Blight risk: the need to address the problem of drawn-out foreclosure processes for vacant and abandoned properties is widely understood. But legislative remedies are proving hard to come by.
--E. Michael Rosser, CMB
There are at least 21 states where foreclosures must go through the judicial process. Because of the delays inherent in that approach, tens of thousands of vacant and abandoned homes are sitting and deteriorating for as long as two to three years. [paragraph] Yet, in few of those states has legislative action been taken to expedite foreclosure on these vacant and abandoned homes, with even fewer efforts actually succeeding. [paragraph] This article examines why this remains such an entrenched problem. [paragraph] Two of the handful of successes occurred last December in Illinois and New Jersey. But in Florida and Ohio, efforts have yet to end in success; while in Colorado and New Mexico, apparent successes have turned into failures. [paragraph] Proponents of adopting what is sometimes called "fast-tracking" have found that arriving at a goal everyone favors is a long, complex process with little agreement over the route to be taken. [paragraph] In Florida, State Rep. Kathleen Passidomo, a Florida Bar board-certified real estate lawyer and a partner at Naples, Florida-based law firm Kelly, Passidomo & Alba LLP, has introduced a new version of her mortgage foreclosure bill that died in the state Senate last year after receiving approval in the House. [paragraph] The new state bill, HB 87, which will be heard during the 2013 60-day session that begins March 5, excludes the previous bill's provision for expedited foreclosures on abandoned properties but does allow for avoiding an otherwise required foreclosure hearing if the borrower does not respond to a foreclosure filing. Passidomo says she feels that this provision covers the abandoned home issue.
All total, she says, her bill helps ensure that the foreclosure process is "as efficient as possible." However, she admits that the legislative session's 60-day limit is "part of the problem" in trying to obtain approval of her legislation.
"Our No. 1 priority will be balancing our budget," Passidomo told Mortgage Banking in an interview.
"Then we have other significant issues to address, one of them being how we need to deal with the Obamacare issue. So there's some big issues on the table. But 1 feel pretty confident that the foreclosure bill will get reviewed. I feel pretty good about it," she said.
However, opposition to the bill from outspoken foreclosure opponent Lisa Epstein, a successful Palm Beach County, Florida, circuit court clerk candidate last fall, has begun, according to a report in the Tampa Bay Times.
On the ground in Ohio
In Ohio--another judicial state--fast-tracking foreclosures on vacant and abandoned homes "has been discussed for at least five years," says Rick Rothfuss, a partner with the Cleveland law firm of Lerner, Sampson & Rothfuss.
"I met with a [state] legislator, Steve Driehaus, going back five years, who was all in favor of this, and in 2008 it was part of a new foreclosure bill. But at the last minute, that section was dropped out of it. It's always being discussed, and it's been reintroduced many times since then. Everybody in Ohio is troubled by the fact that these cases take forever and property is sitting there vacant and in disrepair but, for some reason, nothing has come to pass," says Rothfuss.
"There's a consumer-oriented mindset in Ohio that we don't want anything that will speed up foreclosures," Rothfuss explains.
"So there needs to be a distinction [made] between someone having their day in court, and a foreclosure that would move quickly because the people involved are gone and it can be assumed [they] don't even care about having their day in court."
Ohio legislatures have been "working on these issues for a number of years," explains Driehaus' sister, State Rep. Denise Driehaus, a co-sponsor of several bills.
"We did pass a fairly comprehensive bill out of the legislature a couple of years ago, but it failed to go anywhere in the Senate. So we introduced part of that bill again in the 2012 General Assembly and didn't even get it out of the House. So we are having very limited success with the broad issue of trying to keep foreclosures from happening," Driehaus said in an interview with Mortgage Banking.
Ohio's failed bills have not only dealt with expediting foreclosures on vacant properties, she says, but also dealt with "the broader issue of let's try to keep the foreclosures from happening to begin with, and get the banks to do modifications for the homeowners."
This, she admits, puts someone like her, who has stressed loan modifications over foreclosure, in a bit of an odd position.
"Initially the banks were moving quickly and we were trying to slow things down so that the borrowers and the banks or the servicers could talk to one another and try to keep the borrower in the home, avoiding the foreclosure to begin with," Driehaus says.
"But once the property has gone through that process--for instance, the homeowner has moved out--then we've got this other problem, which is kind of the opposite, wherein we want to make sure that someone is taking responsibility for the vacant property so that we can hold them accountable and make sure it's being maintained.
