The ability of local governments to impose fines on owners of foreclosed property in a state of blight has been indefinitely extended under the Homeowner Bill of Rights.

The fine may be as high as $1,000 a day. The local government may also impose additional penalties, which can include an appointment of a receiver (with the duties of a property manager), the cost of which the owner will be required to pay as a priority lien coupled to property taxes.

The aim of this law under the Homeowner Bill of Rights (a portion of which passed in July) is to lessen the negative effect foreclosures have on neighborhoods and surrounding communities. Fines will add up quickly for owners of REOs (read: lenders) who do not maintain their properties.

Hopefully, this will be sufficient encouragement for owners of blighted properties to take notice and maintain them.

With more than 10,000 REOs on their books in California alone, Fannie Mae (and thus the taxpayer) stands to lose the most if a solution is not found.

Related article:

Homeowner Bill of Rights is law

first tuesday insight

This new law has got it right. The only language lenders (the vast majority who own these abandoned REOs) speak is dollar signs – once the fines start rolling in, they will soon begin maintaining their foreclosed homes.

Levying fines on absentee property owners will be a boon for the recovery for a couple of reasons.  Neighborhoods blighted by unkempt foreclosed property suffer from decreased property values even below the new norm of the recovering real estate market.

Blight is a cancer, literally eating away at neighborhoods as unattended structures fall into disrepair. The result is a vicious cycle of increased crime rates, decreased desirability and thus depreciation in the truest economic sense. Ridding communities of this cancer takes work.

Once the maintenance work follows code enforcement, a virtuous cycle takes hold, increasing property values and pulling many negative equity homeowners out of the financial black hole their home has become. It is at this point that homeowners will sense it is time to sell, allowing them to buy a replacement home – the mainstay action of a long-term MLS single family residence (SFR) regime.

Soon, tenants will join in the demand, building starts will rise and, well, we are then off to the races again.

Related article:

Foreclosed home maintenance: who is responsible?

The best way for lenders to ensure properly maintained REOs, while simultaneously contributing to their coffers, is to rent these vacant homes.

Fannie Mae and Freddie Mac (Frannie) are currently in the process of selling 2,500 homes to investors who will soon rent these formerly empty shells to tenants, boosting property values in ghost town neighborhoods (if they can find creditworthy tenants and keep them rented for the five year program they must commit to). Presently, Frannie is limiting the pilot program in California to 500 homes in the Los Angeles and Riverside/San Bernardino area.

But what are the side effects? This new law is likely to have a significant impact on the buy/rent divide in California’s real estate market.

While many believe that now is a great time to buy real estate, few are qualified and even fewer have the confidence to invest in owning an SFR. Thus, those who are already inclined to rent, for economic and demographic reasons, will be further enticed to rent if the glut of fallow REOs suddenly becomes available to occupy at reasonable rates.

User demand in the California real estate market is currently focused on rental properties, which has driven rents a bit higher, especially in thriving regions of job creation such as the Silicon Valley, and urban San Diego to a lesser extent. An increase in rental housing supply means more demand for jobs (read: agents) in the real estate market.

Those jobs? Property managers.

Related articles:

Syndicators, schemes and scams: the business of REO rentals

REO rentals: a syndicator’s guide

Re: California enacts law to levy heavy fines for blight from HousingWire