The Chicago city ordinance passed in August that requires securities trusts and servicers to pay for distressed property upkeep or face fines has caught on in other cities across the U.S., according to a client report put out by Dechert.
The impact of city ordinances of this nature could ultimately result in the reduction of credit for prospective borrowers in these cities.
The latest site is Springfield, Massachusetts, which recently approved ordinances relating to mortgagee and securitization trust liability for the maintenance of vacant residential property or foreclosures.
“The ability to sell mortgage loans in the secondary market has a significant effect on the availability and pricing of mortgage loans,” Dechert said.
The law firm illustrated its point by citing the example of Georgia several years ago.
It said that a case similar to the enactment of these city ordinances instructive of a reduction in access to credit is the anti-predatory lending statute enacted in the State of Georgia in 2002. This previous ordinance imposed certain liabilities on mortgagees and assignees.
Because of the enactment of this statute, Dechert said that mortgage loans secured by properties located in Georgia generally became ineligible for inclusion in securitization trusts. This is due to nationally-recognized statistical rating organizations inability to assign ratings on the related securities “due to the uncertainty regarding potential liability exposure and costs of compliance with the statute.”
The liability provisions of the Georgia anti-predatory lending statute were eventually repealed under substantial political pressure from Georgia voters who were unable to access the mortgage credit markets.
Dechert explained in the report that the new obligations and liabilities imposed on mortgagees and securitization trustees by these ordinances could similarly restrict access to credit in these jurisdictions.
“The city ordinances in effect that are discussed herein direct a major shift in responsibility,” according to Dechert. “There is no doubt that there is a real estate blight issue, but the proposed solutions may have a chilling effect on lending…if the trend is not reversed, we may see the cost of such obligations shifted to mortgagors by way of higher fees and interest rates in order to reduce the risks associated with lending against such properties and the absence of a secondary market for mortgage loans originated in those jurisdictions that have such ordinances.”
