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Property Preservation from Coast to Coast: Perspectives from Massachusetts and Washington State

Posted By USFN, Monday, May 1, 2017
Updated: Tuesday, April 18, 2017

May 1, 2017

by Julie Moran
Orlans PC
USFN Member (Delaware, Massachusetts, Michigan)

and Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)

In nearly every state in the country, the number of loans in foreclosure continues to decrease. According to data collected by ATTOM Solutions, RealtyTrac’s parent company, there were almost 1.4 million vacant properties (over 18,000 of which were at some stage of foreclosure, with an additional 46,604 bank-owned vacant properties) as of the third quarter of 2016. These numbers represent a reduction in all categories from the same period in 2015. The only exception is bank-owned properties, which saw a nine percent increase, likely attributable to the historic foreclosure backlog in some states that is now moving forward to sale.

These declining numbers can be small solace for municipalities, particularly those in economically depressed cities and towns dealing with vacant and abandoned residential properties in their neighborhoods. In recent years, state and local governments across the nation have used a variety of strategies to address neighborhood blight, relying on long-established laws as well as more recent legislation specifically targeting vacant properties — both in the foreclosure process and at the REO stage.

In this article, the strategies employed by two states (the Commonwealth of Massachusetts and the State of Washington) in addressing their property preservation issues will be contrasted and compared.

When a property owner (or, in some cases, a foreclosing mortgagee) has repeatedly ignored notices of building or sanitary code violations, Massachusetts officials have a variety of tools available to them — which they don’t hesitate to deploy. MA. G. L. Ch. 143 § 51 allows the municipality to file a criminal complaint against an owner who has failed to make the cited repairs within 30 days of the notice. Municipal ordinances in a number of communities require foreclosing servicers or owners of REO to register vacant (and in some cases, occupied) properties in foreclosure. Depending on the ordinance, the servicer/REO owner may have to pay an annual fee, certify that the property has been inspected, appoint a local property manager to monitor the property, and post a “cash” bond of up to $10,000 per property to ensure the property is maintained.

However, for the mortgagee, or an owner of a bank-owned property, an even more serious risk lies in the provisions of MA. G. L. Ch. 111 § 127F: the so-called receivership statute. Under the law, elected officials may file a motion with the state court to appoint a receiver who takes over the process of placing the property in good repair. Once appointed by the court, the powers of the receiver are extraordinary. He or she does not have to comply with public bidding laws, enjoys little judicial scrutiny in either their selection of construction professionals, property managers and legal counsel, or their budget. Additionally, all costs and expenses incurred are given super-priority lien status. Couple this with a comparatively fast-track priority lien foreclosure process and the interest of the mortgagee or REO owner can swiftly evaporate.

Attorney General Enforcement — In addition to the foregoing, surely the most problematic tool Massachusetts has for combatting blighted properties is the Abandoned Housing Initiative of the Office of the Attorney General (AG). This program — launched more than four years ago by the AG who was unhappy with the pace of resolution of blighted properties — uses the receivership statute and the AG’s civil investigatory powers to target vacant properties being foreclosed upon or bank-owned. The referral to the AG of a property can originate from a complaint posted on the AG’s website, by a telephone call from a neighbor or tenant, or from Legal Aid or another consumer group. Municipal officials can also refer properties that they would prefer the AG to handle.

Once a complaint is logged, the AG promptly identifies the owner (and foreclosing mortgagee) and files a motion to appoint a receiver. The AG will use the prospect of the possible appointment to press the owner to make the repairs. The AG staff have become very knowledgeable about repairs and maintenance, and use their power to micromanage the entire process. To avoid appointment of a receiver, they will insist on an aggressively comprehensive repair plan with deadlines for completion. They tend to set status hearings for every two weeks to ensure that the work is being completed; extensions to repair cannot be taken for granted. They conduct their own inspections and are quick to cite any repairs not made to their satisfaction. If the owner is not proceeding fast enough, they will move to appoint a receiver to finish the work. Upon completion of the work — whether performed by the owner, mortgagee, or receiver — they will present the court with their own bill for attorneys’ fees and all other expenses that they have incurred during the process, which is also given priority status.

So how does a servicer and its counsel effectively navigate the property preservation process in Massachusetts? Working relationships with the AG’s and municipalities’ staff are fostered in order to effectively address property issues; excessive fees and costs are challenged, and it is made clear that upgrades disguised as repairs that seem excessive will be questioned. When threatened with a receivership, approval can be sought to complete only emergency (rather than all) repairs on a fast-track basis; motions for access and documentation of inspections can be used to rebut serial repair issues raised by tenants.

