Land Bank Strategies in Ohio and Michigan

Alex and I are working with the Law firm Ancel Glink on the Land Banks project. The task of our assignment is twofold. First, we will be researching strategies that Land Banks in other states have utilized to acquire blighted properties. Second, we will be vetting these strategies under Illinois law in order to see what researched strategies are applicable in Cook County and the South Suburban counties. Alex and I have begun to research the following four states: Ohio, Michigan, New York, and Georgia. Thus far, we have done comprehensive research on both Ohio and Michigan, and this blog post will cover the strategies we found for those states.

There are three main strategies that Ohio land banks have utilized for acquiring properties. The first strategy relates to purchasing Real Estate Owned (REO) properties from lenders. When a homeowner defaults on his/her mortgage, the lender will take the property through foreclosure. In order to foreclose on the property in Illinois, a lender would have to go through the judicial foreclosure process. To proceed through this process, the lender will first file a foreclosure complaint with the court. Once the court issues a judgment on foreclosure then the judge or sheriff will have a public auction for the residential property. The sheriff will also give notice of the foreclosure auction/sale to the public. When the property is going through the public auction, there is usually a minimum bid that is comprised of penalties and taxes placed on the loan delinquent house. If there is no third party buyer at this auction, then it becomes a REO property. This REO property is a burden for the bank/lender because the lender must continue to pay taxes, insurance, broker’s fees, etc. on the property. So, in order to dispose of this property the lender enters into an agreement to sell the REO property to the Land Bank in Ohio.

A second way Land Banks in Ohio have acquired property is through a purchase agreement with Fannie Mae. Fannie Mae purchases mortgages from lenders and pools these mortgages together into Mortgage Back Securities (MBS) and then guarantees against losses on defaults from the underlying mortgages. When the housing crisis happened and many homes went into foreclosures, there was uncertainty as to whether Fannie Mae would be able to keep guaranteeing against losses. So, Congress passed the Housing and Economic Recovery Act (HERA) of 2008 which created the Federal Housing Finance Agency (FHFA) and gave it the authority to place Fannie Mae into conservatorship. The Treasury department used the authority given to it under HERA section 1117(g)(1)(a) to purchase Fannie Mae’s stock in order to provide capital to Fannie Mae so that it could keep providing funds to the mortgage market. This eventually led to Fannie Mae owning and guaranteeing many of the outstanding mortgages and it is from these mortgages that Fannie Mae sells chosen ones to the Land Banks for $1.   
The last strategy is through a purchase agreement with HUD. HUD obtains ownership of delinquent properties through the Federal Housing Administration (FHA). The FHA insures mortgages for lenders if those mortgages meet certain standards. When a borrower defaults on their payments, the lender can take the property through foreclosure and the FHA can obtain ownership of the property through the foreclosure process. Because the FHA operates under HUD, ownership would go to HUD and it is these homes that HUD is selling to the Land Banks in Ohio. One ambiguity is finding out whether the FHA purchases the promissory note from the lender and then takes the property through the foreclosure itself or whether the lender takes the property through foreclosure and sells it to the land bank. Further research will help clarify this.

In Michigan, the largest center for redevelopment of blighted properties is in Detroit.  Detroit has a land bank called the Detroit Land Bank Authority (DLBA).  This land bank acquires blighted properties through gift, purchases, and transfers. The land bank identifies blighted properties and has specific programs to acquire the property identified.  One of those programs simply acquires properties through purchase after foreclosure.
However, studies have shown that this entire foreclosure process in Detroit can easily take up to four to five years. In those years, as Michigan courts have taken judicial notice, not only is the jurisdiction missing property tax payments, but the homes are falling apart, effectively losing value by the day.  The longer it takes to sell a foreclosed property, the less it will sell for, and conversely, it will take that much more investment to rehabilitate the property.  As such, Detroit has a unique program called the Nuisance Abatement Program (NAP).  NAP allows concerned citizens to identify nuisance properties and report them to the DLBA.  Once the DLBA verifies that the identified property is in fact a nuisance under Michigan law (drug house, deteriorating, unsecured access by public, etc.), the DLBA contacts the registered owner of the property.   The owner, who often no longer lives on the property, has 3 options. They can agree to quickly rehabilitate the property, quickly demolish the property or gift the property to the land bank, or avoid further proceedings/hassle.

If the owner fails to reply to the DLBA, or simply fails to do what they agreed to do to abate the nuisance, the city of Detroit then files a complaint in civil court.  Notice of the complaint is sent to all lien holders and interested parties of record for the property.  This initiates a formal process for the previous attempts the DLBA made.  Once the Judge finds the property is a nuisance, the Judge enters an order giving the property owner the same three options it had before the complaint was filed. The difference is that if the owner agrees to rehabilitate the property or demolish it but they do not follow through with this commitment, the Court is able to enforce the Judgment by transferring title of the deed to the city.  In Detroit, the city then gifts the deeds to the DLBA, which then moves forward with its normal process to clean title and either resell the property or demolish it.