June 01, 2016

REAL PROPERTY, TRUST & ESTATE LAW: Perspectives on Abandoned Houses in a Time of Dystopia

Kermit J. Lind

Various stakeholders see different things when they look at houses and buildings abandoned during the mortgage crisis; to overcome these conflicting interests, communities will need sustained collaboration among civic groups and public officials, employing all relevant data and strategic solutions.

Home owners who abandon their homes are often financially broke, desperate, hounded by debt collectors, often naive or misinformed, and unable or unwilling to continue the responsibilities of home ownership. Worse yet, many cannot voluntarily divest their ownership by sale or donation because the title is encumbered with liens exceeding the current market value. Although creditors may get no financial benefit from asserting their rights, they can still hold an empty house hostage in the debtor’s name, speculating on an improbable solution, or sell the debt secured by a lien on the house at a discount.

Absentee owners and commercial housing investors, on the other hand, see their vacant houses as either productive or nonproductive commodities, if they look at them at all. Their interest is in profitable transactions. Paying for upkeep and property taxes on their investment is justified only by expectations of profit. Unprofitable and unmarketable houses are a liability and treated as waste. Corporate and trustee owners, along with their servicers, find little risk in ignoring their legal responsibilities for maintenance of residential properties owned or controlled by their lien rights. They ignore local housing and environmental laws in favor of contract law.

Judges, sheriffs, bankruptcy trustees, and other officials who preside over legal transactions related to involuntary deed transfers, taxation, liens, and record registration see only documents that track transactions and claims affecting the legal title. This institutional fragmentation and myopia enables owners and creditors alike to neglect property maintenance with impunity and defer the resulting costs to hypothetical future owners.

Buyers, rehabbers, and speculators see an income prospect in abandoned houses. Blighted houses for sale “as is” are viewed as money makers by various types of buyers, including those who ignore their legal maintenance responsibilities. Flipping defective houses has become an industry propelled by textbooks, lectures, and get-rich-quick TV infomercials. These houses are sold to people who shop deals on the Internet and “invest” without a single glance at the actual property. These buyers and sellers dream only of profit.

Taxpayers and the public, ultimately, are forced to subsidize home owners and businesses that abandon their obligation to keep their properties from harming other people and others’ property. To get a sense of the public costs, consider that in October 2014, the city of Cleveland, Ohio, reported it had 12,000 abandoned buildings, 6,000 of them already condemned and waiting demolition. It anticipated needing $120 million to demolish its current inventory of abandoned houses in a city of fewer than 400,000 people. Its inner-ring suburbs also have a rising inventory of abandoned houses to dispose of. To deal with this problem, Cuyahoga County is floating a $50 million bond issue for demolition, and municipalities are already fighting for a share of the proceeds.

Conflicting perspectives must be reconciled. Home owners, lenders, investors, speculators, creditors, debt collectors, neighbors, community advocates, local officials, state officials, federal officials, and public agencies are pursuing different, and often conflicting, objectives in relation to real property abandonment. Governments at various levels have different agendas, as do courts, prosecutors, and policing agencies, even those within the same jurisdiction.

Government-sponsored enterprises, global financial institutions, real estate investment trusts, and their servicing agents also do not share the same vision. Each sector’s individual interests compete for profit with procedures that undermine the success of the business plans of the others.

The risks resulting from the asymmetrical battle between the perspectives of housing consumers and those of global financial, investment, and real estate businesses make home ownership less possible and less attractive for young families than at any time during the last century.

Responsible maintenance of dwelling places is the legal and equitable obligation of those who own or control housing. It is also essential to the long-term viability of a housing finance industry that both consumers and investors can trust. Those harmed when property maintenance responsibilities are abandoned include the creditors and investors in neighboring dwellings whose paying debtors may default on their mortgage loans and maintenance when their home’s value plummets. Maintenance issues are omnipresent in the scenario of the concentration and spread of subprime loans, rapid defaults, rising foreclosures, low-value sheriff sales, and the dumping of bank “real estate owned” properties to speculators. Maintenance is abandoned early in the sequence, and the possession of dwellings is subsequently abandoned. The breakdown of maintenance begins a decline toward blight from which recovery is costlier than the value of the property.

Better housing and neighborhood environmental code compliance is essential for stopping rampant abandonment and dystopia. Unfortunately, the code compliance apparatus as currently constituted in most communities is not capable of dealing with abandoned, worthless housing. The various local government compliance and enforcement agencies exercising police power in cities operate in separate silos and often at cross-purposes.

Code compliance is thwarted when each agency pursues its limited mission without regard to the residents who depend on effective law enforcement for a healthy, safe, and secure residency. There is insufficient coordination in public safety operations to constitute a reliable system able to ensure compliance with neighborhood housing, health, and safety laws, especially compliance by absentee owners and controlling lien holders.

Modernization of obsolete code compliance policies and procedures is a critical need for dealing with the surge of abandoned housing. Financially able owners and parties legally responsible for housing conditions should not be able to escape their legal obligation to maintain the condition of their real property and to comply with court orders requiring compliance after conviction or judgment. Creditors with the legal means to control and maintain their collateral should ensure that the collateral’s condition does not destroy the value of neighboring houses or other lenders’ collateral.

Enforcement officers need to act strategically to obtain maximum compliance with the limited resources available. Focusing on repeat offenders with the highest volume of violations will lead to more benefit for neighborhoods than random or complaint-driven enforcement.

Effective role models are available—most notably the sustained collaboration between civic groups and public managers at the local community level, a coalition of the willing and determined. The best example is the Vacant and Abandoned Property Action Council in Cleveland, Ohio, started in 2005. The author has provided guidance for the development of a coalition of city, county, and community leaders launched in March 2016 to abate and prevent housing and neighborhood blight. He has closely followed earlier strategic collaborations in Baltimore, Philadelphia, and Buffalo.

In these examples, senior and managerial staffs of public safety, municipal law enforcement, and community-based nonprofit public interest agencies lead the reform needed to cope with local neighborhood housing disasters. When a determined coalition of policy and program managers communicates regularly across organizational boundaries and bureaucratic silos, they can avoid unintended conflicts with each other, coordinate policy advocacy, partner in program planning, and work strategically toward common objectives.

ABA SECTION OF REAL PROPERTY, TRUST & ESTATE LAW

This article is an abridged and edited version of one that originally appeared on page 52 of Probate & Property, March/April 2015 (29:2).

For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

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BOOKS AND OTHER RECENT PUBLICATIONS: Land Use Regulation, 3d ed.; Title Insurance: A Comprehensive Overview of the Law and Coverage, 4th ed.; A Practitioner’s Guide to Real Estate and Wind Energy Project Development; Handbook of Practical Planning for Art Collectors and Their Advisors; Fundamentals of Title Insurance; A Guide to International Estate Planning, 2d ed.; The Advisor’s Guide to Life Insurance.

Kermit J. Lind

Kermit J. Lind is a clinical professor of law emeritus at Cleveland-Marshall College of Law in Cleveland, Ohio.