Lender-Abandoned, Non-REO Foreclosures

Consider this troubling question: Do mortgage lenders have any obligation to take over a property that has defaulted on its mortgage?

The short answer, it appears, is no: I hadn't previously considered this, until a recent article in the Chicago Tribune started me down this path.

Foreclosures and REOs properties are impacting more than the neighborhoods they are in -- they are actually adversely impacting the real estate business -- especially when it comes to foreclosed homes in possession of lenders (REOs).

First, have a look at some recent data regarding REOs:

"Across the country, federally chartered banks held more than $12 billion worth of foreclosed properties at the end of 2007, about 100 percent more than a year earlier. Of those, $6.6 billion are residential properties of one to four units, said Keith Leggett, senior economist at the American Bankers Association.

One housing data firm said it found the same extraordinary doubling in the Chicago area in what's known as REOs—real estate owned by lenders and investors. First American CoreLogic, based in Santa Ana, Calif., said it determined that 2.5 percent of all housing in the region is in this category, though two other firms calculate a lower figure.

Still, the 100 percent increase carries profound implications for the real estate economy because decisions by individual banks—to wait out the slump or dump properties on a deadened market—almost certainly would affect property values."

Okay, that's typical of most situations: Delinquency leads to default, then foreclosure proceedings. Once a lender retakes the property, the REO leads to a decision on when to best resale -- immediately, or wait it out.

Some lenders are approaching the Foreclosure process a little bit, how shall we delicately call this -- differently. They are considering the sale decision prior to even taking possession. Their conclusions may surprise you:

"In some cities that have low property values, where there are dense concentrations of foreclosures, you see lenders who file foreclosure proceedings but don't actually take control of the properties, because the lenders have to maintain them and pay taxes on them."

"There are areas in some parts of the country where property values are quite low, and there are no large-scale expectations of them going up. They don't know that they will ever recoup those costs," and so the lenders never re-take title to the properties, allowing them to become derelict." (emphasis added)

There you have it: Abandoned, Non-REO Foreclosures.

The local market conditions are what seems to determine the abandonment decision. In a region where the job and real estate market is doing anything better than "a little soft," I would surmise that abandonment makes no sense at all.

However, at a certain point, in a weaker region, with declining neighborhoods, certain lenders might make the decision to simply walk away from a large swath of (potential) real estate holdings, on the simple basis that it might be cheaper to do so.

There are very significant costs to this. Consider what the potential impact of these property abandonments by the lender means:

- Total write off of the loan;
- Boarded up homes/neighborhoods;
- Loss of tax revenue to the local school district or town;
- Long delays before the local town, municipality, or state can take possession due to tax arrears.

Thus, these incomplete foreclosures/abandonments can have very significant impacts.

If this becomes widespread, we could be in the process of creating an entire new universe of suburban slums...

Source:
As owners default, lenders move in
Mary Umberger, Becky Yerak and Tara Malone
Chicago Tribune, March 31, 2008

Comments

[Jeffrey Ber...:]

This is not a new phenomenon in blighted markets. Newburgh, New York being an example I am familiar with, where banks sometimes in the past just walked away and the city ended up owning significant numbers of properties. In the case of Newburgh, the city has finally cleaned up its inventory of property after nearly two decades. Business Week carried an article a couple of months ago about Buffalo and some other Northern industrial cities where legislation is being enacted to force banks not to allow re-possesed properties to become blighted. In many cases even REO properties are allowed to sit with maintenance issues and prices are not reduced enough to entice buyers.

2008 Apr 04 08:44 AM

[gordon:]

Makes sense, banks don't have the staff to deal with them, so they are letting homeowners stay, pending an ultimate gov't bailout of mortgages, they probably know it's coming.
ALERT: BLS added 142,000 phantom jobs today, even 28,000 construction jobs! www.bls.gov/web/cesbd....

2008 Apr 04 11:20 AM

[David Roskoph:]

Barry, Weren't you listening to thie week's testimony - this isn't even a recession. If the Federal Reserve can buy Bear's book in the hopes of a profit, why not S&P futures to sell the story?

2008 Apr 04 11:27 AM

[Urbane Gori...:]

I own a rental in Sacramento and as far as I can see, the Lenders have been very active in foreclosures. My rental should have sold for $215K last year and is competing against a number of REOs now selling at $150K. And I mean a lot!!! Most of these are relatively recent sales -within 3 years and are a net loss to the lenders.

Having worked as an insurance adjuster, I know that lenders (always a partner on your insurance policy) do apply for any damages against the policy upon foreclosure, thereby recouping some of their costs.

I'm really curious why there isn't an REO-Rental agency (And I've thought this in the past when the market turned down.) A quick cleanup, (which they already do to sell) and rent till the market comes back, say 2 years... They would recover not only the insurance costs, but depreciation for the period till the market recovers as well as rents (in my area $1150 p/m for a total in 2 years $27,600.)

Although they are not in the rental business, they could still make a better profit if they farmed the rental side out to someone else until the market turned.

Thx jegan ;-)

2008 Apr 04 02:03 PM

[BlueFire:]

Music to my ears. We investors are going to be buying up some awesome deals in the next 12 months!

2008 Apr 04 06:13 PM

[E&J Home So...:]

We are directly facilitating orders with the banks and lenders that are letting go of these REO's in bulk and even though the market is upside down, it seems like some of the banks such Countrywide are in denial. However, like Bluefire says, to us investors........it is music to our ears.

2008 Apr 14 02:20 PM