Banks Walking Away From Foreclosed Properties, Leaving Displaced Homeowners Holding the Bag
We often receive calls from panicked homeowners who need advice about the ballooning mortgage they can no longer handle. The government was supposed to set up agencies for help with that sort of problem, but reports indicate the success rate is dismal. One problem is that the company servicing the mortgage almost never holds the mortgage note, as these loan have been “sliced and diced” and then resold. Since the servicer has no skin in the game, there is little incentive to work with the homeowner so they can remain in their home. Even worse, the servicer often benefits from foreclosure because its fees come off the top of the sale proceeds.
Now the New York Times is reporting that some of these banks don’t even bother to take possession of property after foreclosing, because the repossession costs exceed the real estate’s diminishing value.
Banks estimate that 40% to 50% of the property value is lost during the foreclosure process. Two factors contribute, the soft housing market and that vacated houses are often vandalized or stripped. If the property value isn’t sufficient, the bank may simply stop the foreclosure process, leaving the vacant (and often vandalized) property in the homeowner’s name. The bank may just dismiss the foreclosure complaint. Or it may take a judgment of foreclosure, but then fail to schedule the property for sheriff’s sale. Either way, the homeowner is still liable for property taxes and obligated to maintain the property. It’s a lose-lose scenario, for both the bank and the homeowner.
So what’s driving these disastrous results, where neither the defaulting homeowner nor the bank benefits? It’s hard to say. Follow the money, and it may be that the servicer actually pockets more than either bank or homeowner. Since mortgages are bundled and resold so that it’s next to impossible to determine which company holds the mortgage note–and therefore has the most to lose–the bank may not even be involved. Until Congress passes a law that will allow bankruptcy courts to reduce mortgage obligations on primary residences to the value of the residence, there is little incentive for servicers to get serious about working with homeowners.
This is a mess of epic proportions that won’t be solved overnight. But if you are a homeowner facing foreclosure, talk to everyone you can about the alternatives to foreclosure. You may be able to persuade the servicer that staying in your home is a better alternative for them than owning a depressed, vandalized, vacant piece of real estate.