naked capitalism

In the through the looking glass world of reality according to banks, tearing down foreclosed houses is a good thing. Really.

The spin that Bank of America is using to justify the notion of bulldozing buildings is that the houses in question are worth bupkis, say $10,000 or less. There’s a wee omission in their discussion. Many if not most of the houses in question have fallen in value because the bank failed to maintain them on behalf of investors. They were stripped for copper and appliances, or got moldy, or had squatters move in and make a mess of the place. I’ve heard numerous stories from not only foreclosure attorneys, but also from readers bidding on properties out of foreclosure. For instance, one attorney told me of a house with a $1.3 million mortgage where the owner had arranged a short sale at $1.1. million. The bank refused to take the offer, foreclosed on the house, sat on it, and eventually sold it for, if I recall correctly, $200,000, which I’d bet was the value of the land. The bank made marginally more in fees via this route and delivered a much bigger loss to investors. I’ve heard similar tales from readers greatly lowering their bids on bank owned properties because they deteriorated so much as the process dragged on.

But here is the scam, um, program, via Bloomberg:

Bank of America Corp. (BAC), faced with a glut of foreclosed and abandoned houses it can’t sell, has a new tool to get rid of the most decrepit ones: a bulldozer.

The biggest U.S. mortgage servicer will donate 100 foreclosed houses in the Cleveland area and in some cases contribute to their demolition in partnership with a local agency that manages blighted property. The bank has similar plans in Detroit and Chicago, with more cities to come, and Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Fannie Mae are conducting or considering their own programs…

The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming, according to the statement. Simon declined to say how many foreclosed properties Bank of America holds.

Donating a house may create an income-tax deduction, said Robert Willens, an independent accounting analyst based in New York. A bank might deduct as much as the fair market value if a home wasn’t acquired with the explicit intent of knocking it down, he said…

It’s an economically justifiable transaction,” {P.J.] McCarthy [of Fannie Mae] said. “Holding on to a property that might sell for $1,000 or $2,000 or $5,000 for several hundred days is not in anybody’s best interest.”

The argument made in the article is “No one needs these homes, no one is going to buy them.” But that’s bogus. As reader Justica pointed out,

Last I checked, we still have a large population of homeless people in Chicago, Cleveland and Detroit where they plan to demolish houses. Remember this next time you hear someone talk about how “efficiently” the market allocates resources. This is waste on a monumental scale.

The benchmark should not be the low purchase price, it should be whether the building is a health hazard or in such serious violation of local building standards as to be irredeemable ex very significant investment.

In the days when Harlem was full of abandoned buildings, there were many homesteading programs, some not exactly legal, others whereby people who presented a plan and could prove they had sufficient resources to execute on it could take over an abandoned building (this was for personal use rather than to flip them). These were considered to be positive measures, since they brought in new residents into the neighborhood and improved the properties.

The only good news is that this program is expected to remain small scale. But with 10.8 million homes at risk of default in the next six years, and banks overwhelmed by the volume of delinquencies now, I wouldn’t bet against short sighted bank-favoring expediencies like this becoming widespread.