Fannie Mae and Freddie Mac Sue to Strike Down Chicago Ordinance Targeting Lenders

The Federal Housing Finance Authority (FHFA), which oversees Fannie Mae and Freddie Mac, sued the City of Chicago in federal court in Chicago to declare the city’s ordinance invalid as it applies to Fannie and Freddie. While this lawsuit, which was filed on December 12, 2011, will not directly protect lenders, the complaint filed in federal court does point out that the Chicago ordinance imposes obligations upon secured commercial creditors that have no legal right to possession of the property. The ordinance requires secured creditors and servicers to secure, maintain and register any “vacant” or non-occupied property that they have a security interest in. The ordinance authorizes fines of up to $1,000 per day if the lender or servicer does not comply.

The FHFA asserts that the ordinance contradicts the FHFA’s federal statutory powers to manage and oversee Fannie and Freddie. Thus, regardless of the outcome of the FHFA’s lawsuit, the ordinance will likely still apply to private lenders and servicers. Lenders or, possibly, the Mortgage Bankers Association will need to step forward and challenge the ordinance, or continue to face fines and liability for properties they do not control.

See Holland & Knight’s October 21, 2011 Financial Institutions alert for additional background about the Chicago ordinance.

Chicago’s problems with vacant properties are not unique. Vacant property problems are far more pervasive in other areas of the country (such as California, Florida and Arizona). Whether or not other cities across the United States will follow Chicago’s aggressive approach to fix the problem of vacant properties in the city remains to be seen. But, if the ordinance succeeds in reducing the number of problem properties, or in reducing the impact on the city’s budget to address those properties, then other jurisdictions may follow suit.