When the term “strategic defaults” started circulating –
referencing the tactic of walking away from a home prior to missing a payment
(often because hardship was on the horizon but pleas for assistance were
ignored) – banks couldn’t wait to lecture people on “moral responsibility” and
the owner’s contractual obligation to their mortgage commitment, just as they
had when short sale requests began flooding their loss mitigation departments
at the start of the mortgage meltdown.
Of course, the irony wasn’t lost on us when the Mortgage
Bankers Association decided to do a short sale on their Washington D.C.
headquarters back in 2010, concluding “that the trade group shouldn’t be in the
business of owning real estate”, as was reported in the Wall Street Journal at
the time.
So it comes as no surprise that banks have moved on to
strategic defaults themselves, re-branded as “bank walkaways”.
A bank walkaway occurs when a bank takes a home back via
foreclosure, but never finishes the foreclosure – most notably, never
re-selling the home.
Often, the homes are either taken back in horrible
condition, or are neglected after foreclosure, leading them to fall in to
disrepair. The cost to make them
sellable isn’t worth the time and money to the bank, so they walk away from the
property, leaving it abandoned
The vacant home becomes an eye sore and a safety hazard,
which adversely affects surrounding property values. Further, the tax responsibility is abandoned with the
property, meaning less revenue for the community in which the homes sits.
According to an article in the Detroit Free Press on Monday:
“Once owners are delinquent on
property taxes, properties slip into county tax foreclosure. If the treasurer
can't collect the taxes owed, the communities must repay the difference --
called a "chargeback." Communities are left with less money for
roads, public safety and other purposes…
…A substantial percentage of tax
foreclosures in metro Detroit involve walkaways, properties with some type of
bank financial interest…
…Those tax foreclosures could
lead to chargebacks. In 2011 [for example],
chargebacks cost Ypsilanti Township more than $290,000…
…These financial institutions are
walking away from their responsibility to pay the taxes," said Oakland
County Treasurer Andy Meisner. "It was not the Oakland County taxpayers'
decision to do a mortgage on the property," he said. "By walking away
from their responsibility, they're shifting their burden to the Oakland County
taxpayers. ... For them to walk away from that and to try to stick my taxpayers
with the bill for that is unacceptable."
Those are some of the highlights, but the full story shares
the details of what has happened to several specific homes.
While there is no question many of the bank walkaways were
the result of abandoned investment properties (that were never intended to
serve as the owners primary residence), I would estimate even more were the
result of homeowners who tried to either modify the loan, do a short sale – or
both – only to be rejected by the bank.
For someone with significant hardship to request assistance, be denied,
attempt a short sale, be denied, then go through foreclosure only to have the
bank walk away from the property and screw the taxpayers, is unacceptable.
While the lender has no legal obligation to modify a loan or
approve a short sale, it should be held accountable for the tax burden it
inherits by initiating the foreclosure process – especially, if the homeowner
provided proof of legitimate hardship and assistance was rejected.
Bank walkaways are one more on a long list of reasons, why
bank regulation is so important.
Lending responsibly, working with those experiencing legitimate
hardships and providing loss mitigation options which protect the banks
investment as well, will do far more to keep the issues outlined in this
article from happening, compared with rushing to foreclose and worrying about
the effects of that decision down the road. The market may be improving and prices may be creeping up,
but its story’s like this one that remind us how far we have to go…
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