"So it's kind of a weird thing," she says. "We definitely want to take enough time at the front end to allow the homeowner to stay in the home, but if that's not a situation that can be worked out, then the foreclosure moves forward and we need to make that happen fairly expeditiously."
Perhaps Florida and Ohio need to learn from the experiences of two other judicial states--New Jersey and Illinois--although their laws are too new to be deemed a total success as yet.
What's happening in Illinois
In Illinois, strong opposition from banks and other lenders led to the defeat of one proposed bill in the 2011-2012 legislative session and extensive amendments to a new bill, SB 16, in the next session. That bill, in amended form, was approved and ultimately signed into law by Gov. Pat Quinn last December.
The defeated proposed bill, in addition to authorizing a fast-track foreclosure procedure for abandoned residential real estate, also provided penalties for conviction on charges of what was termed "wrongful inducement of abandonment of a residence." The penalties included revocation of a convicted person's license and the state taking control of any convicted financial institution.
SB 16, as originally written, would have established three additional foreclosure-related fees totaling $800 and also required vacant-property registration in all of the state's counties, similar to what now is required in Chicago.
"It was not a well-drafted bill," says Joyce Nardulli, vice president, government relations, with the Illinois Bankers Association (IBA). "We really, really did not like it. We didn't even view it as a sincere fast-track effort."
She adds, "It was modeled after Chicago's ordinance, to try to make the whole state have what Chicago has. The FHA [Federal Housing Administration] is suing Chicago over its current ordinance and they [Chicago officials] thought that if the whole state adopts it, that will give them better standing in court."
But the IBA pushed hard for approval of the bill in its final form, she explains.
That final version of SB 16, says Robert Klein, founder and chairman of Valley View, Ohio-based Safeguard Properties Inc., had wide support, including from community groups as a result of successfully explaining that it applied only to abandoned homes.
"What made it [successful] in Illinois was consumer groups were now endorsing it," Klein says.
A "unique" and "critical" aspect of the Illinois legislation, which will "knock down the foreclosure process from 600 days to 90 days," he says, is that "if a servicer goes into a property because they think it's vacant--and they list all the indications that the home is vacant--they cannot be sued for trespassing. That was the big issue some were afraid of for a while. That's just as critical and just as important as the actual fast-tracking of the legislation."
Klein now views it as "the model bill that should be copied across the country."
Under the legislation, which takes effect June 1, servicers can ask courts to fast-track foreclosures on vacant homes when they submit proof of vacancy and abandonment.
All foreclosure filings carry a $50 filing fee plus an additional $50 to $500 per filing based on the total number of filings made by the same lender or servicer during the previous calendar year, with the smaller figure charged to those with fewer than 50 foreclosure actions and the larger figure charged to those with at least 175 filings. Seventy percent of those funds would be used to help municipalities offset their costs to secure and maintain neglected properties, with most of the remainder going toward grants to home counseling and foreclosure-prevention programs.
New Jersey's approach
New Jersey also adopted a fast-track or expedited foreclosure bill last Dec. 3 when Gov. Chris Christie signed it.
"There had been previous attempts to expedite foreclosures," says Michael Affuso, senior vice president and director of government relations at the New Jersey Bankers Association. He explained the previous attempt was vetoed in July 2012 by Gov. Christie because it contained a spending component.
"Our governor," he notes, "is very vigilant against any additional state spending."
Support went far beyond the state bankers association, he points out.
"It was supported by a broad coalition of folks--municipalities supported it, our state league of municipalities supported it, even the citizens groups that were fighting us on foreclosures four years ago supported it because they realized that a vacant or abandoned property is just not a good thing for a neighborhood," Affuso says.
"There's no public reason to have a 900-day foreclosure process for a vacant and abandoned property," he says.
Lenders and servicers can ask to be dropped out of the judicial process and placed into the new expedited process, which "essentially says you go to sheriffs sale within 75 days of the finding by clear and convincing evidence the property is vacant and abandoned," he explains.
While there have been "a lot of inefficiencies" in the judicial process in the past, and the courts have been trying to improve, the new law should do a lot more to speed foreclosures on vacant and abandoned residential properties, Affuso says.
