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Monday, January 7, 2008

When the bank walks away...

We see a lot in the news about owners abandoning houses that are in the foreclosure process. Unfortunately, in urban areas, that often means that thieves and vandals are close behind, often stripping everything of value from the houses or vandalizing them. What we don’t hear much about is the banks themselves abandoning houses. In this week’s issue of Business Week I read about this for the first time; although, it’s apparently been going on for a while.

Some lenders (banks or others) have apparently started evaluating whether or not it’s worth their while to actually go through with the foreclosure process and take over the house. This decision is unfortunately made after they’ve normally driven the occupants from the house through their actions, i.e. after all of the foreclosure notices have gone to the owners and maybe after the sheriff’s sale but before the actual eviction takes place. The old owners may be long gone, but, then the bank decides to walk, too; never officially taking over the property at the end of the process. Apparently this is now getting more common when the mortgages on the properties are "owned" by investment groups rather than actual banks.

The Business Week article brought up some good issues that are starting to bug local governments. Who is responsible for the place when that happens? Who can they hold liable for the taxes and for any liabilities than may come out of an abandoned property? What happens if some neighborhood kid gets into the place and gets injured? Whom do you sue for neglect of the place? Who does the Township or Village or City or HOA, for that matter, go after for back taxes and dues? The house is in a legal limbo at that point. Even worse there’s likely no quick and easy way that title can be passed to someone who might want to buy it and fix it up. It's a legal mess.

The Business Week article sited several local courts that have started holding the banks accountable, fining them and putting liens on their local operations. That tends to get their attention, since that can stop them from doing other business in the community. The legal theory seems to be that the banks have a “controlling interest” in the property, since they forced the old owners out with their foreclosure proceedings.

That seems only right to me. If they are going to kick out the old owners, rather than try to find a way to work out something with them; then, they should be responsible for what happens next and not be allowed to just walk away. In fact, I'd like to see the courts hold the banks more responsible for the upkeep and security of the foreclosed homes that they "control." The deterioration from lack of maintenance and the damage from thieves and vandals to unsecured houses drive the houses value down quickly and cause neighborhood blight. I've seen some HOA's try to levy fines or charge upkeep expenses to banks, with little success, since the banks have deeper pockets for legal defenses; however, a court order or local governmental ordinance might cause the banks to think better about fighting to avoid their responsibilities.

I know that this will sound a little "liberal" to many readers; but, I see this as a moral issue, too. The banks and mortgage companies that come into our communities to do business "owe" it to those communities to be good citizens and not just to be there to take the money and run. If one or two banks and mortgage companies actually made that a part of their marketing into the community, I suspect that they would be more successful than the ones that continue to just look like opportunistic outsiders. I also think that they'd quickly discover that a secured and well-maintained foreclosed property will return much more to them than one that they effectively abandoned, too.

Maybe this new twist and the laws that Congress is working on right now will have enough of a chilling effect on the banks to cause them hesitate longer on foreclosures and make a greater effort to find a work-out solution. Nobody really wins when the bank takes over a property – not the old owner, not the local governments and certainly not the bank. So far, all that has happened is that the banks have made it tougher to get a loan in the first place. The new FHA Modernization Law, when passed, should help a bit with that. Let's all hope!

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