Wednesday, August 28, 2013

District Court Strikes Chicago's Vacant Building Ordinance

Judge Thomas Durkin (N.D. Ill.) ruled last week in Federal Housing Finance Agency v. City of Chicago that a Chicago ordinance that requires mortgagees of vacant buildings in the city to register with the city, pay a registration fee, and maintain the building under certain standards cannot apply to the FHFA or to Fannie Mae or Freddie Mac.  The court held that the Chicago ordinance was preempted by federal law and constituted an impermissible tax against the federal government.

The ruling means that Chicago cannot apply its vacant-building requirements to the FHFA or Fannie Mae and Freddie Mac, but the city can still apply the ordinance to private mortgagees of vacant (that is, abandoned or foreclosed) properties.

The ruling is significant, because Fannie and Freddie together hold about 258,000 loans secured by properties in the city.  The ruling means that the city cannot compel the FHFA to include Fannie- and Freddie-backed properties in its vacant-property registry, cannot collect a registration fee from the FHFA (or its servicers), and cannot fine the FHFA (or its servicers) for violation of the city's maintenance standards.  On the other hand, Fannie and Freddie have their own standards for continuing maintenance of vacant properties.  So for Fannie- and Freddie-backed properties, federal standards, not the city's, apply.

The ruling is also significant, because it telegraphs a federalism concern to the thousand or so local governments around the country that have adopted similar vacant-property ordinances.  While the ruling doesn't directly touch ordinances outside the City of Chicago, other local governments will do well to revisit their ordinances in light of the ruling.

The FHFA challenged the city's ordinance as running up against the federal Housing and Economic Recovery Act of 2008, or HERA.  HERA gives the FHFA authority to place Fannie and Freddie into conservatorship "for the purpose of reorganizing, rehabilitating, or winding up [their] affairs."  It also empowers the FHFA to "preserve and conserve the assets and properties of [Fannie and Freddie]."  

The FHFA directed Fannie and Freddie  to implement consistent mortgage loan servicing and delinquency management requirements and authorized them to contract with servicers who perform activities related to loan defaults, consistent with those requirements.  HERA includes a preemption clause that says that the FHFA "shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers, and privileges of [the FHFA]."

The FHFA sued the city, arguing that HERA preempted the city's vacant-property ordinance and seeking a declaration and injunction prohibiting the city from enforcing the ordinance against it, or Fannie or Freddie.  The court agreed with the FHFA that HERA preempted the city's ordinance and awarded the requested relief.

The court held that Chicago's Ordinance was field- and conflict- preempted by federal law.  As to field preemption, Judge Durkin ruled that HERA's charge to the director of the FHFA to take care of Fannie's and Freddie's assets occupies the field, even if HERA's express preemption provision doesn't mention municipal ordinances:

Here, in contrast, it is evident that the Ordinance encroaches on an area of regulation that Congress reserved exclusively for FHFA.  As applied to FHFA as conservator and mortgagee, the Ordinance regulates how FHFA manages its collateral, including specifically how this collateral--which FHFA does not actually own--should be preserved.  For instance, when FHFA issues guidelines and instructions to servicers regarding the nature and frequency of inspections of vacant and abandoned properties, it is taking those steps it believes necessary to preserve and conserve Fannie and Freddie's assets and property.

HERA expressly prohibits other federal agencies and states from interfering with actions taken by FHFA as conservator.  Although HERA's preemption provision . . . does not expressly include laws enacted by municipalities . . . Congress enacted an extensive federal statutory scheme which specifically requires the Director of FHFA to "establish risk-based capital requirements for [Fannie and Freddie] to ensure that [they] operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of [Fannie and Freddie]."  HERA sets forth various grounds for the Director of FHFA to exercise his discretion to appoint FHFA as conservator of Fannie and Freddie.  Once placed in conservatorship, Congress intended for FHFA to be the sole entity responsible for operating Fannie and Freddie's nationwide business of purchasing and securitizing mortgages.

Op. at 24-25.

As to conflict preemption, Judge Durkin held that Chicago's Ordinance "obstructs Congress's intent to have one conservator take control of Fannie Mae and Freddie Mac, and take action as may be 'appropriate to carry on [their business] and preserve and conserve [their] assets and property' without being 'subject to the direction or supervision of any other agency of the United States or any States . . . ."  Op. at 29.

Finally, Judge Durkin ruled that Chicago's registration fee was an impermissible tax on the federal government, in violation of McCulloch v. Maryland.

http://lawprofessors.typepad.com/conlaw/2013/08/district-court-strikes-chicagos-vacant-building-ordinance.html

Cases and Case Materials, Federalism, News, Opinion Analysis, Preemption | Permalink

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