Over the past few weeks, we’ve been looking at  Saint Paul ordinance07-1194 4 (”Green Sheet” number 3046791), which the City Council adopted unanimously at its June 25 meeting. The law would require owners of vacant homes listed in Category II (needs a bunch of work) and Category III (almost tear-down material) to get a city-determined laundry-list of improvements, to get buildings of whatever age up to current building codes before they could get a Certificate of Occupancy.  These repairs would add between $20,000 and $100,000 and more to the cost of houses before they could be occupied. These buildings are largely owned by mortgage holders – banks, investment firms, debt traders, Fannie Mae and Freddie Mac. 

They are largely “upside down” – they were largely foreclosed with loan balances much higher than the houses’ current values.  In some cases, the discrepancy is immense. 

Dan Bostrom represents the Sixth Ward – the upper-half of Saint Paul’s East Side.  We spoke on the phone last week. 

“It’s not unusual to see houses with $200,000 balances that aren’t worth $30,000”, said Bostrom. 

And the problem – at least in Saint Paul’s worst-affected neighborhoods, Frogtown and the North End and the lower East Side – is serious.  “There’s one block”, Bostrom notes, citing a block just off Payne Avenue, on the lower East Side, “with 23 houses on it.  12 are vacant”. 

The ordinance is intended to compel banks and other lenders owning foreclosed property in Saint Paul to bring foreclosed property up to current building codes before they can be re-sold.  “The outcome we’re looking for”, said Kathy Lantry, who represents Ward Seven, which includes the hard-hit Payne-Phalen and Dayton’s Bluff neighborhoods as well as the placid proto-suburban expanse of Battle Creek, “is a city with liveable houses, that people can afford to live in”. 

Which is, of course, what everyone wants; it’s the means to the end that are the question.  I wondered if this strategy – putting intensely difficult conditions on selling foreclosed and vacant properties – had been thought through; how likely were institutional mortgage-holders to comply with this ordinance?  Had there been any “market research” done on the percentage of compliance expected?

“No”, said Lantry.  “We did this just for the fun of it”, she quipped sarcastically.  She quickly added that the ordinance was not a hasty decision; “We went over this ordinance with any number of bankers, the St. Paul Association of Realtors”, and other local financing bodies to sanity-check the proposal.

“…there was a fair amount of give and take with local community banks in helping to improve upon earlier drafts of the ordinance, and a local representative of an association of community banks in the area has said that they are relatively comfortable with the final ordinance”, added Ward 4’s Russ Stark in an emailed response.

OK – so there was some buy-in (and I plan on following up with some of the industry sources named in the interviews) from the local financial-services community.  We’ll come back to that (I plan on interviewing some of the industry sources named in my interviews, later this or early next weeks). 

But what if, at the end of the day, the lender doesn’t comply?  If the price to get the house – especially a detriorating, vacant one – saleable in the near future is just too high?  Will they have to sell at a huge loss?

“The goal”, added Lantry, “is to get these companies to negotiate workouts with homeowners, rather than foreclosing”. 

“We have provided a cattle prod to try to get them to negotiate”. 

OK, good – but what if they don’t?  What if the prospect of a huge loss is just not acceptable, for whatever reason?  More to the point – what about the houses in which there’s nobody to negotiate, the city’s huge stockpile of vacant homes (which topped a total of 2003 buildings earlier this week – 80% of which would be affected by the terms of this ordinance)?  

“Unfortunately, many of the properties in question, prior to the ordinance, were already ‘falling through the cracks” and deteriorating to the point of needing to demolished”, said Ward 4’s Stark, referring (I presume) to the 300-odd Category III properties on the vacancy list.

“If the mortgage holders walk away, the house is probably beyond saving”, said Lantry.  “Look – you need to remember that these lenders are not unsophisticated, mom-and-pop lenders.  These are big companies…they have a fiduciary responsibility to their trustees…their responsibility is to maintain [these assets] for their trustees”. 

But what if the lenders did abandon these properties?  And remember, there’s a time limit for properties on the vacancy list.  Hypothetically, let’s assume the worst: that most of the banks involved decline to comply with the ordinance.  They also stop paying property taxes, allowing the properties to go tax-forfeit.  The land forfeits to the State, obviously – but the State then assigns it to the city/county to dispose of.  Assuming the hypothetical “worst case” scenario, what does the city intend to do with all of this new property?

Bostrom denied any interest in this; “We don’t want to own a bunch of houses”.  But how about the land the houses are on?  Bostrom vigorously denied any city plant to gobble up property. 

Russ Stark:  “We’re trying to use this and several other tools at our disposal to avoid the problems that all of us are concerned about — and yes, there is some risk that these tools will not be effective.”

“Remember”, added Lantry, “you have two years to sell a house that’s Category II…if they can build a bridge across the Mississippi in 24 months, they can sell a house in two years.”

Of course, bridges that carry 140,000 cars a day are a bull market.  Houses, these days?  Not so much.

More Friday.

UPDATE:  Of course, it’s Russ Stark.  Matt was an ACLU lawyer.  In 1986.  Blah.

(Read the whole series: Part I, Part II, Part III, Part IV, Part V)