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Chicago Ordinance Disrupts Lending

Moody's warns of national adoption

Aug. 1, 2011

By staff

If adopted across the country, an ordinance that has been passed by the city of Chicago could raise loan costs, eliminate non-agency production or prompt more stringent credit requirements for borrowers on securitized loans in the impacted areas. The ordinance is likely to be quickly challenged.

On July 28, the Chicago City Council passed an ordinance that makes mortgage lenders responsible for vacant properties backing mortgages that have not yet completed foreclosure.

Moody's Investors Service said in a client newsletter that lenders must now determine vacancy, ensure safety and provide maintenance and upkeep during the foreclosure process.

The move prompted the ratings agency to warn that, if the ordinance inspires a national movement, mortgage transaction costs will escalate.

The problem is that lenders are saddled with the expense of owning a home even though they don't have any property rights. Also liable are RMBS securitizations.

Moody's questions how a lender can tamper with a property it doesn't own without violating another property owner's rights.

Other issues raised were whether courts will tolerate trespassing, or if they will overrule the ordinance.

Richard Gottlieb, director of Dykema Gossett PLLC's financial industry group, thinks the ordinance could be unconstitutional in its operation. Gottlieb expects its enforceability to be immediately challenged.

"Major trade associations
actively lobbied against passage and yet Mayor Emanuel pushed it through," a statement from Dykema said of President Obama's former chief of staff and Chicago Mayor Rham Emanuel. "As Emanuel admits, a mortgagee is now required to cut the grass, shovel snow and deal with complaints tied to the property."

Moody's projects that issuers will avoid properties in areas subject to such lender liability laws.

"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," New York-based Moody's stated.

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