If there’s any way for banks to cut the cake to work to their advantage, they do.
One example that has not gotten attention is that servicers will complete all the steps of a foreclosure, sometimes even scheduling the sheriff’s sale, and then not put in a bid. The reason? The home is of so little value that at even a $100 price, the bank deems it to be not worth the trouble.
But keeping houses in limbo is a horrorshow for the old homeowner, who unknown to them, still owns the property (meaning they could have lived in in it and maintained it, preventing neighborhood blight) and is still on the hook for property taxes. And of course, these abandoned homes damage the value of neighboring properties.
And needless to say, because they aren’t on the market, these houses are also not considered to be part of official inventories. Foreclosure experts in Florida have told me they see a lot of houses where the banks take the home up to the final step of foreclosure, then let it languish. This story, from Cleveland.com via April Charney, is confirmation that this is a broader phenomenon. Notice that this is a long standing practice; the article cites examples dating from 2006 and 2007. Key extracts:
Banks are backing away from properties they have foreclosed on creating a new set of issues for neighborhoods..
These so-called “bank walkaways” are another troubling development in the foreclosure crisis, particularly in cities like Cleveland with weaker housing markets, say housing advocates and government officials.
Lenders or mortgage companies decide they don’t want homes they have already foreclosed on, sometimes because the value has plummeted or they believe the homes could become costly liabilities if they are socked with housing code violations.
But without that sale, the property can languish abandoned and ripe for vandalism. As liens and liabilities mount — creating a so-called “toxic title” — it becomes even harder to transfer the property. Neighborhoods and local governments are left to deal with the mess….
Some of the fallout that results when properties languish vacant and abandoned shows up in Cleveland Housing Judge Raymond Pianka’s courtroom.
“I see shocked people every single week,” Pianka said. “They thought the burden was lifted because they filed bankruptcy or because somebody somewhere told them they’re no longer responsible, and then they’re pulled back in facing criminal code violations.”
His court also has worked with such owners on moving the property into the hands of another owner such as a nonprofit agency, the city land bank or the next door neighbor.
But trying to transfer a problem to somebody else can become a thorny and protracted process if the long-gone owner can’t be found or the foreclosed house is saddled with so many financial obligations that it is too expensive to touch.
Notice that there is a remedy, and I hope more states push for it:
State Rep. Dennis Murray of Sandusky is drafting a bill he hopes to introduce in the next two months that would require lenders or mortgage service companies to take foreclosed properties to sheriff sale within a certain time — or see their mortgage lien erased.
Some judges are also taking matters into their own hands:
Separately, Cuyahoga County Common Pleas Judge Nancy Margaret Russo recently began ordering those granted a foreclosure decree in her courtroom to file the paperwork for a sheriff’s sale in about 30 days — or face being ordered to court for a contempt hearing.
“I think it’s a big problem,” Russo said. “It’s creating more abandoned homes with nobody responsible for taking care of them.”
It’s not clear whether she has the jurisdiction to issue such orders. But Russo — who was not aware of Murray’s initiative when she began hers — believed it was time to start a discussion.
The more straightforward approach is for places like Cleveland to fine servicers. It would help to work with someone who understood how pooling & servicing agreements worked to construct it in such a way that it would be difficult for them to pass it on to investors. Oh wait, what am I thinking? Servicers pass on all sorts of impermissible fees to investors as it is. The more likely point of short-term leverage is for the city to identify which servicers have been the worst actors and to have community groups encourage businesses, churches, and foundations to move their accounts away from the banks that own them. Losing that type of customer has a vastly bigger impact on banks than individuals moving their money.
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How about this?
Use eminent domain to buy the house for cheap and then sell it back to the original owner.
That’s my idea from yesterday, but if there’s no clear title, then declare the property to be abandoned and sell or let it for whatever you can get.
If MERS has made the property records a hopeless mess, then we go back to basics. Once upon a time the government got title to the land en masse (purchase, annexation, etc.) and made it available to its people to buy and sell as they wished. If that system has broken down beyond repair, then it is the right of the government to reclaim the land and start the process all over again.
Do local governments have the right to eminent domain condemn all the property within their boundaries and dispose of it as they wish, yes or no? Banks-as-slumlords cannot be tolerated. If their actions cannot be stopped, and if eminent domain is the solution, its selective use will so greatly disturb the overall property market as to leave no choice but to condemn everything within the city limits.
Leaving the city as the owner of its own land. Socialism was not supposed to be this easy!
