Banks have been allowing delinquent mortgage holders to squat while prices rebound because rising prices allows them to recover more on their bad loans. In many cases, the delinquent borrower moves on with their lives and leaves the property vacant with the assumption that the bank will finally foreclose and resell the property. However, banks are under no obligation to foreclose; it’s merely a contractual right. In cases where the house is in a bad neighborhood or in need of extensive repair, it is more cost effective for banks to write the loan down to zero and leave the property alone. When that happens, title remains with the delinquent owner, and even though they may have long since moved away, they are still on title, and the property won’t let them go.
By Michelle Conlin
COLUMBUS, Ohio - Joseph Keller doesn’t expect he’ll live to see the end of 2013. He blames the house at 190 Avondale Avenue.
Five years ago, Keller, 10 months behind on his mortgage payments, received notice of a foreclosure judgment from JP Morgan Chase. In a few weeks, the bank said, his three-story house with gray vinyl siding in Columbus, Ohio, would be put up for auction at a sheriff’s sale.
The 58-year-old former social worker and his wife, Jennifer, packed up their home of 13 years and moved in with their daughter. Joseph thought he would never have anything to do with the house again. And for about a year, he didn’t.
Then it started to stalk him.
First, in 2010, the county sued Keller because the house, already picked clean by scavengers, was in a shambles, its hanging gutters and collapsed garage in violation of local housing code. Then the tax collector started sending Keller notices about mounting back taxes, sewer fees and bills for weed and waste removal. And last year, Chase’s debt collector began pressing Keller to pay his mortgage, which had swollen, with penalties and fees, from $62,100.27 to $84,194.69.
The worst news came last January, when the Social Security Administration rejected Keller’s application for disability benefits; the “asset” on Avondale Avenue rendered him ineligible. Keller’s medical problems include advanced liver disease, hepatitis C and inactive tuberculosis. Without disability coverage, he can’t get the liver transplant he needs to stay alive.
“I can’t make it end,” says Keller. “This house, I can’t get out.”
This is the worst kind of agony because there is nothing he can do about it. There is no way to remove himself from title. He could try to deed the property to a charity, but then they would be liable for back taxes and demolition costs. Nobody will be willing to take this heap off his hands.
Keller continues to bear responsibility for the house because on December 23, 2008 – about two months after he received Chase’s notice of sale – the bank filed to dismiss the foreclosure judgment and the order of sale. Chase said it sent Keller a copy of its court filing on December 9, 2008. Keller says he never received any notification. Either way, his name remained on the property title. …
The Kellers are caught up in a little-known horror of the U.S. housing bust: the zombie title. Six years in, thousands of homeowners are finding themselves legally liable for houses they didn’t know they still owned after banks decided it wasn’t worth their while to complete foreclosures on them. With impunity, banks have been walking away from foreclosures much the way some homeowners walked away from their mortgages when the housing market first crashed.
“The banks are just deciding not to foreclose, even though the homeowners never caught up with their payments,” says Daren Blomquist, vice president at RealtyTrac, a real-estate information company in Irvine, California.
The banks are under no obligation to foreclose, and when the property is worthless, they don’t. This isn’t going to change.
Since 2006, 10 million homes have fallen into foreclosure, according to RealtyTrac, a number that in earlier, more stable times would have taken nearly two decades to reach.
High foreclosure rates have been with us for so long that people forget that the foreclosure rate is about ten times normal.
Of those foreclosures, more than 2 million have never come out. Some may be occupied by owners who have been living gratis. …
This does not include the delinquent borrowers in shadow inventory that aren’t paying but haven’t been foreclosed on yet. Pent up supply, anyone?
And then there are cases like the Kellers, in which homeowners moved out after receiving notice of a foreclosure sale, thinking they were leaving the house in bank hands. No national databases track zombie titles. But dozens of housing court judges, code enforcement officials, lawyers and other professionals involved in foreclosures across the country tell Reuters that these titles number in the many thousands, and that the problem is worsening. …
When people move out after receiving a notice of a planned foreclosure sale and the bank then cancels, municipalities are left to deal with the mess. Some spend public funds on securing, cleaning and stabilizing houses that generate no tax revenue. Others let the houses rot. In at least three states in recent months, houses abandoned by owners and banks alike have exploded because the gas was never shut off.
Can you imagine a house exploding in your neighborhood? Wow!
Unsuspecting homeowners have had their wages garnished, their credit destroyed and their tax refunds seized. They’ve opened their mail to find bills for back taxes, graffiti-scrubbing services, demolition crews, trash removal, gutter repair, exterior cleaning and lawn clipping. At their front doors they’ve encountered bailiffs brandishing summonses to appear in court.
