October, 2008

Legislative Committee
Housing Opportunity Committee
Real Estate Finance Committee

This material is for discussion purposes only and has not been approved by the Legislative, Housing Opportunity, Real Estate Finance, or Executive Committees, or the Board of Directors.

Issue:  
Should there be state legislation preempting local vacant property registration ordinances to ensure consistent application of such ordinances statewide?

Action:
Optional

Options:
1. Do nothing.  Historically, C.A.R. has, for the most part, defaulted to local control for decision-making that directly impacts real property at the local level.

2. Establish a new policy regarding local regulatory actions on vacant property maintenance as it applies to foreclosed properties around the state.

3.  Direct staff to prepare an Issues Briefing Paper for the January meetings that outlines preemption options to be considered for possible legislation to be sponsored in 2009.

4. Other

Status/Summary:
As the number of foreclosed properties has grown, local governments have become increasingly concerned about the upkeep of abandoned properties.  Many have adopted new ordinances that require registration, inspection and maintenance of properties along with fines for violations.  Banks that have taken ownership of the properties are responsible for complying with these requirements.  Because they are absentee owners, they often rely on REALTORS® to act as their intermediary to address these issues with local government.

Discussion:

A. Background

A number of cities in California have adopted or amended ordinances to establish responsibilities for upkeep of properties that have been vacated as a result of the foreclosure crisis. These ordinances pose issues for REALTORS® who represent the banks that own these properties.  Banks are absentee owners, and in many cases are not even located in the same city or state.  While they have a financial interest in the property, because of their geographical distance, they are not aware of the city’s regulations.  They also are not immediately aware of any problems that may occur with the property, and are unable to immediately respond should issues arise.  REALTORS® who are hired by these institutions to manage and/or list the properties for sale are expected to address these issues because of their proximity to, and day-to-day interaction with, the property and the community.

Local ordinances that are designed to address issues related to vacant properties typically have one or more of a number of provisions that could be troublesome for banks and the REALTORS® they hire.  These include:

- Vacant property registration
- Inspections
- Notice of Default
- Maintenance
- Fines for violation
- Liens

Many local ordinances impose a registration requirement for vacant properties that is triggered by the filing of a notice of default.  In these instances a bank owner of a distressed property is required to inspect and determine if a property is vacant prior to filing the notice.

Such requirements are problematic for several reasons.  Banks and/or their agents (i.e. REALTORS®) should not be put in the position of making such a determination.  Local ordinances may offer a laundry list of visible indicators of vacancy, such as unopened mail or weeds in the yard, but these in and of themselves may or may not be indicative of vacancy.  Banks and/or their agents should not be put in the position of having to make this determination.

More importantly, filing a notice of default does not constitute a transfer of ownership of the property to the lender.  Therefore, the bank and/or its agent may not have the right to enter onto the property to make the required inspection.  Similarly, they should not be required to enter onto the property to perform required maintenance.  In many cases, a delinquent borrower may still be residing on the premises and an unannounced or unwelcome inspection could lead to conflicts.  Furthermore, the default stage of a delinquent mortgage could drag on for many months, sometimes more than a year.

Registration requirements also impose an administrative burden on the city.  Local government would have to dedicate and/or hire staff to effectively run such a program.  Attempting to pass along any of the costs to underwrite this administrative burden to property owners through fees will add more costs to already severely strained housing and lending markets.

Lastly, once a property is foreclosed upon, lenders will typically move quickly to re-sell it.  Therefore, they have an incentive to maintain the acquired property in good, marketable condition.

B. Recent Change in State Law

SB 1137 (CHAPTER 69, filed with the Secretary of State on JULY 8, 2008; effective immediately), contained a significant change of current law regarding maintenance of foreclosed properties. It requires a legal owner to maintain vacant, residential real property purchased by that owner at a foreclosure sale or acquired by that owner through foreclosure under a mortgage or deed of trust. Local government agencies are authorized to impose civil fines and penalties of up to $1,000 per day per violation on the legal owner for failure to maintain the property.

This new law requires any governmental entity that chooses to impose fines and penalties pursuant to this law to:

1.  Give notice of the claimed violation, including a description of the conditions giving rise to the claim of violation to the legal owner;
2.  Give the legal owner an opportunity to remedy the violation at least 14 days prior to imposing fines and penalties, and;
3.  Allow the legal owner an opportunity to contest any fines and penalties imposed.

SB 1137 defines "failure to maintain," for purposes of this new law, as failure to adequately care for the property, including, but not limited to, permitting excessive foliage growth that diminishes the value of surrounding properties, failing to take action to prevent trespassers or squatters from remaining on the property, or failing to take action to prevent mosquito larva from growing in standing water.

This new law also specifically declares that:

1.  It does not pre-empt any local ordinance;
2.  A governmental entity may not impose fines on a legal owner under both this section and a local ordinance;
3.  This section shall only apply to residential real property; and
4.  The rights and remedies provided in this section are cumulative and in addition to any other rights and remedies provided by law.