On July 28, 2011, the Chicago City Council unanimously passed an ordinance amending the city's Municipal Code to extend the obligations that property owners have for maintaining their properties to mortgagees, servicers and secondary market purchasers, all of whom now are deemed to be property "owners" in Chicago.

The ordinance goes on to require all "owners" to register their vacant properties within 30 days after they become vacant, or within 30 days after assuming ownership of a vacant property, and to ensure that the vacant property is in compliance with all building and fire codes. Registrations of vacant properties need to be renewed every six months. The registration fees are $250 for each vacant property, which doubles to $500 if there is a code violation, triples to $750 for a successive registration period with a code violation, and quadruples to $1,000 for each successive registration period thereafter with a code violation.

The ordinance also imposes daily fines ranging from $500 to $1,000 for each violation of Chicago's building and fire codes (including rules yet to be promulgated under the codes). After the property has been vacant for six months, the "owner must implement and provide proof satisfactory to the department of buildings" that it is in compliance with specified security standards.

"The ordinance burdens lenders with the downside of ownership expense without the benefit of property rights," Moody’s Investor Service’s Senior Analyst Sally Acevedo said in a statement on August 1, 2011. "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.

The ordinance puts mortgagees in a catch-22 situation since they cannot legally enter the property without full possession. The ordinance appears to require a lender to fix something when doing so could lead to a trespass violation if it entered property it did not own. Because the ordinance imposes maintenance obligations on mortgagees who have yet to take title to the property, it is likely to face a constitutional challenge on the grounds it violates lenders' 14th Amendment right to equal protection.

A copy of the ordinance is available here. The ordinance is expected to become effective on September 18, 2011. If you would like more details, please do not hesitate to call Steven A. Migala at (847) 705-7555. He and our other banking attorneys are experienced in representing lenders on workout and foreclosure matters.