Foreclosure Registration Violation


Can vacant property registration(VPR) or Foreclosure Registration hurt a lender or investor in note purchase? Does title search show these violations?

Understanding the vacant property registration and foreclosure registration violations is necessary for any investor that invests in notes or buys a vacant and/or previously in foreclosure property. In most of the cases, title search will not show any violations related to property registration, as by default the title search is performed at the county registry while the registration for vacant property is kept and maintained by the city/township office.
On the few occasions, we have found that ProTitleUSA clients that are investing in mortgages did not run VPR searches checking for foreclosure registration and end up paying close to $100,000 in fees and penalties to the city for unpaid foreclosure registry at $250.00 per day violation.

Figure 1. Example of the violation

FORECLOSURE REGISTRATION – EXPLAINED

Many cities across United States post 2008 financial crisis passed a Foreclosure Registry Programs to establish a residential property program as a mechanism to protect residential neighborhoods, including abandoned properties, unsafe living conditions, lack of adequate maintenance and security as a result of the foreclosure crisis. Additionally, many cities included proactive inspection fees and inspection reporting on the condition of the property.

Cities, particularly those with high foreclosure rates, have found that a large number of their problem properties are properties in foreclosure or owned by banks (REO properties.) This is particularly true in judicial foreclosure states like New Jersey, Ohio or Florida, where the process from initial foreclosure filing to foreclosure sale and transfer of title to the lender can take two years or more. During that period, properties in foreclosure are often vacated by their owner or tenants, and once vacant, can be at severe risk of deterioration and potential abandonment.

Any lender (or beneficiary or trustee who holds or has interest in a deed of trust or a mortgage) on a property in foreclosure located within a city that keeps Foreclosure Registry must register that property with responsible department. For example, in city of Los Angeles, the foreclosure should be registered with the Housing and Community Investment Department (HCIDLA). In fact, lender or trustee must register property in foreclosure within 30 days of issuing Notice of Default (or Lis Pendens). Registration is also required on properties that have been the subject of the foreclosure sale where the title was transferred to the beneficiary or trustee of the deed of trust (or mortgage) involved in the foreclosure or transferred under a deed in lieu of foreclosure.

In many cities, registration with Mortgage Electronic Registration System (MERS) is no longer an option. This is one of the reasons, why lenders execute the assignment of mortgage out of MERS before the start of the foreclosure process.
If the lender’s name or ownership of the mortgage changed, the lender must notify the city within typically 10 days of the change. If a property changes to foreclosed status, real estate owned, the new owner will be required in many cases to pay a proactive inspection fee. (City of Los Angeles Municipal Code Ordinance #181185, sec. 164.03).
Foreclosure registration fees are typically anywhere from $25.00 to $250.00 annually and should be paid on January 1st of each year. In the foreclosure is active and not dismissed, lender must pay subsequent registration fees until the case is dismissed or property is sold at the foreclosure sale. The annual foreclosure registration amount is not significant, however if it’s not paid, the penalty can be painful.

If the city determines that the lender has failed to register the property or did not pay for proactive inspection fees or failed to comply with the monthly inspection and reporting requirements, city will initiate the process of notifying the lender to bring all fees to current within 30-days or pay a penalty in the amount defined by the city. For example, in the city of Los Angeles, the fine is $250.00 per day (City of Los Angeles Municipal Code Ordinance #181185, sec. 164.04).
Lender must not forget to de-register the property in the case of the Non-REO sale or reinstatement or loan by modification signed by the borrower.
The proactive inspection are typically performed by a city, charging lender anywhere from $150.00 to $400.00 per inspection.