Will Chicago’s New Vacant Building Ordinance Scare Off Mortgage Lenders?

Last Thursday, the Chicago City Council passed a vacant building ordinance designed to get mortgage lenders with a financial stake in vacant foreclosed properties to help keep them from falling into disrepair. Four days later, Moody’s Investors Service issued a report arguing that the ordinance may actually discourage lenders from making mortgages in Chicago neighborhoods where foreclosures are concentrated…

Last Thursday, the Chicago City Council passed a vacant building ordinance designed to get mortgage lenders with a financial stake in vacant foreclosed properties to help keep them from falling into disrepair.

Four days later, Moody’s Investors Service issued a report arguing that the ordinance may actually discourage lenders from making mortgages in Chicago neighborhoods where foreclosures are concentrated. “We understand what the intention was [in passing] the ordinance,” says Sally Acevedo, the Moody’s vice president and senior analyst who authored the report. “They wanted to get someone to come in and take responsibility. But it might go the other way.”

The ordinance, which Mayor Rahm Emanuel hailed for “requiring banks to be good neighbors,” defines any entity that holds the mortgage on a property as a property owner. Existing laws require property owners to board up empty buildings, cut the grass, and shovel snow from sidewalks. Thus, a lending institution becomes responsible for the properties on which it holds mortgages.

In the past year, the Chicago Reporter, the Woodstock Institute, and others have shown that thousands of foreclosed properties were stuck in a twilight area where no clear ownership led to neglect, intentionally or not. Alderman Pat Dowell (3rd) led the effort to close that loophole via last week’s ordinance.

But the Moody’s report claimed that the ordinance would require lenders to manage the care of properties “even though they don’t yet actually own the property.” “What you’ve done is increase the lenders’ risk and their costs,” Acevedo says. “When they go to pick and choose where [to lend], they’ll go to the market where there’s less cost.”

Vacant buildings are largely concentrated in sections of the city’s south and west sides, as this city-issued map shows. Many of those areas have struggled with disinvestment, blight, and other problems.

Dowell and Tom Feltner, Woodstock’s vice president, say that, in hearings on the proposed ordinance, banks argued that the new law would make lending in some neighborhoods less appealing. But so far, Dowell and Feltner say, that hasn’t been proven. “There are similar ordinances in Milwaukee, Boston, and L.A., and the banks have not been able to provide any documentation that this is going to happen—that lending is going to dry up—in any of those cities,” Dowell says.

Feltner adds that the ordinance will actually make lending less risky for some companies, since some lenders have diligently maintained their foreclosures, while others have abandoned their responsibilities. “Simply put, this ordinance levels the playing field by saying all mortgage servicers will be held to the same standards,” he says.

Acevedo disagrees. With this ordinance, she says, Chicago “has opened a Pandora’s box. You’ve created a lot of uncertainty. [Lenders] face uncertain, uncapped costs. Is that something people will voluntarily take on?”

Dowell acknowledges that a slowdown in lending is possible. “I’m concerned about the issue the financial institutions are raising,” she says, “but I don’t know that their claim is true. That’s why I think it’s important to keep the dialogue going.” She says that she is attending a meeting Thursday with Emanuel and representatives of several large lending institutions to discuss further steps that can be taken “in the interests of the community and of the banks” to ensure better management of the city’s vacant foreclosed homes.

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