Bank Walkaways Caught Many by Surprise

Earlier in the month, I wrote about how banks were analyzing the recovery amounts on foreclosures and, in some instances, were choosing not to foreclose, leaving the homeowner who thought they had “walked away” stuck with the property . While I got a few comments here, it provoked a firestorm over at Seeking Alpha where my original story was cross-posted.

One commenter said I was “silly” because the “banks are powerless to force people to do anything…” Funny thing is, I never said the banks were “forcing” anybody to do anything. All I said is that the banks were not foreclosing, thus leaving the maintenance and tax responsibility to the person who actually bought the house. It’s the same responsibility the homeowner had when they were making timely payments; nothing changed.

Another commenter said, “Why would someone with so little knowledge about this process post an article on it?” Well, here’s why. I didn’t know that banks were abandoning the foreclosure process. I didn’t know that homeowners who received a foreclosure notice could find out later that the foreclosure process was abandoned, leaving the homeowner with tax, upkeep and demolition responsibilities. If I didn’t know it, perhaps others didn’t know it either. Apparently, a lot of homeowners and government officials also were not aware that this could happen.

Those are just a few of the comments. There were some comments with supposed legal interpretations. Several commenters claimed that this was a recourse/non-recourse issue. It isn’t. The bank isn’t suing anybody to try to recover money. It’s the exact opposite. They’re not suing anybody. Instead, the value of the property is so low that banks are just walking away. They’re doing nothing, including doing nothing with the mortgage lien they still hold. Bottom line is that, at least according to the Milwaukee newspaper article, banks are abandoning the foreclosure process before it is finalized, leaving the homeowner with the responsibility of the property. The article described what was actually happening, not some theoretical legal theory.

Well, over the weekend, it seems like the newspaper in Cleveland had more, and, at least according to the experts quoted in the Plain-Dealer, no state has a method of dealing with banks that simply choose not to finalize the foreclosure process. It’s a mess, and one that has caught many by surprise:

How often these [lender] walkaways happen isn’t clear, and there are mortgage companies that work to hasten sales.

But researchers at the Center on Urban Poverty and Community Development at Case Western Reserve University are studying the issue after noticing that foreclosure filings in Cuyahoga County remained about the same in 2007 and 2008 but that sheriff’s sales were down last year.

Researcher Michael Schramm said they also began hearing from people in various cities and neighborhoods about homes languishing in foreclosure without being sold.

Schramm said that Cuyahoga County saw more than 14,000 foreclosure filings both in 2007 and in 2008. In 2007 there were nearly 10,000 sheriff’s sales, but the number dropped in 2008 to about 8,000.

Lenders or mortgage service companies may decide not to seek a sheriff’s sale because they’re working to restructure a mortgage or the homeowner has gone into bankruptcy. But there’s no doubt they’ve also walked away from homes when it’s in their financial interest to do so...

So, despite all the commenters who say bank walkaways can’t happen, it is happening in certain neighborhoods in certain geographic areas. The fact is that if someone stops paying their mortgage, and the bank doesn’t foreclose, it appears (and I say appears because I am basing this on the information in the two newspaper articles) that the homeowner still retains tax responsibility for the house, while the bank still retains the mortgage lien that they can try to collect on later. [Note that a legislator in Ohio wants to force banks to finalize the foreclosure process or lose their mortgage lien.]

[HT: Clusterstock, Patrick.net]

Comments

[58robbo:]

Why should the banks worry themselves with pesky legal issues when they know uncle SAM will make them whole? i thought if i saved my money that at some point i'd be presented with a golden buying opportunity when the market forced banks to liquidate. i find it nauseating that i still have to pay rent and subsidize underwater homeowners who can't meet their financial obligations

Jul 21 07:26 AM

[mkttrdr:]

I was the one who broke this news 3 months ago. Fact:The banks wont' take a short sale or a property thru foreclosure-this is just to avoid stating the loss to Wall St(the enemy). Plus the inventory is sooo high that in REO the banks get less than 50% of the mtg balance.
Banks are broke-at least ones that lend to homeowners.
Just wanted to warn everyone about this and the trickle down which is coming next year.

Jul 21 09:43 AM

[John Preston:]

The whole "walk away" concept is one of the reason that the response to the mortgage crisis need to be swifter and more complete...

SO far, we have put a very exspensive bandaid on on very serious prblem, one that required more attention than it received.

Homeowners walked away because, in many cases, they could not get a workable solution in a timely manner. Now, the banks are walking away because they cannot provide and adequate solution in a timely manner....

Someone should get the homeonwers and banks in the same room.

This will never happen...its too logical and might actually lead to a solution.......

Jul 21 09:45 AM

[58robbo:]

thank you for your observation. i was beginning to feel lonely. if it wasn't for the numerous bailouts and bank interventions, the banks would've been forced to sit down with homeowners and sort something out. i have often observed real estate being auctioned off for much less than the foreclosed homeowner could afford which resulted in the bank taking a bigger hit than was necessary and having to evicting someone imprudently.
the solution would be simple. the bank would sit down with the homeowner and agree on an affordable price. the bank would then set that price as a reserve and auction the home off. if they failed to pass the reserve and the homeowner would stay in their home at a reduced rate.
if the reserve price was surpassed at auction, the homeowner would lose their home. they would have the option of taking over the payments of something more moderately priced off the banks inventory list or accepting the t's and c's of their loan agreement which most likely would call for bankruptcy.
imo, this would be a workable solution with the priority of keeping as much inventory off the market as possible.
the homeowners fico scores would be slashed and the banks and their clients would have to duke out how to settle the remaining balances. perhaps the balance could be discounted with the payment date set far into the future.


On Jul 21 09:45 AM John Preston wrote:

> The whole "walk away" concept is one of the reason that the response
> to the mortgage crisis need to be swifter and more complete... <br/>
>
> SO far, we have put a very exspensive bandaid on on very serious
> prblem, one that required more attention than it received.
>
> Homeowners walked away because, in many cases, they could not get
> a workable solution in a timely manner. Now, the banks are walking
> away because they cannot provide and adequate solution in a timely
> manner....
>
> Someone should get the homeonwers and banks in the same room.
>
> This will never happen...its too logical and might actually lead
> to a solution.......

Jul 21 11:01 AM

[kebu77:]

Conservatives in Congress defeated the bankruptcy amendment that would have let homebuyers include their primary residence in bankruptcy proceedings. Passage would have created a bottom-up countervailing pressure on lenders/investors to deal with the large number of homebuyers who were having to default due to insolvency. Most resulting resolutions would have been out-of-court negotiated "cramdown" settlements that would benefit both lender/investors and borrowers, i.e., deals that net more than foreclosure value but with reduced payments that borrowers can afford but which also contravene current lender/investor loss mitigation standards.

Jul 21 04:13 PM