Foreclosed properties as a source of revenue

At last Tuesday’s meeting, the Lowell City Council by a 5 to 4 vote rejected a joint motion by Bud Caulfield and Rita Mercier to “allow Sean Burke to address the City Council regarding a plan for vacant/foreclosed homes.” Today, both Gerry Nutter and the Lowell Sun editorial have written critically of the council majority for not allowing Burke to speak. Rather than commenting on that decision, I thought it might be helpful to provide some background on the underlying issue: whether the city’s foreclosure crisis presents a revenue-raising opportunity for the city.

To follow the issue, you first have to understand some of the intricacies of Massachusetts foreclosure law and practice. When a homeowner falls far enough behind in his monthly payments, his lender will initiate a foreclosure by filing a lawsuit in the Land Court under the Service Members Civil Relief Act, a statute that provides added protection against foreclosure to homeowners who are serving in the military. The only issue to be decided in this court case, therefore, is whether the property owner is in the military. Due process requires that the homeowner receive adequate notice of the lawsuit, so the Court issues an Order of Notice that must be (1) served on the homeowner, (2) published in the newspaper, and (3) recorded at the registry of deeds. Since the vast majority of homeowners are not serving in the military, these lawsuits almost always end with a judgment in favor of the lender which authorizes the lender to proceed with the foreclosure. This ends all judicial involvement in the foreclosure process.

It is important to understand that an Order of Notice does not guarantee a foreclosure. If the homeowner is able to work out a modification agreement with the lender, refinance, or sell the property, the Order of Notice becomes moot and no foreclosure auction is ever held. In most cases, the Order of Notice does ripen into a foreclosure auction. That auction typically occurs approximately 90 to 120 days after the Order of Notice is recorded at the registry of deeds. The auction occurs on the property that is the subject of the foreclosure and the property is sold to the high bidder. In 90% of all foreclosures, the high bidder is the same lender that is conducting the foreclosure. Since lenders are not in the business of owning real estate, they do put the property on the market. To enhance the prospects of a sale, the lender also evicts everyone from the house, leaving it vacant until a new owner is found. Unfortunately, the average foreclosed property remains on the market for 9 months until the sale to a new owner is consummated. During that lengthy period of vacancy (which is even longer if the homeowner/borrower abandoned the property prior to the auction), the house becomes a crime-magnet, dragging down the value of all other properties in the neighborhood.

In an effort to force lenders who become owners of foreclosed and vacant homes to keep the homes in good repair, the city council several years ago passed a “Vacant and Foreclosing Property” ordinance (part of Chapter 227 of the Code of City Ordinances). The purpose of the ordinance is:

A. It is the intent of this article to protect and preserve public safety, security, and quiet enjoyment of occupants, abutters, and neighborhoods by:
(1) Requiring all residential, commercial, and industrial property owners, including lenders, trustees, and service companies, to properly maintain vacant and/or foreclosing properties; and
(2) Regulating the maintenance of vacant and/or foreclosing residential, commercial, and industrial properties to prevent blighted and unsecured properties.

The ordinance requires that the property be registered with the city’s Building Commissioner within 7 days of the “initiation of the foreclosure process” which is defined as (1) taking possession; (2) Delivering mortgagee’s notice of intention to foreclose to borrower; or (3) Commencing “foreclosure action” in either Land Court or Middlesex Superior Court. In addition to registering with the Building Inspector, the ordinance requires the person responsible for the property to keep it up to code and to identify a local agent who can be contacted if any problems arise.

These requirements are backed up by fines:

A. Failure to register with the Commissioner shall be considered a violation of this article and is punishable by a fine of up to $300. Each week that such violation continues shall be considered a separate offense.

B. Failure to identify the local individual or local property management company shall be considered a violation of this article and is punishable by a fine of up to $300. Each week that such violation continues shall be considered a separate offense.

C. Failure to maintain the property shall be considered a violation of this article and is punishable by a fine of up to $300. Each week that such violation continues shall be considered a separate offense. Any expenses incurred by the City of Lowell relative to securing or maintaining property shall be recoverable by placing a lien on the property.