A recent article by Matt Taibbi talks about San Bernardino County in California working with a group of business people to test the eminent domain approach. It would be a neat solution. The traditional rule of eminent domain requires the government entity to purchase the property at fair market value. That would set the price, and the County would then use the business consortium to supply a new mortgage to the homeowner. (It could also clean up the title, but I didn’t get a clear reading on that point.) They are saying this first test would be available only to people currently keeping up with their mortgage payments.
http://www.commondreams.org/view/2012/07/21-1
If there is no bid at the foreclosure auction what prevents the state from making a bid of $0.01?
This sounds better than San Bernardino’s plan to condemn by eminent domain all the underwater mortgages. The municipality does not have the legal authority to condemn a contract. But they and people who stand as middlemen will make lots of money if they find a loophole. If foreclosers refuse to take title it might well be because titles are hopelessly clouded by them and their “agent” MERS; and the foreclosures are fraudulent. They are trying to sneak away from the mess they made and still be able to write off their loss. But what kind of a loss is a loss of something you never owned? So in these cases of abandoned titles a municipality does have the eminent domain authority to take the property. And it should be happening. Let the IRS deal with the banks.
I live in a house that isn’t worth half of what we paid for it. For years we’ve been negotiating with Chase by playing hardball, and reminding them that the investor that owns the property would be foolish not to make a deal with us.
As of recently, this finally happened. We’re set for a mortgage reduction if we make a certain amount of payments, which is a win-win for all. I’m shocked that Chase caved.
“I’m shocked that Chase caved.” Me too. Be careful. Record and document everything and have a competent attorney oversee it. Banks, especially Chase, are very slippery predators. Keep us posted.
Please check the documents before you sign anything or even give your PIN or something that is used for phone banking. Be very careful.
“Notice that there is a remedy, and I hope more states push for it”
Would that our president and his party, who really really really want to help the middle class, had pushed for something like this back when they had 60 votes and the House of Representatives.
Someone is going to wise up and eventually argue for a concept I call “constructive repossession.” “Constructive” is a legal term of art meaning “let’s pretend.” It’s used often in property law to describe how something happened legally even though it did not physically happen, such as “constructive notice” or “constructive eviction.”
Some former homeowner should make the argument that if the bank went to the trouble of foreclosing, and then didn’t, then at some point, the law will say that because the bank led the borrower to believe it was taking the house back, and undertook all the steps necessary, and perhaps even gave the occupant money to leave, then the bank legally did foreclose, and the homeowner should no longer be considered the person entitled to possession or liable for the property.
I think this would be an extremely useful concept to develop in California, where the time for adverse possession is 5 years. A squatter who went in and paid the property taxes for 5 years could end up taking title free and clear, as long as that party could establish the date at which the constructive repossession took place. The possibility that the banks could lose the property that way might stimulate the banks to get busy and decide whether they want those properties or not.
This is, like, massively NOT a solution.
While I understand that this is some legal jargon already in-bounds and using it subversively to help people is possibly doable, it merely prolongs the larger problem: this whole middle-class problem of them buying too much crap should be on the burdens of the sellers, not a problem that the former middle class should undertake to solving.
That’s why this brilliant solution (and I don’t mean that light-heartedly) is not any kind of solution we should be fighting for.
The solutions will from the bottom, not the top. The truism that the “whole middle-class problem of them buying too much crap should be on the burdens of the sellers, not a problem that the former middle class should undertake to solving” tends to ignore the fact that the banks themselves have been “buying too much crap” (that is, junk assets that they themselves created, such as CDOs and CDSs). To paraphrase Rick Blaine, “the problems of two [homeowners] don’t amount to a hill of beans in this crazy world.”
I suppose you can spend your time dumping on those people who bought jet-skis with their HELOCs, or instead focus on those who bought CDSs indexed to CDOs backed by those HELOCs. Having spent years representing the former California and discovering just how far this state’s courts will twist themselves to protect the latter, and then seeing just how far an enterprising state attorney general can get, I know where I would instead have expended my energies. If you play their game you will lose every time. The only hope is to change the game.
Deal only with the Legal Department of the Banks. Reason is, they don’t own your house, nor does Fanny or Fredie. The real owners, the investors, were screwed out of their legal position long ago and can’t come against you. So, the Bank’s documents have got to be made up from scratch, illegally, fraudulently.
The Legal Departments know that they are bluffing. When BofA tried to foreclose on our home I went down to Small Claims Court and sued them. Of course, Small Claims doesn’t have Jurisdiction. But, the Banks don’t want to be in ANY Court and wouldn’t transfer the case out to District Court. I wanted them to because I was going to move for Clear Title and had a Lawyer lined up from New York City to handle the case if they did put me under the correct Court.
