«JOURNAL OF LAW, ECONOMICS & POLICY VOLUME 10 SPRING 2014 NUMBER 2 EDITORIAL BOARD 2013-2014 Steve Dunn Editor-in-Chief Crystal Yi Meagan Dziura Sarah ...»
68 CHULA VISTA, CAL., MUN. CODE §§ 15.60.010–.120 (2013), available at http://www.codepublishing.com/CA/chulavista_PDF.html. Effective January 1, 2013, California law mandates maintenance of vacant residential property by owners that have purchased the property at a foreclosure sale or became owners pursuant to a deed of trust or mortgage, but expressly states that it does not preempt local ordinances and that a local government cannot impose fines and penalties under the state statute and the local ordinance. CAL. CIV. CODE § 2929.3 (West 2013).
69 CHULA VISTA, CAL., MUN. CODE §§ 15.60.040–.060 (2013); see also Testimony of D. Leeper, supra note 15, at 101 (“Chula Vista’s new ordinance compels the lender... exercise [sic] the abandonment clause in their contract.”).
70 “Default” is defined as “the failure to fulfill a contractual obligation, monetary or conditional.” Id. at § 15.60.020. A default can be grounded on a borrower’s failure to make loan payments (whether such payments are to consist of interest only, principal and interest, or principal, interest, taxes, and insurance) or a failure to satisfy any other contractual obligation imposed on the borrower by the underlying loan documents. Other contractual obligations in the typical deed of trust and promissory note generally obligate the borrower to maintain and keep the collateral property secure, not to abandon the property, and not to commit waste. Thus, the CVAPO encompasses any of these defaults, and does not distinguish between material and immaterial breaches that could be the basis for a default.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 359 of a notice of default, a lender71 must “inspect”72 the “property.”73 If the property is “vacant”74 or shows “evidence of vacancy,”75 it is “deemed abandoned” and the lender must register the property with the city’s director of development services department76 and pay an “initial registration fee” within 10 days of the inspection.77 Alternatively, the registration may 71 The provision actually states the inspection is to be conducted by “[a]ny responsible party/beneficiary or their designee.” Id. § 15.60.040. Section 15.60.020 defines “[r]esponsible party” as “the beneficiary that is pursuing foreclosure of a property subject to this chapter secured by a mortgage, deed of trust or similar instrument or a property that has been acquired by the beneficial interest at trustee’s sale.” Id. § 15.60.020. This paper shall use the term lender, throughout the CVAPO, to include the beneficiary/trustee of a deed of trust (whether corporation or individual), the assignee of the beneficiary/trustee (whether corporation or individual), and the beneficiary of a deed of trust that is the grantee of a trustee’s deed or a deed in lieu of foreclosure. See id. § 15.60.110 (declaring that “any person, firm and/or corporation” in violation of the CVAPO is subject to strict liability). Since recent California case law has upheld lenders’ use of Mortgage Electronic Registration Systems, Inc., (“MERS”) in deeds of trust, this article will use the term lender to include both the actual entity that originated the loan and the entity that fits the “responsible party” definition in the CVAPO, which may include MERS. See, e.g., Siliga v. Mortg. Elec. Registration Sys., Inc., 219 Cal. App. 4th 75, 83–84, (2013).
72 CHULA VISTA, CAL., MUN. CODE § 15.60.040 (2013); see also id. §15.60.060 (“If the responsible party/beneficiary [i.e., lender] does not have a property preservation or real estate owned section/department, a field service provider or property manager shall be contracted to perform the inspection....”).
73 Id. (setting out the registration and recording requirement). “Property” is defined as “any unimproved or improved real property, or portion thereof, situated in the city and includes the buildings or structures located on the property regardless of condition.” Id. at § 15.60.020. The CVAPO also includes a separate, narrower definition of “[r]esidential [property],” which is “any property... designed or permitted to be used for dwelling purposes....” Id. By implication, property includes all parcels whether zoned for residential, commercial, or industrial use. Interestingly, the city expressed a concern only for residential properties at the time of enactment. See id. § 15.60.010.
74 “Vacant” is defined as “a building/structure that is not legally occupied.” Id. § 15.60.020.
Neither “legally occupied” nor “occupied” are defined in the CVAPO.