Lowell has had many foreclosures over the past few years. I don’t have the exact number handy, but I’d say it’s between 1500 and 2000. If even a fraction of those properties failed to register and you started calculating a fine of $300 per week per property continuing into the future, you would undoubtedly come up with a projected amount owed to the city in the seven-figure range. But the purpose of that ordinance is to prevent vacant-foreclosed properties from becoming a blight on the neighborhood, not to solve the city’s financial woes. A strict, technical enforcement of that ordinance, in fact, would likely worsen the problem of vacant homes. I’m acquainted with a number of instances where homeowners fell behind in their mortgage payments and received Orders of Notice. But in these cases, the homeowners were able to reach some type of forbearance agreement with their lenders that headed off a foreclosure auction allowing these folks to remain in their homes and recover from their temporary financial distress. At no point were these homes vacant. The homeowner s remained and kept them lived-in and in good repair. But if thousands of dollars in additional fines were tacked on, it’s likely that these deals would have fallen apart and the respective neighborhoods would suffer the consequences.

The underlying issue in this debate is strict enforcement of the ordinance versus smart enforcement of the ordinance.

17 Responses to Foreclosed properties as a source of revenue

  1. Righty Bulger says:

    Don’t leave us in suspense Dick. What does this mean in the particular case of Burke v. City Manager? What is Burke trying to do and why won’t the city even hear his proposal?

  2. DickH says:

    I know Sean already addressed the city council’s Housing Subcommittee at its November 30 meeting – I was there and spoke too – so perhaps the council simply didn’t want to hear from him once again.

    This whole issue of whether he should have been permitted to speak – while procedurally relevant, perhaps – risks becoming a distraction. The issue is how to deal with previously foreclosed properties that remain vacant for long periods of time. The city’s inspectional services folks are dealing with this stuff more aggressively now than may have been the case a few years ago. The November 30 subcommittee meeting, in fact, dealt mostly with ISD’s intent to begin seizing the worst offenders through a court-supervised receivership process.

    Every foreclosure is different and each requires a customized approach. That’s the strategy the city is following now. As a result of that strategy, foreclosed properties seem to be finding their way into the hands of new home owners much faster. Another strategy would be to strictly enforce the penalty provisions of the city’s foreclosure ordinance in every possible case. To me, that approach would yield two things: (1) a large amount of money owed to the city that would be difficult if not impossible to collect and (2) more vacant buildings than we’ve ever seen before as the outstanding balance of fines stifle deals that would otherwise return the properties to productive ownership. I’m not sure the two approaches are compatible.

  3. Righty Bulger says:

    Thanks for the answer Dick.

    Jack your second link, the one I really wanted to see, is not working properly here or on Gerry Nutter’s blog.

  4. George Ross says:

    Having worked in one of the major foreclosure/eviction law firms for over 8 years (I no longer work in the industry, thank goodness!), I have personally overseen 1000’s of foreclosure actions and eviction after eviction, unfortunately. I have to say that Mr. Howe is way off the mark here and as a result, I must staunchly disagree with his opinion that enforcing the 2008 Ordinance regarding Vacant and Foreclosed properties will lead to more foreclosures.

    Unfortunately, foreclosure actions and evictions (Summary Process Actions) are handled in an extremely systematic manner. Paralegals and attorneys are overloaded and do not have the time to deal with foreclosure forebearance matters or loan modifications. Reaching the banks is another impossibility. Very rarely have I ever seen a foreclosure initiated and then stopped due to the aforementioned reasons in Mr. Howe’s post. Mr. Howe is misguided to think that enforcing the ordinance will increase the amount of vacant homes. Especially if the City actually practices what it preached to all of us in 2008. Strict enforcement of the codes would most likely lead to two results:

    1) The bank surrenders the property to either the municipality or a nonprofit and as a result of this, the property can then be rehabilitated and sold as affordable housing or whatever is necessary;

    2) The City actually moves forward with the receivership process and then hires contractor’s to rehabiliate these properties. Once this is done, the City attachs a lien upon the property and by doing this, they will eventually take the property away from the bank’s greedy hands;

    2) the national banks facing the threat of losing these properties actually pay the fines and start doing what they are supposed to do, which is maintaining these properties. The only reason why they are currently ignoring the 2008 ordinances are because up to now, there has been no real threat or consequences. Why pay the money to follow the ordinances when there are no real threat of consequences?

    National banks and the law firms that work for them are reactionary and as a result of this, unless something is done that threatens their bottom line, they will keep foreclosing on properties and failing to maintain them.

