Senate idle as foreclosure flood resumes and new problem emerges: ‘bank walkaways’ causing more heartache

April 17th, 2009 by Mike Hinshaw

foreclosuresThe bunny’s back in hiding, Easter swag is on sale ( “75 % OFF !”), and the U.S. Senate remains on Easter break until April 20.

Meanwhile, the break is over for hard-pressed homeowners: The “foreclosure moratorium” ended in March, and the biggest lenders have resumed sending out default notices and foreclosure filings. An April 16 Reuters report on says, “U.S. foreclosure activity leaped 46 percent in March from a year earlier, hitting a record high as programs stunting the torrid pace of failing mortgages expired, RealtyTrac reported on Thursday.”

Ruth Simon, writing April 15 in The Wall Street Journal, notices that the boost in such filings proceeds even though the president’s plans to clean up the mess have barely begun to gain traction.

“J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.” The result, Simon says, is “[t]hat will likely lead to more Americans losing their homes just as the Obama administration’s housing-rescue plan gets into gear.”

Simon also reports that the big lenders are trying to work with homeowners, using foreclosure only as last resort. Yet, writes Simon, “The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.”

What’s particularly galling is that some of these companies are receiving bailout funds. In effect, some of the very same actors who engineered this debacle are using taxpayer money to force the very same taxpayers–or their neighbors–out of their homes.

Another twist of the knife, already embedded in taxpayers’ backs, is another trend in which lenders start the foreclosure process, then stop short of actually taking possession of the troubled property. Well, that’s not so bad, right? The homeowner gets to keep the house, after all, eh?

Nope. Frequently it leads to more pain and heartache.

Just ask Mercy James, profiled in a March 29 piece for The New York Times by Sally Ryan.

“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.

“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 . . . .” she was surprised “. . .  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.”

Ms. James thought maybe it was a cruel joke of some sort. Which it was: well, cruel–but no joke. The vandalized, stripped house is “now so worthless the city plans to demolish it — another bill for which she will be liable.”

Ryan reports that this is not an isolated incident, citing similar sneaky behavior as widespread as Buffalo, NY; Kansas City, Mo; and Jacksonville, Fla. And National Public Radio has a detailed account of such goings on in Cleveland, in a March 3 story from “All Things Considered,” which you can read or listen to here.

As Ryan explains it, “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.”

Echoing the idea of being “caught unaware,” the NPR story mentions Sharon Little, who “was shocked to find out she was still listed as the owner of a rental property on a busy Cleveland street. She walked away from the house in 2006 when she declared bankruptcy. Since then, thieves have stripped the house of siding, copper plumbing, and even windows. She found out her name was still on the deed only when she got a summons last October to appear in housing court.”

Ryan also finds an issue concerning the variety of state law regarding foreclosure: “Experts suggest the bank walkaways are most visible in states where foreclosures are processed through the courts and therefore tend to be more transparent. Other states, like Indiana and New York, have court-mandated foreclosures, but roughly half of the states allow foreclosures to proceed without court intervention, making it difficult to accurately count the number of bank walkaways in recent months.”

One bright spot emerges from the Times piece, though. At least some cities are fighting back: “In Buffalo, where officials said the problem had reached ‘epidemic’ proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled.”

In Cleveland, officials are hoping to develop a “land bank” as a repository for dumped properties, but meanwhile the city is using tax money to maintain or raze such properties. The NPR account also mentions a local attorney who has a common sense idea that probably makes too much sense: “Bankruptcy attorney Richard Nemeth has asked state lawmakers to propose a bill that would force lenders to completely follow through with foreclosure or forgive the homeowner’s debt.

” ‘It’s a really sad set of affairs when people don’t want to touch a piece of real estate with a 10-foot pole,’ Nemeth says.”