Tuesday, March 31, 2009

Banks now also walking away from properties

Remember how controversial it was when companies like "YouWalkAway" offered distressed homeowners expertise on how to simply walk away from their homes? Now it appears that lenders are doing the same, leaving semi-foreclosed homeowners and cities to pick up the mess.

So does that mean bail-out money is being used to increase neighborhood decay? From a New York Times story:

City officials and housing advocates (in South Bend, Indiana) and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure...

Experts suggest the bank walkaways are most visible in states where foreclosures are processed through the courts and therefore tend to be more transparent. Other states, like Indiana and New York, have court-mandated foreclosures, but roughly half of the states allow foreclosures to proceed without court intervention, making it difficult to accurately count the number of bank walkaways in recent months.

The soft housing market and the vandalism that often occurs when a house sits empty are the two main factors influencing the mortgage holders’ decisions to walk away, said Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country.

“Oftentimes when the foreclosure starts out, it’s a viable property,” Mr. Rothenberg said, “but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times.”...

The problem seems most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. Banks and investors typically lose 40 percent to 50 percent of their investment on every foreclosure...

In South Bend, boarded-up houses for whom no one has stepped forward are dotting the landscape, adding a fresh layer of blight to communities that were already scarred from the area’s industrial decline. The city is hoping to create a new type of legal mediation process that would bring together the homeowners and the mortgage holders to settle their disputes while allowing the owners to remain in the home — considered crucial to any stabilization effort...

And then, hopefully, some form of responsibility will return from someone.

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