75 “Evidence of vacancy” is defined as “any condition visible from the exterior that on its own or combined with other conditions present would lead a reasonable person to believe the property is vacant.
Such conditions include, but are not limited to, overgrown and/or dead vegetation; accumulation of newspapers, circulars, flyers and/or mail; past due utility notices and/or disconnected utilities; accumulation of trash, junk and/or debris; the absence of window coverings such as curtains, blinds and/or shutters; the absence of furnishings and/or personal items consistent with residential habitation; and statements by neighbors, passersby, delivery agents, or government employees that the property is vacant.” Id. Reference to “any condition” is ambiguous and subject to interpretations not contemplated by the city. For example, the city would likely apply the definition broadly, where even a borrower’s long vacation or extended travel for work could lead to the minimal conditions that suggest “vacancy” or “evidence of vacancy.” Under this scenario, the uncertainty of the meaning is not lessened by the definition’s express inclusion of examples such as “overgrown and/or dead vegetation,” etc. Id.
76 Id. § 15.60.040.
77 See id. §§ 15.60.040,.080. The amended CVAPO does not state the fee must be paid on an annual basis, as did the original CVAPO. See id.; see also CHULA VISTA, CAL., ORD. 3080 § 1 (2010), available at http://lfweblink.chulavistaca.gov:27630/weblink8/0/doc/76878/Page1.aspx.
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be achieved by registration with a city-approved national database.78 The lender’s registration is valid for as long as the property is subject to the CVAPO, that is, while the “property remains abandoned.”79 After a property is the subject of a notice of default, “deemed abandoned,” and registered with the city, the lender must maintain and keep secure the property.80 These mandated duties also apply to completed foreclosures where title has transferred to the beneficiary of the deed of trust.81 On the other hand, if the initial inspection reveals that the borrower is in default and occupies the property, inspections are to continue on a monthly basis until the trustee (or other party) cures the default or the property is “deemed abandoned,”82 at which point property maintenance by the lender begins. The inspections are to continue as long as the “property remains abandoned.”83 This aspect of the CVAPO contemplates a series of inspections, and requires the lender or its agent “within 10 days of that inspection, [to] register the property as described above.”84 Fort Lauderdale, Florida, is an example of another jurisdiction that was hit hard by foreclosures. It enacted a similar abandoned property registration ordinance,85 but unlike the CVAPO it imposes on the lender the inspection obligation upon default by the borrower before a notice of default has been issued.86 Also distinct from the CVAPO, Fort Lauderdale imposes joint and several liability on the property owner and the lender.87 Las Vegas, Nevada, has a similar regulatory scheme,88 with the exception that the obligations under the ordinance are waived if the lender can demonstrate that the loan documents prohibit the lender from entering the collateral property and there is a “reasonable possibility” the borrower will 78 CHULA VISTA, CAL., MUN. CODE § 15.60.040 (2013). The Chula Vista City Manager has approved the use of the Mortgage Electronic Registration Systems, Inc., registration system, along with the city’s system. See Benton C. Martin, Vacant Property Registration Ordinances, 39 REAL EST. L.J.
6, 33 (2010).
79 See CHULA VISTA, CAL., MUN. CODE § 15.60.040 (2013).
80 Id. §§ 15.60.040–.060.
81 Id. § 15.60.040. When the lender obtains title at the foreclosure sale, there is every reason to expect the lender, as the fee simple absolute owner, to maintain the property and keep it secure.
83 After the “property is deemed abandoned,” the § 15.60.040 inspections stop, but the § 15.60.060 security inspections begin. See id. § 15.60.040,.060.
84 Id. § 15.60.040 (emphasis added). Perhaps not as clear as it could be, this provision most likely refers to the specific inspection when the abandonment is discovered as the trigger that requires the start of maintenance. See id.
85 FT. LAUDERDALE, FLA., MUN. CODE §§ 18-12.1 to 12.5 (2013), available at http://library.municode.com/index.aspx?clientId=10787.
86 Id. § 18-12.1(a). To mandate lender inspections before a notice of default is recorded raises a number of issues that this article will not address.
