The Federal Housing Finance Agency (FHFA) has filed suit against the city of Chicago, challenging a new ordinance that makes mortgage lenders responsible for the upkeep of vacant homes on which they hold mortgages, including homes on which they have not yet foreclosed.
The FHFA argues that the ordinance unfairly impose ownership obligations on lenders without conferring any benefits, including the right to lease or sell the properties.
Under the ordinance, lenders face fines of up to $1,000 daily for failing to provide basic maintenance on vacant properties for which they are responsible. The ordinance also requires lenders to inspect properties they have financed monthly and to pay $500 to register any properties found to be vacant.
Chicago is the latest of several cities struggling to prevent foreclosed and abandoned properties from triggering a downward spiral that can infect and destroy entire neighborhoods. The Las Vegas City Council recently approved an ordinance similar to Chicago’s, imposing fines and jail sentences of up to six months on absentee owners who fail to maintain their properties.
The Las Vegas ordinance requires lenders to inspect all properties in default and to register any found to be vacant with the Department of Building and Safety. In addition to paying a $200 registration fee, lenders must appoint a property manager responsible for inspecting the property at least once a month until it is either sold or occupied.
Philadelphia has approved regulations requiring property owners – including lenders that have foreclosed on homes – to bring vacant properties up to code. The regulations authorize local officials to fine violators and seize their property.
A separate ordinance requires owners of vacant properties to ensure that they have “a functional door or window.”
“Philadelphia residents can no longer afford to have vacant properties harming their neighborhoods,” Mayor Michael Nutter said in announcing the initiatives. “Abandoned buildings tarnish blocks, bring crime and encourage illegal dumping. The city is committed to holding these landowners responsible. Eliminating vacant and blighted properties will benefit our neighborhoods and encourage development.”
Lenders view these requirements as unfair and unreasonable, noting, among other concerns, that they have no legal right to control a property until they have acquired it through foreclosure.
One Wall Street Journal reader suggested that taxpayers also should object to rules that will impose additional costs on Fannie Mae and Freddie Mac, both of which are operating under government conservatorship. “As a taxpayer,” this reader noted in an on-line comment, “I will not only {be responsible for] the upkeep of my own property, I will now be responsible for the upkeep of property in states that I don’t live in.”
DELINQUENCY SURPRISE
The number of borrowers who fell behind by 60 days or more increased unexpectedly in the third quarter, after declining steadily since the final quarter of 2009. The increase, to 5.88 percent from 5.82 percent in the second quarter, wasn’t large, but it surprised researchers at TransUnion who produced the report. “It’s much different than we’ve been talking about the last few quarters,” Tim Martin, a group vice president, told USA Today.
Analysts speculated that broader forces – the uncertain economic outlook, the poor stock market performance and concern about the U.S. and European debt crises, among them ― were responsible for the uptick.
"More and more homeowners are likely to struggle," Martin said in the USA Today report. "I'm not sure this is a one-quarter blip."
The Mortgage Bankers Association (MBA) calculated third quarter delinquencies differently, finding that loans delinquent by from 30 to 9-days declined slightly (by about 1 percent) compared with the previous quarter, but more seriously troubled loans, 90 days or more past due, increased by about the same amount , pushing the delinquency total in that category up to $121.4 billion.
The number of loans in foreclosure also increased for the first time in several quarters indicating that lenders are beginning to clear the foreclosure logjam created by the fall-out from the robo-signing mess. That bodes well in the long term, pointing toward a gradual improvement in the housing market, but increasing foreclosures will put more downward pressure on home prices in the near-term.
"Banks are aggressively seeking out borrowers with a strong capacity to repay loans" said James Chessen, chief economist for the American Bankers Association, said in a press statement. "Slow economic growth and high levels of uncertainty are still restraining lending,” he acknowledged, “but that tide is beginning to turn."
For now, economic pressures and declining home prices are pushing more borrowers underwater, and increasing the risks of strategic defaults. A quarterly report by Zillow found that 28.6 percent of homeowners who have mortgages owe more than their homes are currently worth, up from 26.8 percent in the second quarter.
TransUnion predicts that delinquency rates may increase for one or more quarters before declining toward the end of next year, possibly falling to as low as 5 percent from the peak of nearly 7 percent in the fourth quarter of 2009. That improvement assumes a number of factors: Stronger economic growth, lower unemployment, and a stabilizing housing market – none of them anticipated in the near term.
