Monday, March 30, 2009

Lenders Walking Away

When a property is worth less than the costs of foreclosure there is little incentive for foreclosure on a property. We have seen in parts of the country where properties are almost worthless. If a second-hand beat up car is worth more than a property why would a lender foreclose on them. Why would the lender want to foreclose and deal with the property taxes on a deteriorating property.

The funny part of lenders walking away is they are using the same excuses as the mortgagees who fight foreclosures use - who actually owns the loans. Since many of the foreclosures were bundled, sliced and diced it is hard to know who the actual owner is. While the servicer may trigger foreclosures when the payments are not made, the actual note holder is the one who will own the property when all is said and done. And not being able to track down the owner is the latest excuse not to take back virtually worthless properties. Sad but true according to this New York Times article titled Banks Starting To Walk Away On Foreclosures. Lets take a look -

City officials and housing advocates here [in South Bend] 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.

In Buffalo, where officials said the problem had reached “epidemic” proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled.

“Oftentimes when the foreclosure starts out, it’s a viable property,” [Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country] 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.

“The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can,” [Guy Cecala, publisher of Inside Mortgage Finance] said. “It’s just a sign of the times that things are so bad no one wants to take possession of the property.”

Another huge problem on the landscape of the housing bubble! Hopefully this will not be happening in a city near us.

The article notes in some cases the houses become so worthless that they are scheduled to be demolished by the city - and the "owner" or mortgagee that was never foreclosed is stuck with the bill. Sad, sad stories. Sad, sad state of the housing situation.

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