Though Rahm Emanuel’s 100 days in office are hardly a basis for comprehensive judgement, the mayor’s support of a new ordinance passed by City Council is disconcerting to investors, community developers and all those who have an interest the the health of Chicago’s real estate market.
The ordinance, passed in July, allows the definition of a property’s owner to be broadened to include a “mortgagee” “assignee” and “agent” according to the Wall Street Journal.
The intention behind the law is sincere; in an effort to clean up countless abandoned and dilapidated housing units, the city is attempting to make those responsible pay. But the city’s definition of “those responsible” extends far beyond the property owner; anyone with even a remote financial connection with property responsible for upkeep costs.
It doesn’t matter if the property is foreclosed or if the title hasn’t changed hands; banks, mortgage agents and anyone else economically linked to the property can be made to pay upkeep costs under the ordinance.
As Richard Gottlieb, chair of Dykema’s Financial Industry Group said of the ordinance:
Imagine for a moment that you were told to take care of your neighbors’ lawn — and that if it is not mowed — you are responsible.
But the costs are for more than cutting the grass; last year, the city spent $15 million on vacant property upkeep. As Alderman Pat Dowell told the Journal in a recent interview, the $15M figure does not include costs like streets and sanitation, policing, evicting squatters, rent abatement, water issues, snowplowing and more.
To some like Gottlieb, the law seems more like a means for the city shed an unwanted problem onto the private sector rather than a legitimate governmental endeavor. As he stated in Housing Wire:
It’s over broad in its application and a violation of equal protection…If the property went into REO, they (the financial institution) have every obligation in the world to fix the code violations. This is just a gotcha moment for the city, they are going to punish lenders in circumstances where the code violation is 100% out of their control.
And, as the Journal points out, the ordinance wanders into the murky waters of property law, creating an entirely new set of problems:
Under Illinois state law, it’s illegal to trespass on someone else’s property. And even if it were legal, the ordinance doesn’t define an objective standard for assessing whether a property is vacant or not. Are bankers supposed to peer into windows to see if anyone is at home? If they determine the property is vacant, are they liable for faulty plumbing, peeling paint and weedy lawns? Who is going to do that work?
Moody’s has warned that the ordinance has the potential to drive out what little investment remains in the afflicted areas. Sally Acevedo, a Senior Analyst for Moody’s, foresees longer timelines in future foreclosure proceedings because of the ordinance’s requirements. And longer timelines are never good for investors. Says Acevedo in Housing Wire:
Poor credit quality borrowers in jurisdictions with unclear or indefinite foreclosure processes expose RMBS transactions to longer foreclosure timelines and higher transaction costs under this type of law.
And Chicago, home of exceptionally long foreclosure times (504 days as opposed to the national average of 318) could certainly do without lengthening the period.
The ordinance has also been constitutionally challenged, and opponents have also questioned the city’s ability to initiate such a law, as no state legislation accompanied its passage.
This ordinance is only one of the mayor’s upcoming housing development initiatives. The Micro-Market Recovery Program, a ploy to stabilize property values by way of a $15-$20M loan pool, strives to normalize the values of around 2,000 homes within three to five years.
Though far from ideal, the program seeks to positively involve the community through the loans, allowing banks, non-profits, investors and other community groups to redevelop and revitalize troubled areas, rather than the forced upkeep of the ordinance.
Nevertheless, the struggle has turned into one of “community vs. big banks” and protesters have taken to the streets to show support for “holding banks accountable.” It seems to some that the bailouts are an excuse to use the banking industry as a waste disposal for particularly difficult problems.
Protestors and others deluded into thinking that burdening banks and investors with extra financial obligations will solve the problems their community faces will only find diminished investment and longer turnover rates in areas that need it the most, perpetuating the conditions that lead to abandoned homes and unattractive neighborhoods.