“We have a long way to go to get back,” the TransUnion report acknowledges.
EDUCATIONAL VALUE
Conventional wisdom assumes, and several studies have confirmed, a positive relationship between quality schools and property values: Property values appreciate more rapidly in good markets and decline less steeply in poor ones in areas known for having quality public schools. It appears that schools have an equally positive (or negative) effect on foreclosure rates.
An analysis by RealtyTrac Inc. found that the percentage of foreclosures sales declined as school rankings rose in five metropolitan areas -- Jacksonville, FL., Atlanta, GA; Toledo, OH; Stockton, CA; and Seattle, WA.
Stan Humphries, chief economist for Zillow, a real estate data company, thinks those findings may have more to do with income levels – which tend to be higher in highly regarded school districts – than with the schools themselves. “It is likely that both educational outcomes and foreclosures are ultimately linked to income, not to each other,” he told the Wall Street Journal.
Andre Schiller, one of the researchers responsible for the RealtyTrac analysis, thinks the relationship between schools, prices and foreclosures is more direct. Higher income residents push for quality schools, he suggested, and quality schools, in turn, attract higher income buyers. “Once in place, the higher-quality school systems reinforce this, causing higher demand for properties there and higher values,” Schiller told the WSJ.
DEFENDING ARMS
Since the subprime crisis sank the housing market and ignited an economic downturn, homebuyers have largely shunned adjustable rate mortgages (ARMs) in favor of fixed rate loans, perceived to be safer because they aren’t subject to the rising rates and resulting payment shock that crippled many ARM borrowers. But Paul Willen, a senior economist at the Federal Reserve Bank of Boston, thinks ARMs have gotten a bad rap. “The data refute the theory” that ARMs are inherently unsafe and that they were a major factor in the housing crisis, Willen contended in recent testimony at a Senate banking Committee hearing.
Willen analyzed 2.6 million foreclosures and found little evidence of payment shock. For 88 percent of the ARMs, his analysis shows, the payments had remained the same or declined since the loans were originated. Moreover, Willen testified, more than half – 60 percent – of the borrowers who lost their homes had fixed-rate mortgages.
Economic factors – declining home prices, job losses and other life events – not ARMs, were responsible for most of the foreclosures, he told legislators.
“The narrative of the fixed rate mortgage as an inherently safe product invented during the Depression that would have mitigated the subprime crisis because it eliminated payment shocks does not fit the facts,” Willen asserted.
Fixed rate mortgages have some benefits, he acknowledged and it is true, he agreed, that default rates on ARMs are higher. “But since defaults occur even when the payments stay the same or fall,” he argued, “the higher rate is most likely connected to the type of borrower who choses an ARM, not to the design of the mortgage itself.”
STUCK IN PLACE
The poor housing market and sluggish economic growth have produced historically low mobility rates, altering, at least temporarily, migration patterns that have been in place for several decades.
An analysis of Census data by the Carsey Institute at the University of New Hampshire found that migration into former boom states, such as Arizona, ground to a halt when the recession began and has not recovered, while states that had been losing residents for years -- such as New York, Massachusetts, and California -- have seen the outflow virtually halt.
Mobility rates always slow during economic downturns, the report notes, but migration levels declined last year to the lowest level since the government began tracking these numbers in the 1940s, according to a New York Times report.
The depressed housing market is preventing many unemployed workers from moving to other areas where they might be able to find jobs, because they can’t sell their homes. Responding to the tough market, many companies have become more cautious about recruiting employees from other areas and less generous in the relocation benefits they offer.
“Today, companies are spending more time with employees up front, learning about their real estate commitments before job offers are extended. Rather than a one-size-fits-all relocation program, benefits are decided case by case,” USA Today reported recently.
One major change: Some companies are encouraging employees they are recruiting from other areas to rent instead of buy. Others are providing bonuses to employees who sell existing homes quickly (a quiet means of offsetting losses on those sales) the article noted.
"We have companies that have been very quietly relocating employees, and even some of our larger clients are starting to pick up now," one real estate executive specializing in relocations noted, adding, "It's a very encouraging sign."