    Another problem is that national banks hire national property management companies that are basically useless when it comes to maintaining properties. They fail to follow city ordinances because they either have no idea that ordinances exist, and if they do know, they know that the city won’t enforce them.

    The national banks need their feet pressed to the fire and perhaps Mr. Burke’s nonprofit is the answer. Having worked in the industry, I know that if the banks know they can get away with something they most likely will. The City shouldn’t allow this to occur. Enforcing these ordinances will have no affect whatsoever on whether or not people will lose their homes. That’s just completely inaccurate.

    However, enforcing these ordinances will force the national banks to finally wake up and start doing the right thing for once provided they become cognizant that their days of ruining neignborhoods with carte blanche are finally over. Enforcing fines will not only bring a substantial revenue stream to the City, but will also finally put an end to all of the abandoned and/or unmaintained properties created by the foreclosure crisis.



  5. Righty Bulger says:

    Thank you Jack. Was a browser issue on my end.

    Sorry I got it to work. Now I remember why I never listened to their radio show. Anthes I don’t mind, but McDonough never shuts up. If he interrupted Councilor Martin one more time, I was going to punch the screen. Damn dude. Let the guests speak. We already know what you have to say. It took eleven minutes to describe a procedure that could have easily been done in half the time.

    I believe this is shaping up as a campaign theme. The role of the council and the Murphy/Martin crowd that wants to change it. There’s too much hot air and wasted time on the council floor, I agree. But that’s government as a whole. An hour of C-Span is enough to drive me to suicide. However, that’s the point of the process. One man’s hogwash is another man’s lightning rod issue.

    Curious to see what the voters decide in November. I’m guessing this new “elitist” role of the council won’t fly with mom and pop on the street. I can already hear the campaighn rhetoric and promises of “I’ll never try to silence the voices of the people on the council floor.” It has a populist theme, don’t you think?

  6. Dawn says:

    Would you make the same argument for the individual? If I lost my job, wouldn’t it make sense for the City to give me a free pass on my property taxes. If your answer is yes, then I agree to a more relaxed approach. If no, then the City should collect the 7 figures you talk about.

  7. DickH says:

    Here are the exact number of foreclosures that were conducted in Lowell for the past four years. Go to and count them yourself.

    2007 – 283
    2008 – 392
    2009 – 252
    2010 – 344
    Total – 1271

    So my estimate in the original post of “1500 to 2000” over “the past few years” was indeed incorrect – it was too high.

    Like I said before, every foreclosure is different and should be treated differently by the city. The goal has to be to get a new homeowner into the foreclosed property as quickly as possible. A blanket approach to imposing fines won’t do that.

    I know of a case where the homeowner fell behind, received an order of notice 3 years ago, but was able to refinance and remains in the home three years later. I’m sure no one “registered” with City Hall in that case. Under a strict interpretation of the ordinance – $300/week for not registering plus $300/week for not ID’ing a local caretaker over 3 years – that homeowner or his original lender would owe the city $93,600 in fines. There’s no doubt that homeowner would have lost the house if that amount was added to the equation. There are many others in similar straits.

    As for the houses that do go to auction, national lenders will just ignore fines of this scale – they’ve already burned through hundreds of billions of dollars in bad mortgages and we think a few thousand per house payable to the city of Lowell will get their attention? All that will do is add an additional lien to these properties, making it that much tougher to ultimately sell the property to a new owner who will move in and care for the property which is what everyone’s goal should be. In the really tough cases, court receivership is the answer and that’s the route the city is going, using its own resources and not some third-party who sees it as a business opportunity.

  8. Dawn says:

    I attended the housing sub-committee meeting and heard 3 speakers contribute from the podium including you and Sean Burke. I do not remember Sean Burke discussing any program or anything to do with him. He spoke for no more than 2 minutes before Bill Martin’s famous statement that the City was not interested in collecting money from banks. I do remember Sean Burke commenting on the city managers receivership program and its shortfalls. After I left the meeting, I remember feeling betrayed by the city as it appeared they were coving something up. I don’t know the parties involved or the back door politics, but I think if we are owed the money it’s the responsibility of our elected officials to collect it with or without the help of the unelected community.

    there was some Please correct me if I am wrong.

  9. Dawn says:

    Is it possible for you to ask the city council to publish what the city has collected to date and how much they believe is owed? I think it would help me identify who is telling the truth.

