Chicago’s Vacant Building Ordinance, which imposes substantial and unprecedented duties on mortgagees of residential real estate located in the city of Chicago, continues to generate controversy – and lawsuits.

The Ordinance was amended in July 2011 to impose, for the first time, duties on mortgagees to register and maintain vacant buildings located in the city of Chicago (as reported in Reed Smith Client Alert No. 2011-206). As we noted in the Client Alert, the Ordinance represents the city’s attempt to address some serious problems resulting from the significant increase in vacant buildings throughout the city, including public safety and crime concerns, and adverse property value impacts. A recent GAO report entitled Vacant Properties: Growing Number Increases Communities’ Costs and Challenges details the myriad ills that can be tied to vacant buildings throughout the country – including the millions of dollars spent by budget-challenged cities to secure or demolish them.

After the financial industry voiced serious concerns as to the fairness and legality of the Ordinance, the city went back to the drawing board and retooled the Ordinance. In November 2011, apparently after obtaining the input of some major financial institutions, the city adopted an amended Ordinance which retains the obligations of mortgagees to register and maintain vacant buildings, but reduces the extent of the obligations and allows mortgagees certain affirmative defenses. The Ordinance still requires mortgagees to register vacant residential buildings prior to assuming ownership or filing for foreclosure, and to maintain the building – both the exterior and the interior. The affirmative defenses now available include the assertion of rights by the fee owner in a foreclosure proceeding, and the existence of an automatic stay in a related bankruptcy proceeding.

This “tweaking” of the Ordinance was not enough to mollify the federal government, in the form of the Federal Housing Finance Agency (FHFA), which sued the city in mid-December in federal district court in Chicago. The complaint alleges that the Ordinance is preempted by federal law and regulations governing Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). As stated in the complaint:

The City of Chicago seeks to regulate and supervise the Conservator [FHFA], Fannie Mae and Freddie Mac in their capacity as mortgage investors and mortgagees – that is, as holders of the indebtedness secured by real estate that has not (emphasis in original) been foreclosed upon. The City has enacted an [Ordinance] that imposes a registration and regulatory scheme – replete with taxes, fines, penalties, and ongoing supervision by the Chicago Department of Buildings – on the FHFA and [Fannie and Freddie] in violation of federal law.

The Feds have filed a motion for summary judgment  and are seeking an expedited ruling on the case.

This lawsuit, though pertaining to the Chicago Ordinance only, is of national import; as noted by the GAO report, communities throughout the country grapple with the same problems that Chicago faces – large inventories of vacant buildings, property owners unable or unwilling to maintain them, and significant and ongoing expenses to secure and remediate them. Other municipalities, including Las Vegas, Nevada, Charlotte County, Florida and Cook County, Illinois, have adopted their own vacant building ordinances, with registration and maintenance requirements similar to Chicago’s approach. The local press accounts describe similar motivations and concerns as to those raised in relation to the Chicago ordinance, as indicated by the press coverage in Nevada. We anticipate that nationwide these ordinances will continue to face federal preemption challenges along the lines of the FHFA lawsuit filed in Chicago, as well as challenges based on conflicts with state foreclosure and property laws, which recognize the superior rights of fee owners in these circumstances.

We will continue to monitor the progress of this Chicago ordinance and lawsuit and provide updates in the Blog on this important topic.