John V. Konyk, executive director of governmental affairs at Washington, D.C.-based Weiner Brodsky Sidman Kider PC and immediate past chair of the Mortgage Bankers Association's (MBA's) State Legislative and Regulatory Committee, says that those earlier New Jersey bills that included fast-tracking "didn't go through because they had a number of other issues, and those other issues tended to derail them. So finally they separated out the [fast-track] foreclosure issue."
In Connecticut, another judicial state, expediting foreclosures on vacant homes was one of the topics discussed last January at the Mid-State Association of Realtors[R] annual legislative breakfast in Bristol, Connecticut.
Eight legislators attended, but legislation has yet to be introduced, according to one of the eight--State Rep. Betty Boukus, who said such legislation could be "a good idea."
Other states seeking to expedite foreclosures on vacant and abandoned homes have run into their own unique problems as a result of aspects of the laws they adopted.
Colorado, which uses both mortgages and deeds of trust, and thus is both a judicial and a non-judicial state, has had in effect since Aug. 1, 2010, a provision for the expedited sale of abandoned and blighted residential properties.
But that law has seldom been used and it expires on Aug. 1, 2013.
"The expedited foreclosure provision was something everybody thought would work better than it actually did," says Terry Jones, chairman of the Colorado Mortgage Lenders Association's Legislative and Regulatory Affairs Committee.
"What's required is showing that the property is both vacant and abandoned, and the process of getting the documentation to prove that the property is abandoned takes a fair amount of time. So it doesn't really speed up the foreclosure process.
"When it does get used," Jones points out, "it is in circumstances where the borrower agrees that they have abandoned the house, because in lieu of proving the house is abandoned, you can take a certificate from the borrower [stating] that it's abandoned. But that doesn't happen all that frequently"
As a result of its infrequent use, efforts are not being made to extend the provision.
The focus instead has shifted to defeating a new bill that was introduced on Jan. 30 in the Colorado house, according to Jones and Jenifer Waller, senior vice president for the Colorado Bankers Association.
"The bill actually extends the time it would take to foreclose and applies to all mortgages," says Waller.
Complications in New Mexico
Complications also arose in New Mexico, a judicial state, when lenders, under the state's amended Deed of Trust Act of 2006, began using deeds of trust in most loan closings, with hopes of being able to do non-judicial foreclosures,
"But when some of those new deeds of trust began to default and attempts were made to do non-judicial trustee foreclosures rather than judicial foreclosures," explains Alan Fowler, president of the New Mexico Mortgage Lenders Association, "we found out that because of conflicts in the laws, yes, we could use deeds of trust as our security instrument, but statutes did not allow us to foreclose outside the courts. So we have to do judicial foreclosures even if a deed of trust is the security instrument. It would require a legislative fix to allow us to do non-judicial foreclosures."
But so far, no attempt to allow non-judicial foreclosures has been made in the current legislative session, he says.
Then there's Florida
Until Rep. Passidomo's HB 87 or any other legislation is approved and signed into law, Florida has to make do with a cumbersome, easily subverted provision to fast-track foreclosures on vacant and abandoned properties.
"We have an expedited judicial process here in Florida," explains Anthony DiMarco, executive vice president of government affairs at the Florida Bankers Association in Tallahassee, which, like the Mortgage Bankers Association of Florida, supported the bill that died in the state Senate last year. He adds, "but no one uses it because if the borrower files any sort of defense--it doesn't matter if it's a real defense or a bogus defense--it gets kicked out automatically from expedited [status]. So people say, 'Why bother to waste more time?"
Alex Castellanos, president-elect of the MBA of Florida, who will assume the presidency in June and is an assistant vice president at a regional bank, says his organization supports legislation "that identifies true vacant properties."
He adds, "But how do we fast-track them and alleviate some of the court issues when our court system in Florida is so backed up with some of these foreclosures just bogging them down? At the end of the day, nobody's fighting foreclosures [on these properties] but it still takes 24 to 36 months [to complete foreclosures], and the home deteriorates to a level where it becomes almost worthless."
Ohio also currently has in place a failed method of fasttracking foreclosures on vacant and abandoned properties. The process is an involved one and requires a final decision by a judge.
"In Ohio, like other judicial states, we have our rules of service and everyone who has any potential interest in a property has to be served," explains Ron Chernek, a partner at the law firm of Reimer, Arnovitz, Chernek & Jeffrey Co. LPA, TWins-burg, Ohio.
