Today, the word "foreclosure" evokes an unfortunate reminder of the nation's economic meltdown, particularly the speculation and collapse in the real estate market.
For city government officials, however, the term describes a more pressing headache: When homes are abandoned, who will maintain them? Not only do empty homes mean a decrease in tax revenues, their un-mowed lawns, stagnant swimming pools, and broken windows create a hazard to community well-being.
Few cities have faced this reckoning more than Chula Vista, a boom town of 200,000 about 10 miles south of San Diego, where 70% of the housing stock is less than 20 years old. In January 2009, the city's hard-hit 91911 zip code led all of San Diego County with 66 foreclosures. Other Chula Vista zip codes hover around the troubled County's top ten of most-foreclosed communities. Not surprisingly, Chula Vista has become the site of innovation amidst the crisis.
The story in Chula Vista starts with Doug Leeper, the city's energetic Code Enforcement Manager. With nearly 20 years of experience, Leeper brings a tremendous body of knowledge to the job. To Leeper, Chula Vista's frenzied growth made it a "target-rich" environment, ripe for predatory lending and risky financing. But even with foresight on the impending crisis, what action could the city take? As empty homes threatened to bring down neighborhoods, Leeper scoured the foreclosure process to find some way to handle the boom in abandoned homes. Soon enough, he found his answer. The Abandonment and Waste Clause is a rarely utilized section of the mortgage contract that Leeper says, "creates a minimum standard of maintenance and protects the collateral by allowing lenders to enter, secure and maintain properties that are abandoned prior to the completion of the foreclosure." This period, known as pre-foreclosure, typically takes 4 -6 months in California, more than enough time for a property to become a hazard.
Under Leeper's supervision, Chula Vista passed a new ordinance that required lenders to register, inspect and maintain prior to the conclusion of the foreclosure. If lenders failed to meet these requirements they would be subject to daily fines of $100 - $500. By August 2008, a year after the Residential Abandoned Properties Program (RAP) was rolled-out, Chula Vista enforcement had registered nearly 50% of the city's known vacancies, and collected $1.41 million in registration and non-compliance fees (easily covering the program's $175,000 staffing costs).
Across the country, cities are exploring enforcement and fine-based measures to guard against potential blight. Others have turned vacant properties into affordable housing via land banking, a growing practice where local agencies use legal maneuvering to bundle foreclosed properties in a communities and drive out speculative buyers. In Chula Vista, the sheer volume and protracted nature of foreclosure made RAP a natural fit. Leeper also noted that despite the scale, "properties are selling and turning over -the inventory isn't stagnant" suggesting that if houses are properly maintained the market is still managing to generate steady sales.
Seizing upon the success of RAP, the California legislature has introduced bills to create a statewide registration system. Chula Vista's enforcement staff has grown and they've incorporated GIS technology into their tracking systems. With more enforcement staff, they've been able to move from a strictly reactive response to a more proactive method. Yet, despite increases in percentages of registrants and non-compliants, they are still tackling around 50% of the foreclosures. Their efforts to get lenders to buy-in to the program and keep up properties has helped reduce service costs for other city departments, like sanitation and police.
As with any fee- based program there are bound to critics. Surprisingly, however, lenders have been generally cooperative with the effort. Leeper notes that the scope of the crisis and the hefty fines has put the lending industry on the clock and taking notice. They're willing to cooperate and attempting better business practices to address the situations in a cost effective manner. Lenders today are much more likely to have associates check properties, whereas fifteen years ago they would have let them sit idle.
The most dogged critic of the program has been the real estate community. Despite their general support for the program's goals, a number of agents have been sacked with fines passed on to them by lenders. This is commonly a result of contracts between lenders and agents where agents are required to take care of properties. City officials have begun working with agents on solutions to these types of situations.
The Chula Vista program has generated interest nationwide. City officials have fielded inquires from 400 other municipalities across the country. When counseling other cities, Leeper suggests a number of things. First, he recommends cities truly understand the extent of the local foreclosure problem, because introducing such a program like RAP may be more trouble than its worth. If there are no homebuyers then RAP really serves as a band-aid on much bigger problem. Second, don't require that properties be maintained by local property managers, as this can lead to messy contracts and missed responsibilities. And finally, he says to "be flexible," ensuring fines are cost-effective but reasonable for lenders. As with all these types of initiatives, it's not about creating new revenue streams, but about keeping neighborhoods safe.
John O'Leary (firstname.lastname@example.org) is the executive editor of the Ash Institute's Better, Faster, Cheaper web site, and coauthor of the book "If We Can Put a Man on the Moon..." to be published by the Harvard Business School Press in Fall 2009.