Protecting Lenders’ Rights When Municipalities Come After Nuisance Properties
When faced with imminent or current default on their mortgage loan, property owners often abandon their homes before a foreclosure is completed and sometimes before it even begins. These properties may become or remain vacant and fall into disrepair without a distant lender’s or servicer’s knowledge. However, neighbors and local authorities can’t avoid noticing issues like overgrown weeds, pest infestations, structural hazards, and squatters in abandoned properties.
That is why many municipalities have enacted abandoned property nuisance ordinances designed to address problems arising from neglected and abandoned properties within a community. However, for mortgage lenders and servicers or others with interests in an abandoned or neglected property, these ordinances can pose a significant threat to their security interests and rights. When local authorities are empowered to impose priority liens and even foreclose on such property and extinguish mortgage liens, and when lenders and servicers fail or are denied an opportunity to take action to remedy the claimed nuisances, they may face a loss of lien priority or security interest.
Arguably, ordinances that allow local governments to put liens on or foreclose on blighted properties violate a lender’s or servicer’s due process rights and constitute an improper taking in situations where those entities do not have the right or ability to cure alleged problems they may not even be aware of. Most lenders and servicers, however, would rather not spend their time and resources engaged in protracted litigation with municipalities as to the constitutionality of their ordinances, especially if they could have taken other steps that would have both protected their rights and addressed the issues that led to governmental action in the first instance.
Accordingly, it is incumbent on lenders and servicers to act quickly and decisively once they learn a property has been abandoned or fallen into disrepair. While most nuisance ordinances require the municipality to notify lienholders of record about any needed repairs or demolition of buildings, lenders and servicers should not solely rely on such notices to stay abreast of the condition of a property owned by a defaulting borrower.
The following are some basic steps lenders and servicers can take to protect their interests in abandoned and neglected properties:
- Never ignore citations or notices from a municipality regarding nuisance issues; take immediate steps to inspect the property and assess its condition.
- Advise the borrower of their obligations to keep the property in good condition and remediate problems identified in the citation or notice.
- Be vigilant of states and municipalities that have “fast-track” foreclosure laws for abandoned or blighted properties which could result in priority liens being recorded against the property or extinguishment of the mortgage lien.
- Add any remediation costs to the outstanding loan balance.
As noted, monitoring the condition of property secured by a first priority lien (whether the loan is in default or not) and quick responsive actions to remediate any nuisance issues can spare lenders and servicers from protracted litigation or loss of their interests in the property. If you would like to discuss the implications of nuisance ordinances on your loan portfolio, please contact Deb Lapin at Maddin Hauser.