Lender-Abandoned, Non-REO Foreclosures
Consider this troubling question: Do mortgage lenders have any obligation to take over a property that has defaulted on its mortgage?
The short answer, it appears, is no:
I hadn't previously considered this, until a recent article in the Chicago Tribune started me down this path.
Foreclosures and REOs properties are impacting more than the neighborhoods they are in -- they are actually adversely impacting the real estate business -- especially when it comes to foreclosed homes in possession of lenders (REOs).
First, have a look at some recent data regarding REOs:
"Across the country, federally chartered banks held more than $12 billion worth of foreclosed properties at the end of 2007, about 100 percent more than a year earlier. Of those, $6.6 billion are residential properties of one to four units, said Keith Leggett, senior economist at the American Bankers Association.
One housing data firm said it found the same extraordinary doubling in the Chicago area in what's known as REOs—real estate owned by lenders and investors. First American CoreLogic, based in Santa Ana, Calif., said it determined that 2.5 percent of all housing in the region is in this category, though two other firms calculate a lower figure.
Still, the 100 percent increase carries profound implications for the real estate economy because decisions by individual banks—to wait out the slump or dump properties on a deadened market—almost certainly would affect property values."
Okay, that's typical of most situations: Delinquency leads to default, then foreclosure proceedings. Once a lender retakes the property, the REO leads to a decision on when to best resale -- immediately, or wait it out.
Some lenders are approaching the Foreclosure process a little bit, how shall we delicately call this -- differently. They are considering the sale decision prior to even taking possession. Their conclusions may surprise you:
"In some cities that have low property values, where there are dense concentrations of foreclosures, you see lenders who file foreclosure proceedings but don't actually take control of the properties, because the lenders have to maintain them and pay taxes on them."
"There are areas in some parts of the country where property values are quite low, and there are no large-scale expectations of them going up. They don't know that they will ever recoup those costs," and so the lenders never re-take title to the properties, allowing them to become derelict." (emphasis added)
There you have it: Abandoned, Non-REO Foreclosures.
The local market conditions are what seems to determine the abandonment decision. In a region where the job and real estate market is doing anything better than "a little soft," I would surmise that abandonment makes no sense at all.
However, at a certain point, in a weaker region, with declining neighborhoods, certain lenders might make the decision to simply walkaway from a large swath of (potential) real estate holdings, on the simple basis that it might be cheaper to do so.
There are very significant costs to this. Consider what the potential impact of these property abandonments by the lender means:
- Total write off of the loan;
- Boarded up homes / neighborhoods;
- Loss of tax revenue to the local school district or town;
- Long delays before the local town, municipality, or state can take possession due to tax arrears.
Thus, these incomplete foreclosures/abandonments can have very significant impacts.
If this becomes widespread, we could be in the process of creating an entire new universe of suburban slums . . .
>
Source:
As owners default, lenders move in
Mary Umberger, Becky Yerak and Tara Malone
Chicago Tribune, March 31, 2008
http://www.chicagotribune.com/business/chi-foreclosure_monmar31,0,1221355.story
Related:
The Next Slum?
Atlantic Monthly, March 2008
http://www.theatlantic.com/doc/200803/subprime
Thursday, April 03, 2008 | 10:15 AM | Permalink
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» Questions from Political Animal
QUESTIONS....Q: What happens if a buyer who can't make his loan payments decides to just walk away from the house? A: The bank takes title and tries to sell the house, either now or later, when the market improves. Q:... [Read More]
Tracked on Apr 3, 2008 11:37:28 AM
» "Reluctant Banks" Let Defaulted Borrowers Stay in Homes from The Big Picture
Yesterday, we discussed Lender-Abandoned, Non-REO Foreclosures. That started a robust discussion, leading to a follow up piece by Bob Ivry of Bloomberg: Lenders Buried By Foreclosures Let Late Borrowers Stay in Homes. According to Ivry:Banks are so ove... [Read More]
Tracked on Apr 4, 2008 11:24:35 AM
Comments
No big deal; if these properties have become abandoned (no property taxes are being paid) the City/County can take possession. (Imminent Domain) Great opportunity for refurbished low income housing, or better yet bulldoze and create a park, green space, community garden, etc. People migrate to jobs. If jobs leave, people leave. If no people left, return the land to the agriculture, forest, grass lands, that were there before the cheap, ugly subdivision inconveniently located miles and miles away from employment centers.
Posted by: GreenMachine | Apr 3, 2008 10:38:24 AM
So if they're not taking title, what happens to the property? Is it just open to squatters? How do you keep any control if you don't hold title? Or does it go to the municipality?
The Detroit MLS looked bad, but I shudder to think what else we might see . . .