But, the Bank wanted to settle. Within 30 days they had fixed our credit ratings. Within 90 days I got my home modification. All fees torn up. And, they sent me $2,000 to sign and gave me an indemnification saying that if it turns out I’m paying the WRONG person (which is virtual certainty) all this money for the next umpteen years that they will have to cover me for all losses.
So, they had expensive New York City attorneys handling everything for them. I paid $20 and my Wife and I handled sending in the Small Claims forms, putting the case off over and over at THEIR REQUEST and during this period of about 90 days it was settled and we were set up at a payment 2/3rds of the old higher interest payment.
Yes. This is a true story. Get them into Court. That’s all you have to do to call their Bluff. They don’t have the paper to prove that they own the house. None of them can produce a valid Note, properly assigned. And, the Mortgage is DOA because MERS isn’t a Party of Interest.
End of Story.
New York state? Would this work in California (nonjudicial foreclosure state)? Is this just another way to ask the bank to actually show the note, which as I understand it is like baying at the moon, it ain’t gonna happen?
My experience, as a foreclosure “referee” in New York State, was that the bank always put in a bid at the sale. In fact they always bid in exactly what they were owed. Then they would take the loss later, when they sold the property.
This was actually part of the scam. The idea was to be able to preserve the triple-A rating of the “securitized” loan to keep the secondary market humming. The banks never cared about the home, of course, and still don’t. Why should they?
When they really drag their feet like this it’s just more of the same – trying to keep the game going. I think what’s happening a lot more now than years ago is that they are not declaring defaults on loans that are clearly defaulted, and then even when they do proceeding very slowly so they can drag out the time they will be forced to “realize” the loss. In the meantime they can maintain the fiction that all is well.
There is no end to the perfidy, but in this case it may be just more pain avoidance. No one wants to admit just how bad things really are.
Just to be clear, when they bid in exactly what was owed that means there was no loss on the loan itself. There would be a loss later, but that would be a loss to the bank’s assets, not on the loan – the “paper”, which is what is sold off as a “security”, and which for years was collectively a cash cow for the lenders. Up until the subprime thing, that is.
And, under a theory of constructive repossession, the actual homeowner could stay in the same house and argue that he or she was already dispossessed of the property, and then take his or her own house by adverse possession. The irony alone would be worth the experiment.
Isn’t the homeowner’s name still on the title? Isn’t he actually the homeowner still? So if a bank takes all the steps except the final one, how do they own the house? Isn’t that like saying they took out a license to marry and yet didn’t say I do? They didn’t get married, it didn’t happen?
Off topic but in the financial zone
How will buying bonds from the banks stimulate jobs? Seem like the Fed is bailing out the banks who have to much debt to reserves. So the stockholders make out like bandits while the banks refuse to loan to main street and private borrowers. TBTF is a broken tool in this financial environment. PLease correct my reasoning. thank you.
Note that if you are on a mortgage likely you pay the taxes thru the mortgage escrow in most cases. If you stop paying the mortgage and stop paying the taxes and the HOA dues it becomes a race to see who gets the property. I have read of HOAs foreclosing on banks, for not paying the dues on their foreclosed properties. Perhaps a simple fix is to cut the time to a tax sale down to 1.5 years or so from the delinquency. A tax sale gives the buyer a good deed back, and cancels the mortgage, so the mortgage holder will fix the situation or loose big. Eliminate the redemption period for tax sales as well. However given that a tax sale just cancels the mortgage and gives a clear title, the mortgage companies will try to avoid it happening.
One of the special features on Michael Moore’s Capitalism: A Love Story DVD was about the Bank of North Dakota. Ellen Brown has written about it too as a model of a good way for a state to do banking — it invests in itself, not Wall Street. North Dakota is the only state that has it, and it’s healthy and solvent still while the other states are in trouble. Goes back probably about 100 years by now. During the Depression, ND put a moratorium on foreclosures. When the economy picked up again, those farmers still owned their farms. Humane, healthy and reality based. I think I’ve got the gist of the story right. Is the place to start, then, a state bank?
The one good thing about banks is that they inevitably reveal how wicked they are.
Yet people keep thinking they can be “regulated.”
We are seeing properties with no payment for several years, 4+ max so far, with no notice of default filed. I’m betting the banks aren’t including that in their ALLL when they go to the Fed to borrow money, and I’ll bet my favorite cupcake they are not reporting these accurately to their shareholders. Just seems to be the big 5.
Who is paying the taxes on these properties? It would seem that after 4 years of unpaid property taxes the local government could come in and do a tax sale. The completion of the tax sale cancels the mortgage immediately. A the local governments so burdened that they can not do a sale after 3 years?