A servicer faced with an abandoned property in disrepair will have to: carefully balance the cost of repairs against the equity in the property, as well as the risk of making repairs on a property in foreclosure against being deemed a mortgagee in possession with the inherent obligations and exposure associated with that status; and, in all cases, adopt an effective oversight and escalation process to avoid garnering the attention of the AG.

Since the decision of the Washington Supreme Court in Jordan v. Nationstar (Wash. July 2016), property preservation has been one of the big issues to be addressed in the current legislative session in Washington State. So big, in fact that the Federal Housing Finance Agency (in communication with several Washington State Senators) recently wrote: “… Washington is the only state that has a major court ruling that adversely impacts the ability of servicers to carry out the maintenance standards that Fannie Mae and Freddie Mac require on a national level.”

The cities and the government agencies have been involved in trying to protect the local codes’ registration laws designed to prevent blight, and to hold foreclosing lenders responsible for the maintenance of property. Nonetheless, as the mortgage loan servicing industry knows, even well-intentioned legislation seldom provides immediate relief to the issues that sparked the process.

So what is a servicer to do with current loans securing potentially abandoned and vacant properties in Washington State, during one of the most interesting winters we’ve had in the Pacific Northwest? The Supreme Court didn’t provide much guidance except to conclude that appointing a receiver is not the exclusive method for lenders to gain access to properties. Unlike in Massachusetts, Washington’s attorney general is more focused on immigration bans and standing up against the new policies announced by the Trump Administration; receiverships and dealing with blighted properties haven’t been on the Top 10 list. Consequently, servicers aren’t seeing the same activism and receivership undertakings outside of Spokane County, which was most involved with the Jordan decision. That said, “Doing nothing” is not an option. There is too much at stake and the risks are too great.

As practitioners in an area so ripe with specific legislation and regulation, it is a career highlight to have the opportunity to craft a tailor-made solution utilizing creativity and the legal process to solve real, practical problems facing our clients and our communities. We are doing just that in property preservation. These cases are being handled in a very efficient, yet customized, fashion by tracking foreclosure (once the foreclosure sale occurs the right of possession and an ability to enter and maintain the property is more clear), reaching out to consumers to obtain their consents; and, if that doesn’t work, filing civil cases seeking an order allowing entry onto the property for the purpose of repairing and maintaining during the pendency of the foreclosure sale. Designated property preservation departments are then communicated with to ensure that the legal rights available are understood so that action can be taken within the boundaries of the unique Washington law, as well as within the court orders that are obtained.

This author’s firm has had cases involving deceased borrowers with no clear successor stepping in to claim possession and ownership of the property; real estate investors with multiple properties who haven’t been able to sell and gave up on marketing efforts; active military duty borrowers who have moved away and weren’t sure how to give the property back to the bank; borrowers who surrendered the property in a bankruptcy proceeding and were represented by counsel who were more than willing to sign the consent; and emergency situations with health/fire/police department engagement.

The response from the superior (trial) courts has been very positive. The judges understand the problem; they live in the neighborhoods where these vacant properties threaten safety and property values. Although a legislative solution might not provide a prompt path toward efficient resolution, in many matters a court order has been obtained within a few weeks to allow the servicer (and its agent) to enter onto the property to do what is necessary to protect the asset. This solution is more efficient than the receivership route, waiting for the foreclosure, or awaiting a legislative fix.

Some folks question whether maintenance and repairs are necessary for structures where the obvious solution is going to be a teardown. The takeaway is that servicers should be aware and consider partnering real estate agent/brokers with the property preservation departments to come up with better long-term strategies for investment in maintenance and repair. Naturally, the risk there is that if the property is sold via foreclosure, there might not be an asset to maintain. However, the likelihood of a third-party sale could be increased by certain repairs and maintenance work.

Closing Words: Property Preservation is Local
In looking at the different ways in which Massachusetts and Washington address the same concern, what’s clear is that property preservation is a very local affair. Servicers with large national portfolios need to approach each state in a proactive (and customized) manner in order to protect the value of the property, the interests of the investor, and — above all else — the interests of the community.

Strong vendor relationships with local counsel, brokers and real estate agents, as well as with preservation vendors are vital. Allowing these professionals to connect and collaborate is the key towards implementing sound, efficient legal and practical strategies. USFN firms are focused on this important issue and will continue to keep the industry informed.

Copyright © 2017 USFN. All rights reserved.
Spring USFN Report

Note for consideration of the USFN Award of Excellence: This article is a "Feature."

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