The Federal Housing Finance Agency (FHFA) has reacted on two fronts to a recent move by The City of Chicago to enforce parts of its housing code relating to vacant properties.  First it directed the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae to revise their Servicing Guidelines to account for Chicago's action and second, it sued the city for interfering with the conservatorship.  

In November the City Council unanimously enacted an Ordinance to impose registration fees, taxes, fines, penalties and maintenance obligations on parties responsible for vacant properties in 92 Zip Codes in the city.  The problem, from FHFA's perspective, is that the City defines the parties with these obligations very broadly, to include mortgagees and those acting on their behalf as among those responsible for the properties.  Chicago officials estimate that $15.5 million was spent last year boarding up or demolishing more than 500 properties, knocking down vacant garages and maintaining the exteriors of approximately 1,900 homes.

The legislation as passed was actually a compromise from earlier proposals that classified the lender as an owner even before title passed through foreclosure.  The legislation as enacted requires the mortgagee to registered the property with the city every six months as long as it is vacant, to provide the name of an authorized agent to whom the City can direct complaints, and to maintain the vacant building in a manner to ensure it is secure and limit any potential health and safety issues.  The mortgagee is charged $500 to register the building initially and any violations of the ordinance is punishable by a fine of $1,000 per day.

The suit filed Monday in the U.S. district court for the Northern District of Illinois asserts that the City "is interfering unlawfully with FHFA's federally mandated oversight and exercise of discretion as Conservator and regulator of the GSEs to preserve and conserve the value of collateral securing the Enterprises credit exposure.   FHFA contests the Ordinance on a number of points:

  • It identically regulates property owners and mortgagees with security interests in vacant property and thus imposes obligations on the Conservator and the GSEs for which they do not have attendant property rights including the right to enter the property.
  • It subjects the Conservator and the GSEs to the supervision and direction of a Chicago department in violation of federal law (the Housing and Economic Recovery Act of 2008, "HERA") which preempts the Ordinance as applied to the Conservator and the GSEs.
  • The Ordinance overrides the discretion of the Conservator and the GSEs in many ways on an operational level such as mandating the types of materials used in maintenance and repairs.
  • The Ordinance incorporates a taxing feature (registration fee and penalties) that would unlawfully be applied to servicers of loans on behalf of the GSEs and any tax on the Conservator or the GSEs as well as any penalties and fines are specifically prohibited by HERA.
  • The Ordinance compounds the aforementioned problems by imposing vague, subjective requirements such as the requirement to assess whether a property is uninhabited or merely seasonally vacant, potentially imposing an unknown liability if such an assessment is incorrect.

The suit asks the court to declare the Conservator and the individual GSEs statutorily immune from the Ordinance as it applies to mortgagees and enjoin enforcement against them.  It also requests that the Conservator be refunded all monies that it and the GSEs have paid under the Ordinance as well as reimbursement of costs and accrued interest.

In accordance with FHFA's directive to the GSEs, Freddie Mac has issued an industry letter to its servicers directing them to take the following actions in preparations for additional future requirements.

  • Determine the number of mortgages they own or guarantee that may be subject to the Ordinance, their state of delinquency and occupancy.
  • Perform the inspection, maintenance, repair, and legal obligations required by the Ordinance for vacant properties until further notice. No pre-approval from Freddie Mac for over-allowable expenses is required until further notice.
  • Separately record and track outside of the usual systems and forms all expenses incurred by the servicer or its vendors for filing registration statements or for inspection, maintenance, or legal services required by the Ordinance but servicers should not submit these expenses to Freddie Mac until further information is requested
  • Continue to services mortgages in accordance with the Guide and applicable local State, and federal law.

The Chicago Ordinance has to be a great concern to FHFA and to private banks as it appears to be only the tip of the spear.  As reported here earlier, the City of Las Vegas has enacted a similar ordinance and, according to the law firm Dechert, LLP, San Diego, California and Malden, Massachusetts are currently considering such regulations.