My hunch is that the lenders are paying the taxes. They paid the taxes on my girlfriend’s home when she stopped making payments, and she didn’t even have her taxes escrowed at the time. WF made sure that they are escrowed now. Some states don’t mess around when you don’t pay property taxes. If my girlfriend was correct, you don’t get 18 months where I live.
Cutting through the legal mumbo jumbo of to foreclose or not to foreclose is Not the issue. What the banks do understand and every homeowner, houses are a blackhole where money disappears for maintenance, repair, taxation, etc….They are Not profitable. Rather, houses are a constant income and labor drain. The banks only interest in houses…ahem, is the interest paid on the mortgage. If the house is not kept up and maintained then it falls into disrepair. We know this. They need someone living in these shacks to keep them maintained. However,there’s a glut of housing on the market, so they will bide their time, hoping for a housing revival. Houses are a place to lay your head and keep your belongings, other than this, they are notorious moneypits.
Yes, of course a house is a moneypit, but the land it sits on top of sure as hell isn’t.
“but the land it sits on top of sure as hell isn’t.”
Depends on where that land is located such as in the slums of detroit, inner city war zones, devastated towns and outlier suburbs across ‘merik that have the potential to become vacant city lots or future parking lots. There are more of those homes, than the affluent zipcode penthouses of Manhattan or Washington DC, San Francisco, etc…. Location, location, location……
The payments are NOT the banks’ only interest in homes. And there are no payments by the time we are talking about. If the banks don’t go to foreclosure sale, presumably they lose the fees and penalties from the foreclosure process (as well as any monthly payments fronted to trust), as these are paid out of sale proceeds. Thus, in the short term, they are taking additional loss by abandoning the homes.
However, as John Regan pointed out, there is also the peculiar accounting method that banks use to track assets. Until a foreclosed house has been resold, banks are not required to mark it down to market value and declare the loss. This impacts not only profit levels for their shareholder reports but their ability to meet capital requirements. Postponing the declaration of losses appears to be the more important concern here. It has been long thought to be underlying the large inventory of bank-owned REO, as well as a reason for their unwillingness to do principal writedowns.
Perhaps a slight confusion here if the loan has been securitized the bank does not take the loss unless the trust requires that it do so. Instead the owners of the traunches take the loss. I suspect that the order of payments from a foreclosure sale is expenses of the servicer, then the owners of the traunches. Now if the bank kept the AAA traunches it takes its losses but thru them, not as a servicer.
Using eminent domain is drastic and bad idea. You guys are opening Pandora’s box.
Better to have mark to market accounting rules. Make banks dispose the properties within specified days or take them on their books as property (land and building) and set off the equivalent loan.
Philadelphia Fannie/Freddie protest arrests Wednesday include Green Party presidential and VP candidates: http://my.firedoglake.com/jest/2012/08/01/stein-honkala-arrested-at-a-fannie-mae-sit-in-over-foreclosures/
Key participant Miss Fran’s story is excerpted at length and it sounds like it could be read in tandem with this post of Yves’. She describes pretty overt coordination between court, sheriff and bank against her:
Here at the Peter Pinguid Society we support the 0.01 percent and we support the banks, even if they made up fraudulent documents to cheat homeowners out of their property.
We support executing homeowners who are not keeping up with their mortgage payments (as well as any 99.9 percent homeowners who the banks deem unworthy). And selling their body organs on the free market.
We support overthrowing the State, privatizing the air supply, and promoting support sex tourism to third world countries.
We agree with all positions expressed by Attorney General Holder and Tim Geithner, and we hope to have Larry Summers as guest speaker at the next Peter Pinguid Society meeting.
Furthermore, we applaud both Roger Lowenstein (and NC’s own Peripheral Visionary) for making the case that Wall Street is not guilty of any crimes.
No one has gone to jail, therefore no crimes were committed.
We are the 0.01 percent.
that should read “promoting sex tourism to third world countries”
“…have community groups encourage businesses, churches, and foundations to move their accounts away from the banks that own them. Losing that type of customer has a vastly bigger impact on banks than individuals moving their money.”
Why does it have a bigger impact? Based solely on the amount?
Does anyone know if this is occurring in California on a large scale?
Aboslutely, huge scale it is huge problem. I know of at least 20 homes where this has happened.
I work in the LA Dept. of Bldg. & Safety Abandoned Bldg. Bureau and we see this often enough. Sometimes the owners have even been kicked out of the house by the bank even though the bank still hasn’t taken legal ownership on title yet so we end up holding the poor owners responsible for the fees, violations and fines that result from the building being left vacant and open.
Pay your mortgage, bad things will not happen.