The Cleveland Federal Reserve is looking at a case in Ohio where the state legislature is looking to allow municipal corporations to file for summary foreclosure on vacant and abandoned residential properties.
Implementation, assuming it becomes a law, may give a boost to those who want to fast-track the process.
This focus on vacant foreclosures — zombie properties — is nothing new.
A month before the bill was introduced, the Cleveland Fed released a white paper, “Policy Considerations for Improving Ohio’s Housing Markets,” which suggested implementing a fast-track foreclosure for vacant and abandoned properties.
Cleveland Fed researchers found in that paper that in 2013, fast-tracking of vacant foreclosures could have saved creditors $24 million to $129 million in Ohio and $24.3 million to $54 million in Pennsylvania.
Currently those states have judicial foreclosure processes.
That same month, Forefront reports, the issue took center stage during a one-day seminar called “Getting Back in Gear: Better Ways to Move Stalled and Vacant Foreclosures Forward” at the Federal Reserve Bank of Cleveland.
Speaking at the start of the seminar, Paul Kaboth noted an anomaly in foreclosure numbers.
“The number of homes and loans entering foreclosures is down,” said Kaboth, who is vice president of community development at the Cleveland Fed. “They’re still elevated, but the numbers have declined. Yet, the time that loans and homes stay in foreclosure has increased.
“We just don’t understand why this is the case,” he continued. “There could be a variety of reasons.”
Kaboth says it could be that loan modifications have not been effective, or have sometimes been introduced into futile situations, he told the crowd. In some such situations, borrowers couldn’t afford the modified mortgage payments, period; in others, they could initially, but later couldn’t because of subsequent shocks, such as job loss.
“We ask ourselves these questions, but it’s really hard to get around the answer,” Kaboth added. “And then finally — and really the impetus for today’s session — is: Are there more productive ways that we can address this foreclosure issue and this delay? It’s a problem for everyone.”
Benjamin Brown with the building department of Warrensville Heights, Ohio says that it remains an issue.
“One of the biggest problems we have, and one of the most frustrating problems we have, is the properties that have been charged off on and they’re vacant,” he explained. “So now we have a property that’s sitting dilapidated; we can’t establish contact with the owner; and we just have a property that’s sitting in limbo.”
It takes an average of one to two years for mortgage loans to go from delinquency through the foreclosure process in Ohio, according to the Cleveland Fed’s May 2013 white paper.
And the longer properties sit vacant, the more collateral damage they inflict.
Forefront notes the full costs:
There’s the carrying cost to creditors, which includes ongoing maintenance, code-violation citations, repairs, and taxes for properties that sit in creditors’ real-estate-owned, or REO, portfolios. (That’s industry-speak for foreclosed property owned by institutions.)
Nationally, creditors’ carrying costs are estimated at between $25 and $100 a day, though conversations with loan servicers working in Ohio and Pennsylvania suggest costs closer to $50 to $100 a day, according to the Cleveland Fed’s Tom Fitzpatrick, assistant vice president for credit risk management, and Kyle Fee, economic analyst.
The benefit of fast-tracking vacant foreclosures may be what it can spare neighborhoods and municipalities, Fitzpatrick says.
“We measured the cost to creditors because that’s what we can do,” Fitzpatrick explains. “The cost to communities and municipalities is likely much larger.”
Those costs, which are harder to measure with any specificity, include the drag of foreclosed, empty houses on neighboring property values and the crime introduced by those who capitalize on abandoned properties to steal or to conduct illicit business.