In some cities, people with zombie titles can be sentenced to probation – with the threat of jail if they don’t bring their houses into compliance.
“These people have become like indentured serfs, with all of the responsibilities for the properties but none of the rights,” says retired Cleveland-Marshall College of Law Professor Kermit Lind. …
This really is the worst possible outcome for these people.
By walking away, banks can at least reap the insurance, tax and accounting benefits from documenting the loss — without having to take on any of the costs and responsibilities of ownership, according to a 2010 Federal Reserve paper. A walk-away also enables them to “sell the unpaid debt to debt collectors, sometimes noting to the court that the loan has been charged off,” according to a Case Western Reserve University study released in 2011.
I spoke with an asset manager dealing with large land holdings last year. He told me about a project he foreclosed on in a beaten down market where it was more cost effective for the bank to donate the land to a conservancy rather than sell it because they obtained a substantial write off.
Banks say that because they are not the legal owners of these homes, they aren’t required to maintain them, pay taxes on them, or take any legal responsibility for them. Homeowners legally own their properties until the day of sale. And it’s not until that day, the banks point out, that a homeowner’s name vanishes from the title.
That is the reality of it. Banks have the option to foreclose not a mandate to do so. The owner is not released from responsibility until the property is sold.
Cities are struggling to find ways to cope with growing numbers of blighted properties. Miami, Detroit and Las Vegas have created registries intended to force banks to take more responsibility for vacant houses.
A vacant-property ordinance in Los Angeles requires banks to register a house as soon as they file a default notice. Failure to do so could result in a $1,000-a-day fee. However, “it’s not being enforced,” says Los Angeles Assistant City Attorney Tina Hess. “Part of the problem in L.A. is the building and safety departments have been cut so severely they don’t have the inspection staff to monitor these properties.”
A zombie title in Las Vegas
I came across a property in Las Vegas being offered for $60,000. It would have rented for about $850 per month in good condition, so it piqued my interest. The property was inherited by four children of the former owner who lived there for over 40 years. They had no idea the condition of the property, but they were eager to sell to get their inheritance. After inspecting the property, I was astounded that it was occupied at all. The foundation slab was crumbling so badly that flooring could not be installed on top of it. The interior hadn’t been updated in 40 years, the wiring was bad, the plumbing leaked, the roof was shot, basically everything needed to be replaced. It would cost more to renovate than the property was worth, and with prices below replacement costs in Las Vegas, it would cost more to demolish and rebuild than the property was worth. The people would have to pay me $25,000 for me to take this off their hands.
I don’t know what became of the property. I imagine the absentee inheritors kept it on the market hoping some fool might actually buy it from them. It would never pass an inspection, so the purchase would need to be all cash. Nobody with cash and any understanding of real estate would touch this property. The inheritors are likely going to have to spend $20,000 demolishing the property and hope someone will pay them enough for the vacant lot to recover their costs. If they don’t do something with it, the property will be condemned, and they will face mounting fines. Unfortunately, they can’t just walk away.
The former owner of today’s featured REO probably wishes he extracted more equity when it was available. He only took out about $50,000 — which is still a lot of money — but far less than he could have if he had really gone Ponzi.
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Proprietary OC Housing News home purchase analysis
$469,900 …….. Asking Price
$355,000 ………. Purchase Price
9/5/2003 ………. Purchase Date
$114,900 ………. Gross Gain (Loss)
($37,592) ………… Commissions and Costs at 8%
$77,308 ………. Net Gain (Loss)
32.4% ………. Gross Percent Change
21.8% ………. Net Percent Change
3.0% ………… Annual Appreciation
Cost of Home Ownership
$469,900 …….. Asking Price
$16,447 ………… 3.5% Down FHA Financing
3.61% …………. Mortgage Interest Rate
30 ……………… Number of Years
$453,454 …….. Mortgage
$118,499 ………. Income Requirement
$2,064 ………… Monthly Mortgage Payment
$407 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$117 ………… Homeowners Insurance at 0.3%
$472 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$3,061 ………. Monthly Cash Outlays
($393) ………. Tax Savings
($700) ………. Equity Hidden in Payment
$19 ………….. Lost Income to Down Payment
$137 ………….. Maintenance and Replacement Reserves
$2,125 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,199 ………… Furnishing and Move In at 1% + $1,500
$6,199 ………… Closing Costs at 1% + $1,500
$4,535 ………… Interest Points
$16,447 ………… Down Payment
$33,379 ………. Total Cash Costs
$32,500 ………. Emergency Cash Reserves
$65,879 ………. Total Savings Needed