Posted by: zero529 | Apr 3, 2008 10:40:27 AM
...throw in lenders who foreclose and are stuck with exorbitant monthly taxes insurance and other expenses ...no or few buyers who can qualify ...in South Florida alone there maybe $100 billion in real... not book value losses...as liquidity dries up things here anyway are only in the 3rd inning by my eye...what happens when lenders don't want triple AAA properties back..can't happen ? ..I was in Houston in the late 80's buying gorgeous brand new Triple AAA empty office buildings for 10 to 20 cents on hard construction cost dollar for a company I worked for...Miami and parts of the South coast remind of this.. by the way Barry great blog ..
Posted by: brasil | Apr 3, 2008 10:46:20 AM
Err ... hold on just a moment here.
If you are a lender who just wants to wash your hands of a debtor AND his property all you need to do is write off the debt and send to the county recorder the lien release documents and poof, "you are out."
Why even bother with the "foreclosure" part of the thing. It is just a waste of time and resources.
Posted by: esb | Apr 3, 2008 10:52:28 AM
Seems like a non issue to me. Home prices in the vast majority of places are not going below the cost to maintain the property. Also, home prices don't have to go up for them to recoup their value. They can simply rent them out.
Posted by: Albert Einstein | Apr 3, 2008 10:52:32 AM
What's the point of foreclosing but not taking title? It sounds like the owner would just stay in the house, pay the taxes, maintain the property, and move to quiet title some time later. And what happens in jurisdictions in which the owner has the title and mortgage creates only a security interest?
Posted by: Royce | Apr 3, 2008 10:52:51 AM
Very interesting. I suppose you'd have to follow the money: is there an obligation to pay the property tax that, by local law, falls on anybody but the owner who abandoned the place?
Some areas might end up back in 1950's style 'urban renewal' if cities end up owning the stuff. That is their only way out. Fix-up is not worth the investment and no developer will come in unless you can clear out all the old stuff and turn over a 'clean' site.
Posted by: wally | Apr 3, 2008 10:54:52 AM
Interesting that some foreclosure sites are now titled "Bargain Network" and offering deals "30-60% off Market Values"
Trying to shift psychology yet again.
And re: Goldman pushing BSC....
Goldman knows everything before everyone else.
Former CEO of GS contacts his buddies to get the ball rolling so that they can sit in Congress and justify the whole thing. "It was all so quick" seems to be the mantra they spin to us....if what Blodget says is true then it's pretty obvious they were sacrificed with full complicity of all involved....except no one bothered to tell BSC at the time.
Sanctioned stealing
Ciao
MS
Posted by: michael schumacher | Apr 3, 2008 11:02:51 AM
There's an REO speedwagon / Mortgage collapse joke in here somewhere, but I can't find it.
Royce raises an excellent point; why foreclose if you don't want the place, and the hassle/cost that comes with it? Once everyone stops trying to screw each-other, I say the mortgage holders make a downward adjustment to the principal, write off the amount adjusted, and continue with business as usual; trying to con some other poor sucker in to buying garbage he can't afford with money that doesn't exist.
Posted by: Braden | Apr 3, 2008 11:07:55 AM
a typical foreclosure (what's that anymore!!) costs the banks on avg. about 45-50K
Do the math and you see why they don't want them at all..
Ciao
MS
Posted by: michael schumacher | Apr 3, 2008 11:22:18 AM
Does anyone see the irony here? Lender's have spent the last 6 months talking about the "immorality" of jingle mail. Apparently they have no problem turning the keys over either(to anyone but them).
Posted by: Lee | Apr 3, 2008 11:28:23 AM
Empty, abandoned houses are just the extreme end of this whole fabricated housing boom /bubble.
At one end you have people selling at a loss of walking away from their ARM’s, and then the foreclosed houses, and finally at the far side of the process, you have not only the empty houses, but the new subdivisions abandoned in mid construction- their wood framed carcasses rotting away in the elements, or lonely foundations filling with rain water.
Posted by: Paul in NYC | Apr 3, 2008 11:34:46 AM
Probably better off on another post,but since it was mentioned here:
BSC overpayed for their inventory...couldn't price their inventory...couldn't sell their inventory...and had that inventory acting as collateral. If you put yourself in position to be crushed by the market or your competitor, then that scenario will normally play out. BSC was shown to be clowns masquerading as traders.
Posted by: Matt M. | Apr 3, 2008 11:39:30 AM
There are other industry impacts to this situation and others like it. Based on anecdotal evidence, utility companies are taking larger write-offs because people walk away from their houses without notification and stop paying the utility bills. By law in many states, utilities cannot turn off power or gas to homes from ~Nov to ~April so they are stuck. Even when they know foreclosure has happened, they are having a much harder time than in the past getting banks to pay the utility bills.
This is anecdotal based on conversations with folks in utilities serving states from the midwest to TX and the Mountain west. I would be fascinated to see a rigorous analysis.
Posted by: Fear the Data | Apr 3, 2008 11:40:51 AM
I guess that is the positive side of a fractional reserve banking system that leverages every dollar up 10 fold. For every dollar you lose you are really only losing a dime in real money
Posted by: DavidB | Apr 3, 2008 11:45:19 AM
OT...Sort of: Builders First! Uh, what was the question? Oh Yeah, crumbs for the strapped homeowners...
