If there’s any way for banks to cut the cake to work to their advantage, they do.
One example that has not gotten attention is that servicers will complete all the steps of a foreclosure, sometimes even scheduling the sheriff’s sale, and then not put in a bid. The reason? The home is of so little value that at even a $100 price, the bank deems it to be not worth the trouble.
But keeping houses in limbo is a horrorshow for the old homeowner, who unknown to them, still owns the property (meaning they could have lived in in it and maintained it, preventing neighborhood blight) and is still on the hook for property taxes. And of course, these abandoned homes damage the value of neighboring properties.
And needless to say, because they aren’t on the market, these houses are also not considered to be part of official inventories. Foreclosure experts in Florida have told me they see a lot of houses where the banks take the home up to the final step of foreclosure, then let it languish. This story, from Cleveland.com via April Charney, is confirmation that this is a broader phenomenon. Notice that this is a long standing practice; the article cites examples dating from 2006 and 2007. Key extracts:
Banks are backing away from properties they have foreclosed on creating a new set of issues for neighborhoods..
These so-called “bank walkaways” are another troubling development in the foreclosure crisis, particularly in cities like Cleveland with weaker housing markets, say housing advocates and government officials.
Lenders or mortgage companies decide they don’t want homes they have already foreclosed on, sometimes because the value has plummeted or they believe the homes could become costly liabilities if they are socked with housing code violations.
But without that sale, the property can languish abandoned and ripe for vandalism. As liens and liabilities mount — creating a so-called “toxic title” — it becomes even harder to transfer the property. Neighborhoods and local governments are left to deal with the mess….
Some of the fallout that results when properties languish vacant and abandoned shows up in Cleveland Housing Judge Raymond Pianka’s courtroom.
“I see shocked people every single week,” Pianka said. “They thought the burden was lifted because they filed bankruptcy or because somebody somewhere told them they’re no longer responsible, and then they’re pulled back in facing criminal code violations.”
His court also has worked with such owners on moving the property into the hands of another owner such as a nonprofit agency, the city land bank or the next door neighbor.
But trying to transfer a problem to somebody else can become a thorny and protracted process if the long-gone owner can’t be found or the foreclosed house is saddled with so many financial obligations that it is too expensive to touch.
Notice that there is a remedy, and I hope more states push for it:
State Rep. Dennis Murray of Sandusky is drafting a bill he hopes to introduce in the next two months that would require lenders or mortgage service companies to take foreclosed properties to sheriff sale within a certain time — or see their mortgage lien erased.
Some judges are also taking matters into their own hands:
Separately, Cuyahoga County Common Pleas Judge Nancy Margaret Russo recently began ordering those granted a foreclosure decree in her courtroom to file the paperwork for a sheriff’s sale in about 30 days — or face being ordered to court for a contempt hearing.
“I think it’s a big problem,” Russo said. “It’s creating more abandoned homes with nobody responsible for taking care of them.”
It’s not clear whether she has the jurisdiction to issue such orders. But Russo — who was not aware of Murray’s initiative when she began hers — believed it was time to start a discussion.
The more straightforward approach is for places like Cleveland to fine servicers. It would help to work with someone who understood how pooling & servicing agreements worked to construct it in such a way that it would be difficult for them to pass it on to investors. Oh wait, what am I thinking? Servicers pass on all sorts of impermissible fees to investors as it is. The more likely point of short-term leverage is for the city to identify which servicers have been the worst actors and to have community groups encourage businesses, churches, and foundations to move their accounts away from the banks that own them. Losing that type of customer has a vastly bigger impact on banks than individuals moving their money.