Three years ago, the city of Buffalo, New York, tried to stretch the definition of "owner" under city codes to the point where it was elastic enough to cover a lender who foreclosed on a house but never took title to the property. That attempt was made by dint of a clever legal argument made by a "creative" lawyer (in that case, the Buffalo City Attorney) and ultimately, the effort failed.
Last week, Housing Wire reported about a newly enacted Chicgo ordinance that defined "property owner" to include lenders that had "an interest" in the property even though the lender had not completed foreclosure.
With this change, a mortgagee is now required to cut the grass, shovel snow and deal with complaints tied to the property, according to Chicago Mayor Rahm Emanuel, who applauded the ordinance's passage Thursday.
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Emanuel defended the ordinance saying "vacant properties often become a financial burden on the city," with Chicago spending more than $15 million on vacant buildings last year alone.
The American Securitization Forum sent Chicago a letter that said that the new law stinks on ice.
"We strongly object to the proposition that a lender can or should be considered an owner and required to undertake property maintenance responsibilities prior to assuming title to the property," ASF wrote. "A lender under a mortgage loan or a subsequent assignee does not own the property securing a mortgage loan. Rather, the borrower owns the property and has granted a lien on the property to the lender to secure the borrower’s loan payment obligations," the forum explained.
ASF also argued that "even a defaulting borrower retains all elements of legal title to the property and the associated legal rights of possession and responsibilities for maintaining the property."
In its letter, the group fired a warning shot saying "imposing such duties and obligations on lenders, without possessory rights, contradicts established legal and constitutional property rights principles" and could become the "subject of significant legal challenges."
Fannie Mae, Freddie Mac, and the Federal Housing Finance Authority also publicly lambasted the ordinance.
Yesterday, Moody's Investors Service stated the obvious: the burden of the law could chase lending out of the very blighted areas it was intended to benefit. If there's more risk and potential liability to lending there than elsewhere, either lenders aren't going to lend there or they will price the risk accordingly, which means borrowers who can get financing will pay more for it than they would without this misguided effort.
Of course, Rahm Emanuel got excellent face time before the press, which is all that counts. By the time the logical consequences of this ordinance become manifest, the press will have moved on.
The law of unintended (albeit logical) consequences continues to thwart all social engineering endeavors.
