Banks walking away…

A recent New York Times article by Susan Saulny and Published: March 29, 2009, documented several cases of a relatively new phenomenon – banks just walking away from foreclosed properties. Susan documented several cases around the country where banks had started foreclosure processes and even scheduled the sheriff’s sale, only to cancel that sale at the last minute and then quietly walk away.

In the cases that Ms. Saulny documented the previous owners had already moved out and in at least one case the house had been vandalized and stripped by thieves. There in lays the root of the problem – the houses were then worth less than the banks thought it would cost them to pursue the full course of the foreclosure. That’s not hard to see, Locally we have foreclosed homes selling for under $5,000 in Detroit and Pontiac (and likely in Ypsilanti). That’s below what one would think the land is worth; however, there is the cost of tearing down the existing structure, which could exceed the cost of the house. And if one did create a vacant lot right now, that likely wouldn’t sell either, since there is little building going on and that lot would be in the middle of a depressed area.

The second shoe that the article pointed out has dropped on the former homeowners is that the cities where these homes are located can’t find anyone else to hold responsible, so they go after the former owners with bills for cleanup or maintenance or for violation of other ordinances. They do that because the sheriff’s sale didn’t take place and the title is still in the name of the previous owner. Wouldn’t that be a kick in the pants? You just got thrown out of your house and now the city says you’re responsible for the stripped hulk that remains. In some of the cases documented by the Times article the lender had gone out of business ands there was no way to track anybody else down.

I guess people who get foreclosed should try to stay in place as long as possible, to see whether the bank is really going to go all the way through the process. In Michigan a foreclosed owner gets to remain in the house rent-free for 6 months after the Sheriff’s sale and even at the end of that “redemption period” would get a few days notice to move upon eviction proceedings.

It’s not clear what the real legal status of these homes would be, if the bank walks away. I would assume that, if the previous owner had kept current on things like taxes and utilities, and there had been no Sheriff’s sale, then the title remains with the previous owner and they could continue to occupy the place. They might have trouble trying to sell it though, since there would likely not be any discharge of the foreclosure ever recorded. This is probably legal fodder for many court cases. Have you seen any of this happening where you are? What was the outcome?