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With residential properties, what's unrecorded can hurt you

Municipal code violations are unrecorded by the title process. Company offers a means to track and avoid them

There’s a hidden menace lurking in the nation’s backlog of defaulted mortgage loans and vacant properties—the unrecorded municipal code violation. A two-year-old company has built its business around helping various mortgage industry players, including lenders and servicers, become aware of and deal with this threat. The most recent trend to emerge is compliance with the rapid growth of vacant property registration ordinances.

Rudy Krupka, chief executive of Code Violation Services, Inc., explained in an interview that more and more municipalities are requiring registration of assets that are in various stages of the foreclosure process. This is happening because of the difficulty—often near-impossibility—of identifying who is ultimately responsible for a vacant property. Cities and towns are instituting these registration ordinances to help them deal with the issue of neighborhood blight, public safety issues, and nuisance violations, according to Krupka.

One concern: Vacant properties improperly maintained or secured drive down property values. But Krupka said another, less talked about, reason for these new vacant property registration (VPR) rules is that municipalities are looking for revenue. Registration is a way for the towns to make contact with the responsible parties and derive revenue from fees and fines, because these ordinances often require upgrades, maintenance, and fees. According to Krupka, VPRs can require a variety of support documentation, such as notice of default, local property contact, name of bank as trustee, assessor’s parcel number, date of vacancy and foreclosure, proof of liability insurance, and foreclosure attorney contact information.

Keeping tabs on the myriad of ordinances on the books or being issued can be difficult —especially for lenders and servicers operating on a large scale, he said.

The company’s latest product, VPR Plus, is a new technology platform that can help lenders, servicers, and others manage compliance with VPRs. Using a secure web portal, a client sends in a request for a particular property, and CVS determines if registration is required. If it is, the company handles all the details. Using the service, clients can also quickly determine the status of their vacant property registrations throughout the default process from pre-foreclosure through REO, the company states.
 
Code violations—hidden challenge
Vacant property registration is a subset of a larger issue that CVS deals with—unrecorded municipal code valuations. These actually have been the focus of the company since its founding in 2009. These codes cover a range of issues from overgrown lawns, broken windows, and missing railings to more serious environmental problems. Violations result in fines and penalties which can accumulate to significant amounts, and in some cases litigation. Given the fact that the average foreclosure timeline runs more than a year, fees and fines can quickly mount. In some Florida cases, said Krupka, daily fines have accumulated to $100-$300,000 over several years. The key factor, Krupka notes, is that these code violations are completely outside the title process.

In addition to the potential monetary loss, asset owners can face loss of collateral (physical and financial), legal liability, and the negative publicity—e.g. headlines such as, “Bank neglect fosters neighborhood decline.”

CVS began by working with title and escrow companies, but has since expanded to work with due-diligence firms, hedge funds, banks, and Realtors. Over several years it has built a national database of code information by leveraging its contacts with municipalities. It will provide reports to clients of unrecorded code violations and work with the clients in whatever remediation or negotiations may result.

Krupka pointed out also that doing code violation/registration due diligence as part of the origination process can make a difference, especially now.

“Four out of ten purchase originations are in some stage of default,” he observed. This can include foreclosure, bank-owned property, and short sale. “As an originator, you need to qualify the borrower and the asset,” he said, which would include unresolved municipal code violations.
 
“Municipal liens can supersede other liens,” he added, “and any violation transfers with the property.”
Bill Streeter

Bill Streeter is Editor & Publisher of Banking Exchange. He has been a full-time business journalist for 43 years, 37 of them with ABA Banking Journal. During his time with the Journal, he rose from Assistant Managing Editor to Editor-in-Chief and in 2012 became Editor & Publisher. He has been an observer of momentous changes in banking, from the introduction of ATMs to the 2008 financial crisis and passage of the Dodd-Frank Act. He has won numerous business journalism awards, including being part of a team that won a finalist position in the Jesse Neal Awards, the "Pulitzer Prize" of business journalism.

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