Chicago property preservation ordinance bad news for mortgage lenders: Moody's
The Chicago ordinance passed last week on vacant house upkeep could restrict lending in the city and other areas impacted by similar laws if lenders, mortgage assignees and securitizers conclude they end up assuming too much risk, according to Moody's Investors Service.
The ordinance passed by Chicago's City Council would force lenders to pay for maintenance on vacant properties, even leaving them open to having to pay for upkeep before they officially own the property, Moody's said.
The ordinance changes the definition of a property owner to include the financial institution with an interest in the home. In other words, lenders and other businesses that are party to the loan can be dragged into the ownership pool and required to mow lawns, oversee risks on the property and shovel snow, among other duties.
"The ordinance burdens lenders with the downside of ownership expense without the benefit of property rights," Moody's Senior Analyst Sally Acevedo said in a statement Monday. "By broadening the definition of owner of vacant buildings, the ordinance, absent clarification, picks up mortgage lenders and assignees, such as RMBS securitizations. Lenders must now determine vacancy, ensure safety and provide maintenance and upkeep during the foreclosure process, even though they don't yet actually own the property."
Moody's warned the law creates a dilemma that could chase lending activity out of the impacted areas.
"Poor credit quality borrowers in jurisdictions with unclear or indefinite foreclosure processes expose RMBS transactions to longer foreclosure timelines and higher transaction costs under this type of law," Acevedo said.
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