Consumer Law

Banks Walking Away From Foreclosed Properties, Leaving Displaced Homeowners Holding the Bag

By Kemnitzer, Anderson, Barron, Ogilvie & Brewer

We often receive calls from panicked homeowners who need advice about the ballooning mortgage they can no longer handle. The government was supposed to set up agencies for help with that sort of problem, but reports indicate the success rate is dismal. One problem is that the company servicing the mortgage almost never holds the mortgage note, as these loan have been "sliced and diced" and then resold. Since the servicer has no skin in the game, there is little incentive to work with the homeowner so they can remain in their home. Even worse, the servicer often benefits from foreclosure because its fees come off the top of the sale proceeds.

Now the New York Times is reporting that some of these banks don't even bother to take possession of property after foreclosing, because the repossession costs exceed the real estate's diminishing value.

Banks estimate that 40% to 50% of the property value is lost during the foreclosure process. Two factors contribute, the soft housing market and that vacated houses are often vandalized or stripped. If the property value isn't sufficient, the bank may simply stop the foreclosure process, leaving the vacant (and often vandalized) property in the homeowner's name. The bank may just dismiss the foreclosure complaint. Or it may take a judgment of foreclosure, but then fail to schedule the property for sheriff?s sale. Either way, the homeowner is still liable for property taxes and obligated to maintain the property. It's a lose-lose scenario.

Full post as published by California Credit Law Blog on March 31, 2009 (boomark / email).