For some time rising foreclosures have led cities and states to consider ways to slow things down.
Now more municipalities are taking a different tack: ramping up the costs associated with holding on to a foreclosed property.
The response, which has emerged largely in Southern California and the Midwest, often takes the form of steep fines or other sanctions for code violations on foreclosed homes that have been sitting vacant. Where once the focus was primarly on keeping people in their homes, more recently efforts have been aimed at mitigating the effects of foreclosures on neighborhoods, especially when they happen in clusters.
Last week St. Paul became one of the latest cities to take such action. Mayor Chris Coleman gave 19 companies — most of them big lenders and servicers — 30 days to come up with a plan to rehabilitate foreclosed homes or face legal action.
"What we're trying to do is have the lenders and banks come and work with us on an abatement or mitigation plan," City Attorney John Choi said Friday. Many homes have become "a public safety hazard," because people are breaking in to steal copper pipes or to take drugs.
Mr. Choi mailed warnings last week to Wells Fargo & Co., Deutsche Bank AG, U.S. Bancorp, HSBC Holdings PLC, JPMorgan Chase & Co., and Merscorp Inc., which runs an electronic mortgage registration system. He said these companies own or service about a third of the 1,700 foreclosed homes in St. Paul.
However, Ted Meyer, a spokesman for Deutsche Bank, said in an e-mail that even though its DB National Trust Co. acts as a securitization trustee on many properties, it does not "own or control any of the properties referenced in the letter" from Mr. Choi. "The trustee is not responsible for maintenance nor any other foreclosure-related issues," Mr. Meyer said.
Similarly, Teri Charest, a spokeswoman for U.S. Bancorp, said it acts as a trustee on most of the St. Paul properties cited in the letter it received. As such, it is not responsible for repairs, she said.
Each letter came with a spreadsheet listing the vacant properties that Mr. Choi said the recipient company controlled, along with a list of claims the city could pursue if the company did not cooperate. Another 13 companies were sent letters Friday.
Susan Davis, an executive vice president at Wells Fargo Home Mortgage's Minneapolis office, said the lender started a toll-free hot line in January that cities and counties can call when they are concerned about a property.
"Whatever the time frame, we will work closely with the city," Ms. Davis said. "Everybody benefits when the home is maintained and reoccupied."
R.K. Arnold, the president and chief executive of Merscorp, said in a written response to questions from American Banker that he had received the letter, and that his Vienna, Va., company "takes it very seriously."
Merscorp will meet with St. Paul officials, Mr. Arnold said. "It is our responsibility, and we will fix the problem."
HSBC and JPMorgan Chase did not return calls seeking comment.
An ordinance that took effect last month in Palmdale, Calif., requires lenders to pay a $100 fee to register vacant or abandoned homes that are in foreclosure, as well as up to $2,500 for code violations.
That ordinance was modeled on one that took effect in October in Chula Vista, near San Diego, and instituted a $70 fee to register vacant properties as part of an effort to keep home values from dropping further.
Several other California cities, including Calimesa, Fresno, and Oakland, are drafting similar proposals.
Officials in Buffalo, Cleveland, and Detroit — cities with some of the highest foreclosure rates in the country — passed strict code-enforcement measures last year and are taking steps to demolish structures that are deemed not worth saving.
Asset managers say violation fines have skyrocketed in some cities and are reaching as high as $1,000 a day.
"The cities are being so proactive in attacking the lender, thinking we're the deep pockets," said Shelley Kaye, an asset manager at First Option Asset Management Services LLC in Irvine, Calif., and the president of REOMac, a trade group for such outfits.
One problem is that cities often send code violation notices to the wrong address, so by the time it gets to an asset manager, the fines can be steep, she said. (Some of Mr. Choi's letters were addressed to high-ranking executives like Josef Ackermann, Deutsche Bank's chairman in Frankfurt.)
With servicing costs soaring, many companies do not want to make costly repairs, Ms. Kaye said.
Jonathan Engman, an lawyer with the Detroit firm of Fabrizio & Brook PC, who represents lenders, said cities are fining lenders anywhere from $200 to $2,500, even though taxes are being paid on foreclosed properties.
This month, he said, he appeared before the Detroit City Council and was given 24 hours to clean up a property before it went on a demolition list, even though city residents who owned abandoned properties were given deferments.
"There is no fair treatment of the industry," he said. "Cities are using the citations as a tax."
Robert Klein, the CEO of Safeguard Properties, a privately held Brooklyn Heights, Ohio, asset management firm, said lenders and servicers are trying to take "a proactive approach" to empty buildings but do not always have the legal authority to do so.
"Some of these properties are in default and have not gone into foreclosure yet, so lenders are limited as to what they can do," he said. Some lenders have been sued for trespassing — by borrowers who have defaulted.
