House Maintenance Law Hits Lenders

There are lots of good reasons why a bank should consent to a short sale of a home rather than foreclose on the financially distressed borrower. Now here’s one more, especially if more cities begin to follow the lead of Chicago when it comes to vacant homes.

The Windy City has just put a new law on the books that holds lenders liable for the upkeep of vacant homes, even if the borrower still has title to the property. Calling the new ordinance a means of “protecting residents, neighborhoods, and communities from the devastating impact of foreclosures,” Chicago’s mayor said it makes sure lenders maintain a satisfactory level of upkeep and maintain insurance on the house.

The law applies to properties even prior to foreclosure; that is, even if the homeowner abandons the house while the lender is still trying to collect payments or the foreclosure action is in process. In effect, it is broadening the definition of a property owner to include the mortgage holder.

Of course, it is always in the lender’s benefit to maintain a foreclosed and vacant home, if they ever hope to sell it and minimize the financial loss. But some lenders do better than others, and poor maintenance and upkeep lead to neighborhood eyesores, hurting everyone nearby, not just the lender’s property. In too many cases, it really does cost the city or town money to keep a property maintained, so criminal fines would be justified. I’d like to see more cities enact laws like this.

For one thing, it would provide one more incentive to lenders to go along with a short sale when the opportunity presents itself. Most lenders have come to see the light when it comes to short sales. They understand that taking a relatively small hit on the loan amount is preferable to the long, drawn-out foreclosure process and the need to deal with the empty house later, for weeks, months, or even longer.

But other lenders are either overly bureaucratic or convinced that somehow foreclosure will be a better financial deal for them. Knowing that upkeep of the foreclosed house would be mandated by law might wake some of them up to the downside of going ahead with an unnecessary foreclosure.

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