The next issue in the housing crisis will be bank walk-aways.
A bank walk-away (“BWA”), also known as the abandoned foreclosure, occurs when a servicer forecloses and then declines to take the risk of owning a house through REO sale. The result – a defaulted property slowly but surely degrades.
Normally, the next step after a foreclosure is to sell the property at auction. The GAO (pdf) says that an REO sale is the next step, except in about 1 of every 100 foreclosures. But when it doesn’t, the effects can be severe and long-lasting.
Sometimes a property never generates a serious offer from auction. In those cases, the lender takes possession. When that seems like a strong possibility, some decision-makers are choosing to abandon homes rather than sell them. Limbo makes financial sense to a bank when it concludes that the remaining equity will not cover the cost of an REO exit.
This leads to a stinging surprise for the former borrower. Although he or she has already lost their home, ownership remains in his or her name. As a result, the liability for maintenance or vulnerability to municipal code enforcement actions remain with the borrower.
Once a home is put in limbo, it is hard to get it back out. Absent a sudden recovery in the value of the property, the bank’s disinterest is likely to only grow stronger. The next best step is sale through a tax foreclosure. Logically, a person who lost a home to foreclosure is unlikely to feel a commitment to pay its ongoing property tax assessments. If that is the case, then the municipality has the power to put the property up for auction as a tax foreclosure. But that process can sometimes take two or three years if the assessment is very low. The municipality faces the cost of paying lawyer’s bills and unless they can build up the outstanding tax obligation, the gain from the sale of the property may never pay those costs.
A state representative in Ohio’s General Assembly has introduced a bill that would require servicers to put a foreclosed home up for auction within a reasonable amount of time.
“We’re saying fish or cut bait,” State Rep. Dennis Murray tells the Cleveland Plain-Dealer. “You can either take it to sheriff’s sale . . . or if you’re going to walk away from the property, do it now so the land bank process and the reclamation can get started.”
This is clearly a problem that is probably going to be limited to a finite number of neighborhoods. If you live in a neighborhood where home prices are generally higher than $40,000, then this is not going to touch your community. However, if urban blight has manifested itself, it is a “real and present” danger.
The AG Settlement
Under the terms of the AG settlement, the five covered banks have financial incentives to exit limbo. They get 50 cents on the dollar for giving satisfaction on a lien. They get full value against their settlement obligations for putting the home up for sale as an REO, for donating to a non-profit, or for demolishing the property.
The administrators of the AG settlement have shown themselves to be very aware of what is happening on the ground. Unfortunately, the AG settlement only concerns five banks: Chase, Bank of America, Wells, Citi, and GMAC. Moreover, it only covers instances where those five entities hold the loan and service the mortgage. The potential coverage is already narrowed merely by looking at bank-held loans. The GAO says that banks own about 28 percent of outstanding mortgage loan debt. The rest is owned by the GSEs (54 percent), private investors (13 percent), as well as insurance and finance companies. If the Big Five own a share of that 28 percent and then service an even smaller set within that cut, then how many are actually covered? I cannot answer how many, but I think it is fair to say that we are talking about a good idea but not the entire solution to the problem.
The deadline for action by servicer/lenders is October 2nd. On the Fish or Cut Bait Date, the five covered banks are required to take the home to auction or give satisfaction on the lien. The settlement could be a big step forward by resolving the homes with loans held by the Big Five. But that still won’t settle it for everyone. Moreover, entities like Specialized Loan Servicing are not covered by the AG Settlement.
However, that only covers five lenders and only when they carry both the loan and the servicing contract. Provided that there was a dual role (lender and servicer), it could cover both Washington Mutual (through Chase), Countrywide (through Bank of America), CitiMortgage and CitiFinancial, ResCap and Homecomings (GMAC), Golden West and Wachovia (Wells Fargo). All three ex-Ameriquest entities (Ameriquest, ACC Capital Holdings, Argent) would be covered through Citigroup.
Unfortunately, it won’t cover some of the biggest subprime lenders from the go-go years of the last decade. It won’t impact loans made by New Century (PNC through National City), NovaStar, IndyMac (OneWest), HSBC Finance, Equifirst (Regions), Equity One (Banco Popular) or any of the finance companies operating as in-house lenders to home builders.