FHFA Files Lawsuit Against Chicago Over Vacant Property Rules

The Federal Housing Finance Agency (FHFA) has reactedrnon two fronts to a recent move by The City of Chicago to enforce parts of itsrnhousing code relating to vacant properties.  First it directed the two government sponsoredrnenterprises (GSEs) Freddie Mac and Fannie Mae to revise their ServicingrnGuidelines to account for Chicago’s action and second, it sued the city forrninterfering with the conservatorship.   </p

In November the City Council unanimously enacted anrnOrdinance to impose registration fees, taxes, fines, penalties and maintenancernobligations on parties responsible for vacant properties in 92 Zip Codes in therncity.  The problem, from FHFA’srnperspective, is that the City defines the parties with these obligations veryrnbroadly, to include mortgagees and those acting on their behalf as among those responsiblernfor the properties.  Chicago officialsrnestimate that $15.5 million was spent last year boarding up or demolishing morernthan 500 properties, knocking down vacant garages and maintaining the exteriorsrnof approximately 1,900 homes.</p

The legislation as passed was actually a compromisernfrom earlier proposals that classified the lender as an owner even before titlernpassed through foreclosure.  Thernlegislation as enacted requires the mortgagee to registered the property withrnthe city every six months as long as it is vacant, to provide the name of anrnauthorized agent to whom the City can direct complaints, and to maintain thernvacant building in a manner to ensure it is secure and limit any potentialrnhealth and safety issues.  The mortgageernis charged $500 to register the building initially and any violations of thernordinance is punishable by a fine of $1,000 per day.</p

The suit filed Monday in the U.S. district court forrnthe Northern District of Illinois asserts that the City “is interferingrnunlawfully with FHFA’s federally mandated oversight and exercise of discretionrnas Conservator and regulator of the GSEs to preserve and conserve the value ofrncollateral securing the Enterprises credit exposure.   FHFA contests the Ordinance on a number ofrnpoints:</p<ul class="unIndentedList"<liIt identically regulates property ownersrnand mortgagees with security interests in vacant property and thus imposesrnobligations on the Conservator and the GSEs for which they do not havernattendant property rights including the right to enter the property.</li<liIt subjects the Conservator and the GSEsrnto the supervision and direction of a Chicago department in violation ofrnfederal law (the Housing and Economic Recovery Act of 2008, "HERA") whichrnpreempts the Ordinance as applied to the Conservator and the GSEs.</li<liThe Ordinance overrides the discretionrnof the Conservator and the GSEs in many ways on an operational level such asrnmandating the types of materials used in maintenance and repairs.</li<liThe Ordinance incorporates a taxingrnfeature (registration fee and penalties) that would unlawfully be applied tornservicers of loans on behalf of the GSEs and any tax on the Conservator or thernGSEs as well as any penalties and fines are specifically prohibited by HERA.</li<liThe Ordinance compounds thernaforementioned problems by imposing vague, subjective requirements such as thernrequirement to assess whether a property is uninhabited or merely seasonally vacant,rnpotentially imposing an unknown liability if such an assessment is incorrect.</li</ul

Thernsuit asks the court to declare the Conservator and the individual GSEsrnstatutorily immune from the Ordinance as it applies to mortgagees and enjoinrnenforcement against them.  It alsornrequests that the Conservator be refunded all monies that it and the GSEs havernpaid under the Ordinance as well as reimbursement of costs and accruedrninterest.</p

Inrnaccordance with FHFA’s directive to the GSEs, Freddie Mac has issued an industryrnletter to its servicers directing them to take the following actions inrnpreparations for additional future requirements.</p<ul class="unIndentedList"