The Problem with the High Vacancy Levels Is That the Properties Begin to Deteriorate Or

May 26, 2008

In a new twist to the foreclosures in the subprime lending market, Minneapolis has won the right in court to have a legal caretaker manage 141 vacant properties in the Hawthorne and two others area of the city. The properties are vacant because of foreclosure and the borrowers simply walking away or sending the lenders what has come to be known as “jingle mail.” Jingle mail consists of a letter sent to the lender by the borrower with the keys to the property enclosed.

The problem with the high vacancy levels is that the properties begin to deteriorate or attract crime, with windows being broken out and then boarded up, with the resulting look of a war zone. For example, in the Hawthorne area, some blocks have 11 out of 13 homes on one block vacant. The Hawthorne Area Community Council was created to redevelop the area. While the Council filed suit against CitiMortgage, the lender in the area, it also worked to temporarily take care of the blight. The boarded windows on the vacant homes with broken windows have been painted to make the boards look like window panes with plants in the windows. The victory in Round I of the litigation against Citi gives the Council the right to manage the properties.

Other cities, such as Buffalo (a city with 10,000 vacant properties) are relying on existing statutes to recoup maintenance costs or force lenders to take upkeep steps. Buffalo has relied on its city upkeep codes, codes that require property owners to maintain their property in a safe and conforming condition. In some cases, the properties have become so dilapidated and damaged that the city has been authorized by the courts (relying on the upkeep code authority) to demolish them.

Lenders have objected saying that such steps by cities will have a chilling effect on lending activities. That is, mortgage companies will be hesitant to lend in cities that are aggressive when it comes to foreclosures. However, the community and city councils respond that the conditions now are unusual because of the high rates of foreclosure and the abandonment of properties by both the borrowers and the lenders. They councils acknowledge that they are charting new legal territory with their suits and actions but that the levels of foreclosure and property conditions are unprecedented as well.

Discuss the borrowers ethical responsibilities when they default. Discuss the lenders’ responsibilities for making the loans and then caring for the properties. Discuss the rights of both under the constitution and property law. Is this eminent domain?

FOR MORE INFORMATION

Donna Leinwand, “Cities Suing Lenders in Strategy Against Foreclosures,” USA Today, May 16, 2008, pp. 15A and 16A.