiction-imposed penalties.

In addition, it would provide that locals cannot cite property (and create a lien) for violations of a maintenance ordinance, and do not have a claim against the lender unless and until notice has been given and the lender has failed to commence maintenance of the property within a period of not less than 14 days and completed corrections within a period of not less than 30 days. This is the same notice currently required under state law (after SB 1137, Perata), which specifically states that it does not preempt local law.

The result of this approach would be that the penalty cannot be a lien against the property but is instead a direct obligation of the lender - but only after notice and failure to perform.

Other interest groups
It is not known how other interest groups might react. Lenders are uncomfortable with the increasingly aggressive local ordinances attempting to charge them for code violations and maintenance of their pre-foreclosure and REO properties. Their trade groups have indicated a willingness to support making the rule of SB 1137 pre-emptive of local authority. However, they have not confronted the prospect of another mechanism (even if it is more reasonably structured) that makes them responsible for pre-foreclosure expenses.

Local governments, primarily cities, are potential opponents as well. There are some that suspect that local governments are using inspections (and citations) of vacant REO properties as a substitute source of revenue and a way to keep inspectors busy as activity in the construction sector has been reduced. They also have an appropriate desire to maintain quality neighborhoods against nuisance properties, and may resist any change in their inherent police power. On the other hand, if the mechanism statutorily clarifies their ability to pursue lenders and still allows them to require maintenance of vacant properties, then they may be convinced not to oppose.

Should C.A.R. sponsor legislation to give lenders the right to maintain vacant pre-foreclosure properties as outlined above?