As is often the case in mortgage servicing, properties secured by defaulted mortgages can wind up vacant or in need of repair. Depending on the condition of the property, the municipality may issue code violations and file suit naming both the owners of the property as well as anyone with a recorded interest. Neighbors may be reporting conditions to the city or county drawing additional scrutiny and these properties may appear vulnerable for vandalism and thievery.
Should a servicer secure the property? It can be difficult at times to provide an easy answer. However, from a best practices approach, consider the path with the least exposure for litigation surrounding these issues. Under the terms of the standard Fannie Mae and Freddie Mac Mortgage, the answer typically is yes, you can secure. Most of the time, the mortgage will contain a paragraph relating to what actions the mortgagee may take in protecting its interest in the property. The mortgage will call for the borrower to maintain the property and keep it from deteriorating and will include specific language allowing the mortgagee to do and pay whatever is reasonable to protect its interest in the property and rights under the terms of the mortgage in certain circumstances. From a servicing standpoint, when ample evidence is mounted suggesting a property is vacant and in need of securitization or repair, it may be easy to rush an order to a vendor to secure or repair the property, however, exercise caution.
The cautious approach is to first review the terms of the mortgage to ensure you have the option to secure or take actions with respect to the property. Second, evaluate the potential risk and exposure. Would your actions lead to additional litigation? Is the property in foreclosure and has the foreclosure become contested? Is the mortgagor represented by Counsel? Does there appear to be personal property within? Third, does the municipality have any vacant building registration or securitization requirements?
To give an example, the City of Chicago requires that a mortgagee shall, within the latter of a residential building becoming vacant for more than 30 days or 10 days after a default, register the building and secure the property to prevent unlawful entry and pay a $700 registration fee. The registration must be renewed every six months for as long as the building remains vacant and unregistered by an owner and a renewal fee of $300 will apply. Additionally, the property must have a visible posted sign indicating the name, address, and phone number of the registered mortgagee or mortgagee's agent with the vacant building registration number and the property must be maintained so that the exterior is clean and secure and the interior is winterized.
Because these situations can sometimes lead to confusion or instances in which both sides are pleading their case before the court, my advice is to consult your attorney and consider seeking a court order allowing the repairs or any actions you wish to take at the property, unless you are simply seeking to secure the property pursuant to local ordinance requirements. The Illinois Mortgage Foreclosure Law has a specific statutory provision which addresses the right to possession of mortgaged real estate during foreclosure. Specifically, in terms of residential real estate, the mortgagor/borrower shall be entitled to possession of the subject property except if the mortgagee/lender objects and shows the following elements: 1) a sufficient basis why it should be entitled to possession, 2) the terms of the mortgage allow the mortgagee to obtain possession, and 3) the court finds a reasonable probability the mortgagee will ultimately prevail in the pending suit. If you do elect to secure the property, ensure that ample photos are taken showing exactly what actions were taken at the property.
Without obtaining a court order, a situation may occur in which a property is secured and the mortgagor(s) or occupant(s) subsequently files a motion with the court seeking relief for time, mental anguish, lost personal items, and anything that is reasonably related to being locked out of the property. In these scenarios, it can be difficult to disprove what personal property was or was not present and has subsequently disappeared. This leads to additional litigation fees in having to retain counsel to defend the motion as well as extend funds for settlement, in many cases, in order to resolve the matter as quickly and efficiently as possible.
What if your loan is current and the city or municipality files suit alleging code violations? It is equally advisable to seek the advice of counsel in this situation. If the servicer is named in a lawsuit seeking relief for municipal or building code violations and the loan is current, the servicer will still need to appear in the case and ensure the borrower is taking the appropriate steps toward curing whatever outstanding issues remain. Failing to appear could mean missing out on notice of actions the Plaintiff may wish to take at the property such as the appointment of a receiver, which could eventually record a lien that takes priority over the mortgage. Typically, in these cases, the court will want to be kept updated from the servicer side of things with respect to the status of the loan, i.e. current or in default. In some situations, the court may ask the servicer to take action at the property.
The importance of recognizing building code violations and municipal ordinance issues is not unique to Illinois. As natural disasters continue to occur throughout the United States and mother nature reminds us of her strength, code violations and preservation issues will continue to impact servicers. Stay alert for notice of these violations when they arrive and have a procedure for timely recognition and resolution of these issues in order to protect your lien interest.