The Cruelest Cut of All: New Twist Develops in Foreclosures
Troubled home owners could be in for a much bigger problem than they could even imagine.
This past week I read a story about “Banks Starting to Walk Away on Foreclosures.” When I came across this story at the New York Times website, I thought it was just another interesting angle on the foreclosure crisis. After pondering it over the weekend I find that I am quite worried about the bigger implications.
The basic gist of the story is this: some banks are now deciding to not actually foreclose on certain homes because they think the value of the home just doesn’t make it worth it. The problem is, by the time the bank makes that determination, the home owner has already given up hope and moved on, leaving the house sitting vacant. So, the empty house gets vandalized, etc. until it’s just trashed. It’s bad enough that the mortgage company just decides, no thanks we don’t want the home. Then, the home owner is notified by the city that they are responsible for this home which now needs massive repairs because it’s been trashed since the home owner left. If they don’t make the repairs the city will levy fines on them until the property is returned to suitable conditions.
The NY Times article has several examples of this happening in South Bend, Indiana which has been hit hard financially by the economic down turn. They also cited this as a growing trend in other cities, like Kansas City. In general, if a city is struggling financially and the home has been greatly de-valued due to vandalism, it’s quite possible the bank may chose to “walk away” from the home themselves.
The article quotes Guy Cecala, the publisher of Inside Mortgage Finance:
“The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can…It’s just a sign of the times that things are so bad no one wants to take possession of the property.”
When this happens, the home is really left in limbo and will sit there only getting worse. The home owner has already moved on, and obviously they don’t have the financial ability to care for the home or they would not have left in the first place. The mortgage company has the legal right to take the home at any moment, but they don’t want it, so they stop a step short so they don’t have to become liable for the property. The city can’t really do anything in this situation either. The worst spot to be in might be held by the neighbors of these homes as it tanks the market value in the area and invites crime.
I have not heard of this happening in the Twin Cities, but it would not surprise me to learn that in certain areas it is indeed what’s going on. This new approach will probably gain popularity among the banks when they are faced with city ordinances like those in St. Paul and Minneapolis. The cities are now often requiring repairs to be made on a foreclosed/vacant property before a new buyer can close on the sale of the home, which can cost the seller tens of thousands.
The StarTribune recently had a story about this involving Scott Ficek, a Realtor I really know and really respect. In the story, it walks through a deal where Scott helped his client, an investment property buyer, purchase a home in North Minneapolis for $12,500. By the time the bank selling the home was done paying off fees to the City of Minneapolis, Realtor commissions, etc. they made a whopping $69.60 on the sale. That does not take into account the tens or hundreds of thousands they lost when they had to foreclose on the home in the first place.
The banks are often appearing to be pretty dumb in how they are handling many of their foreclosed homes, but in the long run they aren’t that stupid. Soon they will discover that some homes really just aren’t worth taking back via foreclosure. As these houses sit in limbo with the home owner long gone and no new buyer in site since there’s no one to actually sell the place, how are the cities going to handle that? Go after the broke home owner, or the bank that does not yet have any legal responsibility for the home? Given that we live in Minnesota, the cities will likely sue the big, bad bank but I think they’ll need to come up with a more innovative solution.
On thing that might happen is these “limbo homes” could be the perfect target for cities to buy up using their Neighborhood Stabilization Program (NSP) money that was recently distributed. Roughly $40 million in Federal funds from the October Bailout Bill has finally made it to Minnesota cities, with the bulk staying in the Twin Cities. Buying up these homes may allow the cities to avoid the problems I wrote about with Dakota County’s Silver Lining program.
I’m sure this is a story we’ll be talking more about in the future as the crisis continues to unfold.
Alec Grebis has been helping home owners buy and refinance in Minnesota for over 14 years in mortgage lending. He works for Cornerstone Mortgage in their Burnsville, MN office. You can listen to him every other week on the MN Real Estate Show on Saturdays from 3-5 pm on 100.3 K-Talk. He can be reached at agrebis@houseloan.com
April 7th, 2009 at 8:52 am
There’s gotta be a way that neighbors or the cities can take control of these homes and maybe rent them out, sharing whatever management responsibilities and also the proceeds from the rent or future sale.
Seems to me it would make more sense to create solutions rather than blaming people for the problems.
December 20th, 2009 at 12:31 pm
That is the most dramatic loss I have ever seen, but there have been others where the bank makes less than $5k. At this point, I think the banks have gotten smarter and the market has heated up so they can sell them for more.