The future has arrived

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Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
The future has arrived

Lender-Abandoned, Non-REO Foreclosures

Thursday, April 03, 2008 | 10:15 AM
 
NOTICE: this is not exactly new! 

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 . . .

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The future has arrived

Hmmm ... what is the incentive for the lender to undertake the
expense of foreclosure, without taking title? Seems like it would be
less expensive for the lender to just write off the mortgage as a total
loss and walk away ... instead of foreclosing and THEN walking away.

If
the lender doesn't take title, then the property would remain in the
name of the previous owner -- who will get hit with a huge tax bill for
'loan forgiveness' if the mortgage is merely written off instead of
foreclosed. Meanwhile, the property tax liens will keep accumulating,
probably making the property unmarketable until the municipality writes
off the tax arrears.

Remember 'slum clearance' in the 1950s and 1960s? Maybe another round
is coming. Instead of burning the furniture to stay warm, we can
actually burn the wreckage of nearby houses. Lots of BTUs in them
bones.

 

pir8don's picture
pir8don
Status: Gold Member (Offline)
Joined: Sep 30 2008
Posts: 456
Re: The future has arrived

What I can't understand is why people leave these homes. Even when the lenders go though the foreclosure proceedure, if there is no chance of anyone buying the home, why don't the residents just go out the front door and come in the back? Even if it wasn't aknowledged as a practice, surely everyone would turn a blind eye as it must be in the best interests of everyone involved.

Is it just the power of belief in money that people consider themselves forced to leave or is there a more tangible threat to continued residence?

Don

 

emdiaz's picture
emdiaz
Status: Bronze Member (Offline)
Joined: Oct 23 2008
Posts: 25
Re: The future has arrived

I guess this is what is going on in Detroit where the houses are selling for $1 but you have to clear with the govt. first before you get the title.

 I when this weekend to a friend B-day party and they treated me like I was crazy because the economy is just passing thru a bump and everything is OK.

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