Foreclosed and Abandoned: Cities Look for Help
Business + Economy

Foreclosed and Abandoned: Cities Look for Help

Lyneva Mottley has lived in the same home in South Los Angeles for nearly 50 years, and she's tired of foreclosed houses on her block turning into eyesores. The abandoned properties, with overgrown lawns, broken windows, graffiti, bullet holes and trash are not only ugly, but have become unsafe and are often taken over by gangs.

“It’s been months of this condition,” said the 75-year-old retired telecommunications supervisor. “It brings down the value of the neighborhood and allows criminal problems. I feel unsafe.”

Now, a new program that aims to make banks responsible for the upkeep of their properties may solve her problem. Passed in May, LA’s foreclosure bank registry program requires banks to maintain foreclosed properties or face fines of $1,000 per day, up to $100,000 a year, per property. The new ordinance aims to protect neighborhoods from becoming blighted as a result of property abandonment.

The city’s budget crisis made it an easier sell, said City Councilman Richard Alarcon, who recently canvassed to alert residents to report blight. The city faces a projected $485 million budget deficit for fiscal year 2010-11.  Officials anticipate that the new law will generate up to $5 million.

More Foreclosures on the Horizon
The housing crisis resulted in 2.5 million foreclosures nationwide from January 2007 through the end of 2009, according to the Center for Responsible Lending. More than 3 million homeowners will receive a foreclosure notice in 2010, said Rick Sharga, senior vice president of RealtyTrac, a website that tracks foreclosures. 

Los Angeles, which according to Alarcon currently has some 23,000 homes in foreclosure, appears to be the first city to seek penalties from banks. But housing policy experts say the idea is likely to spread. Other cities weighing similar policies include:
Chula Vista and Oakland in California; Las Vegas; and Cape Coral, Fla.

Foreclosed and abandoned properties can overwhelm cities that once tried to absorb the cost of caring for them before repayment from lenders. Political scientist James Q. Wilson, a professor at Boston College, developed the ‘broken window theory’ in the mid-1980s, which some credit with lowering crime and eliminating graffiti in New York City. He believed that if broken windows were not repaired on a building, it would invite vandals or squatters to do more harm.  Similarly, if there’s litter on a sidewalk and the litter is not removed, more litter will accumulate.

A city can spend as much as $5,400 per property for minor landscaping, snow removal, and boarding up a building, according to the Center for Housing Policy, a research organization.“The foreclosures issue is first and foremost about what happens to properties when they go through long periods of neglect,” said Chris Hoene, director of the Center for Research and Information with the National League of Cities.

Some banks have been taking steps to maintain the properties they foreclose, hiring contractors and in some cases allowing homeowners to stay in foreclosed properties for as much as year or longer. San Francisco-based Wells Fargo, the largest mortgage originator in the U.S., has a property preservation department. “The team conducts monthly inspections to ensure homes are maintained in accordance with local standards, as well as prepares the house for resale,” the bank said in a statement. “If a property is delinquent and vacant, but has not yet gone to foreclosure sale, we will maintain and secure it.”

According to a June analysis by SNL Financial, the value of foreclosed property held by U.S. banks increased to $41.5 billion at the end of the first quarter of2010, up from $36.9 billion in 2009. The Mortgage Bankers Association last year created the Vacant Property Registration (VPR) MERS initiative to address the administrative duties associated with complying with thousands of different municipal ordinances.

30 Days or Pay the Fine
In LA, lenders have 30 days to start fixing problems once a foreclosed house is identified as abandoned. The city’s building and safety department is responsible for enforcement, but it relies on a complaint-based system from residents reporting blight through the city’s call center or online at, a website created by local unions. LA resident Mottley is a member of a neighborhood group called Los Angeles Alliance of Californians for Community Empowerment, which has teamed up with the local state union group and others to help enforce the law.

Given the scale of the problem, though, more enforcement may be needed. RealtyTrac’s Sharga predicts that in extreme situations, municipalities may buy some of the houses using federal stimulus dollars in order to rehab them. That was the case in Flint, Mich., which bulldozed seven properties in the town center to create a park. Some lenders may even donate bank-owned properties to municipalities just to get them off their books, in which case cities could transform the buildings according to their needs … if they have the money. 

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