Btw A 'win-win' for creative truthtelling with reinstatement of losses! Time to reprice executive options, eh?
Housing Accord Puts Builders First (Washington Post)
http://www.washingtonpost.com/wp-dyn/content/article/2008/04/02/AR2008040202293_pf.html
Senate Democratic and Republican leaders rushing to address the nation's housing crisis reached agreement yesterday on a package that would provide billions of dollars in tax rebates to the slumping home-building industry while offering little to homeowners threatened with foreclosure.
After working through Tuesday night to flesh out a bipartisan agreement, lawmakers unveiled a bill that rejects the most ambitious plans for aiding distressed homeowners, including a Democratic proposal to permit bankruptcy judges to modify the mortgage on a person's primary residence.
Instead, lawmakers settled on a sharply scaled-back array of measures that would provide $4 billion in grants for cities to buy foreclosed properties, temporary tax breaks worth up to $7,000 for home buyers who purchase foreclosed properties, and new tax deductions for almost every American who owns a home. The package, which would cost about $15 billion over the next 10 years, also would jump-start stalled legislation to streamline the Federal Housing Administration, one of the top priorities of the Bush administration.
Families who cannot afford to repay their home loans - the group at the heart of the mortgage meltdown - would benefit mainly from $100 million to expand foreclosure counseling services and greater latitude for local housing authorities to use tax-exempt bonds in refinancing subprime loans.
Home builders and other businesses suffering losses in the flagging economy, meanwhile, would get the lion's share of federal spending in the bill: $6 billion in tax rebates.
snip
Posted by: SR | Apr 3, 2008 11:46:03 AM
I apparently missed a Business Week cover story on this some time ago:
Geez, how did I miss that? Was that a vacation week?
Two issues I am wrestling with: First, how many of these are there? I cannot find any sort of hard data.
2nd, what basis does a citylike Buffalo have to enforce a banks election not to enforce its lien ? Is a lien against a property an option or an obligation?
Posted by: Barry Ritholtz | Apr 3, 2008 11:47:28 AM
MS, agree completely. Rubin and Paulson with fellow former GS individuals are running the whole damn thing. I believe it goes to the heart of who is really running everything, and it sure as Hell isn't our elected officials who look the other way at every occasion. Sickening really!
Posted by: SPECTRE of Deflation | Apr 3, 2008 11:49:47 AM
If BSC assets were "performing"-as the clueless Fed Head said- then why were they not liquidated??
No one can ask that question on the committee???
We are so screwed......Mexico here we come.
Ciao
MS
Posted by: michael schumacher | Apr 3, 2008 11:55:46 AM
In 1995 they changed the Reserve Requirements, in 1999 the did away with Glass Steagall and in 2005 we had the Bankruptcy laws changed to protect the playas after they had allowed everyone to borrow up to their eyeballs. If I didn't know better, I would call it conspiracy but that can't happen in America right?
Posted by: SPECTRE of Deflation | Apr 3, 2008 11:58:33 AM
I know understand that Dodd has upped the ante to $400 Billion on helping homeowners who should never have qualified for the homes they bought. They allowed BSC to fail before bending over and kissing every other playas arse with whatever is needed. This smells to high Heaven.
Posted by: SPECTRE of Deflation | Apr 3, 2008 12:10:36 PM
And no Paulson at the committee??
"Trip to china planned months ago"
He's been responsible for all of this bullshit bailout(s) and he can't even answer a few questions??
The hubris on display here is truly staggering.
Ripping us off and smiling the whole time.
MS
Posted by: michael schumacher | Apr 3, 2008 12:15:20 PM
Barry, everything was securitized so nobody knows who the lender would be. It's why Deutsche Bank keeps getting hammered every time they go to court. The shit paper was sliced and diced until it was damn near impossible to figure out who the lender would be. They want to give Judges the power to change mortgage agreements which is unconstitutional. We are in deep trouble.
Posted by: SPECTRE of Deflation | Apr 3, 2008 12:17:09 PM
Places like Stockton Calif. are facing some of these issues already from a city planners perspective.
The entire city is having to deal with slum like issues because the large number of abandoned homes are spread out over the entire city. So, even though it may be only 2 homes per block the effect on the neighborhood is close to what it would be if it was most of the homes on the block.
Okay now, everyone who thinks that the bottom is in on the housing stocks, I have some Bear Stearns stock priced at the low low price of $60/share just for you. :)
Posted by: Advsy | Apr 3, 2008 12:22:30 PM
MS, he's in China asking them to buy more MBS. LOL! Ya can't make this stuff up. Not one person has asked how the FED did this in the first place. There charter gives them no right to do the things they are doing. They can hold paper no longer than 6 months and that must be backed by argricultural commodities, yet they set up a 10 year LLC. Are you kidding me? What has happened to our Representative Republic folks?
Posted by: SPECTRE of Deflation | Apr 3, 2008 12:23:38 PM
