A story in Monday's New York Times ("Banks Starting to Walk Away on Foreclosures
," March 20, 2009) rehashes a concept that's anything but new -- vacant properties, and the headaches that go with them. But what's irksome more than anything else in the Times' coverage is the suggestion that vacant properties are "the next phase" of the nation's housing crisis.
Let's start with the premise of this latest example of psuedo-journalism, and the requisite villianization of the lender:
City officials and housing advocates [in South Bend, Ind.] 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.
The Times takes much of the same tack as BusinessWeek did in its own cover story that looked at the exact same issue over one year ago
("Dirty Deeds," Jan. 8, 2008). The Times story here covers very little new ground relative to the problem of vacant properties, but is clearly just as content to paint the problem as one that is the fault of lenders, out to screw the proverbially stainless (and oft-hapless) borrower and/or stick it to local governments.
If only the issue of vacant properties were so simple. In truth, managing vacant properties is a massive headache -- for borrowers, for lenders/servicers, for investors, and for municipalities as well. It's been a massive headache for all parties for a very long time, too, in certain locales. The costs can be significant, and a lack of partnership and communication can drive a stake into the heart of entire neighborhoods, especially in economically depressed areas.
A feature article in a recent issue of HousingWire Magazine ("When Nobody's Home," January/Febuary 2009) tackled this issue in far more depth -- and I'd like to think with far more balance than anything the business press has been able to do thus far. An excerpt:
While it’s clearly in the best interest of a lender to maintain the condition of its secured collateral, “lenders and servicers face a double-edged sword when securing collateral against damage and depreciation prior to completion of the foreclosure sale,” explains Rob Hicks, vice president of industry relations and risk management for LPS Field Services, Inc. and LPS Asset Management Solutions, Inc. The twin companies provide complementary property management solutions for lenders and servicers nationwide.
In many ways, servicers are finding themselves squeezed by both investors and local cities when it comes to timing of property preservation efforts, a sort of damned-if-you-do, damned-if-you-don’t scenario.
For one thing, the failure to preserve collateral exposes the lender or servicer to actions by investors for neglect. And that says nothing of equally swift action against lenders and servicers by local code enforcement departments and/or courts in the form of fines, costly nuisance abatement, liens and/or demolitions. And, of course, there’s also the not-so-little matter of depreciation of collateral that, given the current market conditions, is likely to end up in the lender or servicer's REO inventory, Hicks said.
On the flip side, securing collateral prior to the completion of foreclosure sale exposes the lender or servicer to assertions by code enforcement and court personnel for code violations or nuisance abatement actions. And, of course, there is the threat of class-action lawsuits alleging abusive and/predatory servicing practices; and even allegations of theft and damage to personal property by borrowers that have long since abandoned the property.
“It is not uncommon for homeowners to file fraudulent claims against the servicer, claiming that valuable personal property, such as electronics or artwork, are missing from the property,” said Robert Klein, CEO of Safeguard Properties, a large field services provider. (Because, of course, everyone leaves a prized Rolex and stashed wad of cash equal to three months’ salary behind when they flee their house.)
And that's assuming that the servicer can even make a determination that the property has been abandoned ahead of a foreclosure sale, too -- often more of an art than a science, since borrowers in such situations tend to go AWOL on the lender/servicer altogether. Imagine seeing a property in disrepair, and deciding to re-key and winterize the property, only to have the borrower show up and claim that such work was trespassing and a violation of their rights.
If borrowers aren't speaking to their servicer, stories like the one the Times used to kick off its story become all too common:
Mercy James thought she had lost her rental property here to foreclosure. A date for a sheriff’s sale had been set, and notices about the foreclosure process were piling up in her mailbox.
After Ms. James had her tenants move out, vandals hit the home. It is set for demolition, but the title is still in her name.
Ms. James had the tenants move out, and soon her white house at the corner of Thomas and Maple Streets fell into the hands of looters and vandals, and then, into disrepair. Dejected and broke, Ms. James said she salvaged but a lesson from her loss.
So imagine her surprise when the City of South Bend contacted her recently, demanding that she resume maintenance on the property. The sheriff’s sale had been canceled at the last minute, leaving the property title — and a world of trouble — in her name.
This isn't a sob story; it's a common refrain of what happens when a borrower -- who still holds title to the property -- goes dark on their lender/servicer. There isn't anything in the story that tells if Mercy James had let her servicer know she and her tenants had abandoned the property. I'd wager a guess that the answer here is no, given the outcome in this case.
The Times -- and much of the business press that has covered this issue thus far -- seems to fail to understand that the borrower's decision to walk away, go AWOL, and let the home fall into the hands of looters and into a state of disrepair, without so much as responding to any correspondence from the servicer, might be the very reason the lender was forced to cancel the sale in the first place. It's entirely possible that this outcome could have been avoided.
There's far more to consider here, including contesting the very notion that servicers tend to walk away from vacant properties, too. “The fact is, as an industry, mortgage servicers spend in excess of $2 billion annually to take care of vacant properties so they don’t become nuisances to neighbors and communities,” Safeguard's Klein told us in a recent feature story inside HousingWire Magazine. “Unfortunately, servicers who are the ‘good guys’ get lumped in with property flippers and Internet investors whose irresponsible practices have been major contributors to urban blight.”
And the ugly truth is that municipalities can be at fault here, too; lost revenues can have a way of driving some obstinate and counterproductive behavior from cities. Consider the following example
from the Milwaukee Journal Sentinel last year:
[James Mulligan, an attorney representing banks] said the city’s refusal to negotiate building code violation fees ... quashed at least one [property] sale.
“We were $1,500 apart on a sale,” Mulligan said. “If the city had forgiven $1,500 in code violations, they would have collected the taxes, and one home would be occupied rather than boarded up.”
What's also missing from much of the Times' latest lender witch-hunt is a look at the myriad of ways local municipalities are actually attempting to work with lenders and servicers to make it easier for them to secure and maintain properties they don't yet possess legal title to (meaning they don't have the legal right to enter and maintain the property).
HousingWire Magazine, for example, recently profiled a unique program being piloted in the city of Chula Vista in Southern California designed to work with lenders who identify vacant properties ahead of foreclosure. And we've also recently discussed a cutting-edge effort involving MERS now put into place to help local municipalities more quickly locate a direct contact for servicers when a property is found to be vacant. None of which you'll find in the Times' coverage (or BusinessWeek's for that matter).
Paul Jackson at email@example.com
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