  10. Frederick Miedzane says:

    Unfortunately, your “homeowner” example is one success story in a sea of thousands of horror stories. Very rarely do homeowners in foreclosure find any success in loan modifications or refinancing opportunities (rarely they can’t even find a person a negotiate something like this until it is far too late). Additionally, where does the homeowner obtain the financing to “refinance” if they are already in foreclosure? If they do not have a rich uncle, they will be out of luck. You honestly think another bank is going to give a loan to a former owner already in foreclosure? You know it’s virtually impossible and so do I. 9 times out of 10 the former owner loses the property and gets evicted, and that’s a conservative estimate. Furthermore, claiming that former owners will have to pay for the bank’s failure to register and maintain a property is false to its core. Why would a former owner have to pay for a bank’s negligent acts? Where are you getting your information from? Are you that far removed from the plight of common people? I am hoping the answer is no, but I must say your comments are alarming.

    National lenders will absolutely “ignore fines” of any scale, especially if the City of Lowell and any other cities continue to ignore enforcing their city ordinances. Please correct me if I’m wrong, but you would rather there be abandoned, crime-ridden properties all over Lowell due to banks not registering and maintaining properties (because there are no real consequences), just to make it easier for brokers and real estate agents to resell these properties? What about the 95% of Lowell residents that actually pay their mortgages and taxes? Why should they suffer with higher taxes and troubled properties within their neighborhoods due to the negligence of national banks? Why are you giving the banks a pass and simultaneously ignoring the hard-working citizens of Lowell?

    Strict enforcement of the city ordinances will force national banks to wake up and start fulfilling their obligations to maintain the properties that they cause to become vacant due to foreclosure and Summary Process Actions. Enforcing the city ordinances will also force the banks to finally maintain the foreclosed properties that are also occupied with tenants and allow these tenants to live in an apartment that habitable, not riddled with code violations that make it dangerous to tenants and more importantly their children.

    Then miraculously at the same time, the City of Lowell can collect revenue from fines that are rightfully owed to the city. I am confident that when faced with the risk of fines or receivership, the banks will have no choice but to clean up their act. Let’s not make excuses for the banks though. So what if they have “burned through hundreds of billions of dollars in bad mortgages,” dare I say who’s side are you on? Let the banks pay and if they refuse, let them know that there will be consequences to their acts of negligence. Let’s not be sympathetic to the ones that created this mess in the first place!

    With regard to your statement pertaining to court receivership, the Divisional Services Department of Lowell stated that they would not use the city’s resources when rehabilitating properties via receivership. Instead they would depend on “investments” from the contractors who agree to rehabilitate these properties via the receivership process. Please check the minutes of the City Council Meeting on 11/30/10 if you do not believe me. I was there and so were you.
    In my opinion, that sounds like many 3rd-party businesses making a profit, when in reality a not-for-profit could do the same thing and then reinvest into the city.

    I ask that you please put politics and any private interests aside and instead consider supporting not only the Citizens of Lowell, but the City entirely.

    Thank you for your time.

  11. DickH says:

    It’s funny how this post is turning into an infomercial for Mr Burke’s proposal. The wisdom of the council majority is clearer than ever.

  12. Jason says:

    These ordinances, while good in theory, are really just another unfunded mandate. They will be utilized if absolutely necessary and are good leverage to hold over the property owner’s head. However in reality there are not sufficient municipal resources to do the work it would take to make these numbers work. The same goes for the city’s false alarm ordinance, the sidewalk shoveling ordinance, etc. Understand that in government it is primarily people that do the work, not laws, rules, tools or equipment. The story in yesterday’s Sun illustrated Lowell’s work force is down 9%. Where are you going to get the productivity from?

    I’m sure the same people clamoring for the bank’s money also understand that if the investment is insured (as most mortgage securities are) piling on will help destabilize insurance companies and lead to increased costs for lenders. Who then pass it on to….. the customer.

  13. Dawn says:

    I also am disappointed in the loss of jobs in the city. I agree with who would or could even collect money owed, but living near seriously run down properties owned by these banks is depressing. I don’t know if I’m sold on the idea of anyone outside the city government being involved, but it should not be excluded until the city has it’s own plan on how to handle these neglected properties. If that somehow puts me on one side of this issue or the other I guess it speaks for itself.

    It is not my intent to push anyone’s agenda.