87 Id. § 18-12.5.
88 LAS VEGAS, NEV., MUN. CODE §§ 16.33.010–.090 (2013), available at http://library.municode.com/index.aspx?clientId=14787&stateId=28&stateName=Nevada.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 361 report the lender’s entry as a trespass or will assert that the lender’s entry is a breach of the loan documents or an illegal or unauthorized entry.89 Also, this regulation declares that the regulation itself does not create a duty or obligation to anyone other than the city; does not create or imply a cause of action in favor of anyone other than the city; and that the acts of the lender do not create a duty or obligation to or a cause of action in favor of anyone other than the city.90 These two cities’ ordinances illustrate how the CVAPO does not account for situations in which the borrower may still assert rights against a lender because he is still the fee owner of the property, and further how it does not include a joint and several liability provision to reinforce the borrower’s contractual commitments.
2. Maintenance and Security
A CVAPO inspection is intended to determine if the property is vacant91 or if there is evidence of vacancy.92 In the event either circumstance is found, the CVAPO declares the property is “deemed abandoned.”93 Upon discovery of an abandoned property, the CVAPO rewrites the property maintenance obligations in the deed of trust so that the borrower’s maintenance obligations become the lender’s obligations. The lender must undertake the duty to maintain and keep secure the property,94 although no statement in the CVAPO expressly states the lender must complete these duties.95 Maintenance and security measures are to be done according to the stated standards for maintenance and security96 and the definition of “neighborhood standard.”97 Pursuant to § 15.60.070, the director of development services has the authority “to implement additional maintenance 89 Id. § 16.33.070.
90 Id. § 16.33.090.
91 CHULA VISTA, CAL., MUN. CODE § 15.60.020 (2013). The CVAPO defines “[v]acant” as “not legally occupied,” but does not define this phrase. See infra Part III.C for the discussion of this term as used in the CVAPO.
92 Id. § 15.60.020 (“‘Evidence of vacancy’ means any condition visible from the exterior that on its own or combined with other conditions present would lead a reasonable person to believe that the property is vacant.”) See supra note 75 for the entire definition.
93 Id. § 15.60.040,.020.
94 Id. § 15.60.040 9.
95 See generally id. § 15.60 (describing the full breadth of the Abandoned Residential Property Registration section, in which specific duties to maintain and keep property are absent).
96 Id. §§ 15.60.050,.060,.070.
97 CHULA VISTA, CAL., MUN. CODE § 15.60.020 (2013) (“‘Neighborhood standard’ means those conditions that are present on a simple majority of properties within a 300-foot radius of the subject property.”).
The city is authorized to enforce the requirements of the CVAPO and exact any remedy provided in its Municipal Code against a lender that fails to inspect, register, pay a registration fee, maintain, repair, keep secure, or hire a local property manager.100 A lender can also be liable for the failure to complete additional measures required by the director of development services.101 According to § 15.60.110, a violation of the CVAPO “shall be treated as a strict liability offense regardless of intent.” The available remedies include fines of $1,000 per violation per day, assessments, and even possible imprisonment for up to six months upon conviction for a misdemeanor.102 As of May 2008, the city chose to impose fines against noncompliant lenders.103
4. Purpose and Means
While many of the regulations discussed in Part II had to do with government policy to increase home ownership for high-risk, unqualified borrowers, the CVAPO is a regulation that attempts to deal with the consequences of that policy. The least told part of the financial crisis story concerns the pressure imposed on lenders by the federal government and community organizations. The pressure, coupled with the lenders’ objective to earn profits, led to funded and securitized subprime mortgages in unprecedented numbers. Loans for home ownership by low- and moderate-income families and minorities increased because lenders ignored traditional underwriting standards and, to a certain extent, utilized exotic loan products to accomplish the goal. The expectations of an increase in home ownership were high and were being realized, but it was foreseeable that borrowers would default and lenders would foreclose.
98 Id. § 15.060.070 (additional measures “include but not limited to securing any/all doors, windows or other openings, installing additional security lighting, increasing on-site inspection frequency, employment of an on-site security guard or other measures as may be reasonably required to arrest the decline of the property”).
99 Id. § 15.60.040 9.
100 Id. § 15.60.090.
101 Id. § 15.060.070.
102 CHULA VISTA, CAL., MUN. CODE §§ 1.20.010, 1.30.180, 1.41.010–.180 (2013).