"You really can't circumvent that procedure. Once the [foreclosure] complaint is filed, you have to go through that service procedure. You can't really speed that up because there's a due process argument and requirement that these people have to get served. So you have to go through whatever you need to do to get them served," he says.
"After that, you get to the phase where, in court, you might be able to say to the judge, 'Listen, this thing is vacant; we don't want these vacant properties to cause a blight on our community and we want to get this over with as quickly as possible. The bank's not going to complain; the borrower's not going to complain because they're gone. The only one's complaining are the people living next door," Chernek says.
"So the judge then may expedite the judgment process and maybe get it to sale a little bit quicker," he says. "But again, there are statutory requirements with respect to getting a property to sale--notice and advertisement of the property, etc.
"This leaves it up to the judge, and the judges here are pretty inundated with these cases," Chernek explains. "I really have not seen a lot of expediting of these cases. It's tough to get something expedited when there's so many cases going through the pipeline at one time."
Still, this cumbersome process for expediting foreclosures has "resulted in the foreclosure of about 8,000 vacant properties in the county [Cuyahoga County] since 2005," says Jim Rokakis, director of Cleveland-based Thriving Communities Institute.
"It's become an accepted way to move these properties. But now we're working on language that will enable us to bifurcate properties that have been abandoned by the [borrower]. That will enable us to fast-track those as well."
Don't call it "fast-track foreclosures"
Often proposed legislation has been loaded down with other provisions, causing either lender/servicers or community groups--or both--to work against passage. This is what happened at first in Illinois and New Jersey before failures turned into successes.
Frequently the oft-used term "fast-track foreclosures" led to community opposition. And legislators fear they will "get killed at election polls if they support fast-track foreclosures," Tyler Smith, vice president in charge of Des Moines, Iowa-based Wells Fargo Home Mortgage's real estate-owned (REO) portfolio, said at Safeguard Properties' Property Preservation Conference in Chicago last November.
The term "vacant and abandoned properties" has to be included and stressed in all references to clarify that delinquent borrowers still in their homes won't be denied their legal rights, Smith and others say.
But proving that a home is actually "vacant and abandoned" is a major point of contention for consumer groups, and what is meant by "vacant and abandoned" has to be clearly defined.
"Generally, the key things that get involved in the discussion are, first, how do you know it's vacant and abandoned? And what are the standards to establish that? It goes back to the municipality and the local building inspector to create standards for how do you know for certain it's truly vacant and abandoned and not just someone who's gone away for a couple of months or whatever. That's the first issue," says Konyk.
He adds, "Then, once you determine the process for declaring that it's vacant and abandoned, how much of the remaining foreclosure process can you strip away? How can you get the courts comfortable with issuing a judgment that circumvents the rest of the process or if there's certain other things that need to occur?"
Consumers focus on those questions, he says, in order to make sure somebody who really hasn't abandoned a home is not easily thrown out.
"The question, then, is how quickly can you get those necessary things done? That varies in a whole lot of states," says Konyk.
"When you say 'fast-track,'" says Ohio attorney Rothfuss, "nobody wants foreclosure to be fast--we want everybody to have their day in court, but that's not what this is all about. People who don't want their day in court, who walked away, are better off having the foreclosure move quickly, as is the whole community better off [in] having it move quickly on a totally different track."
"Community groups are in opposition until they fully understand it applies to vacant properties," says Safeguard Properties' Klein. He prefers the term "accelerated foreclosures," explaining that using the term fast track "is not the way to go." Others use the term "expedited foreclosures," he says.
While successful legislative action in judicial states to expedite vacant property foreclosures has been slow to date, Klein says the tide may be turning.
"I think the Illinois bill, which took about three years in the making, if not a little bit more, will lead to action in other states because I have personally received quite a [lot of] feedback from communities around the country asking, 'How can we do this, because it seems the right thing to do?' I have not received one negative response," he says.
"Support grows from the ground up--from the code-enforcement officials to their supervisors. But it needs a push from the ground up to get this thing passed. That's what's necessary," Klein says.
Often proposed legislation has been loaded down with other provisions, causing either lender/servicers or community groups or both to work against passage.
Jerry DeMuth is a Chicago-based freelance writer. He can be reached at email@example.com.
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|Comment:||Blight risk: the need to address the problem of drawn-out foreclosure processes for vacant and abandoned properties is widely understood.|
|Date:||Mar 1, 2013|
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