Changes Sought To Fight Abandoned Foreclosures

Sometimes a house is so bad not even the bank holding the mortgage wants it. The cost of foreclosing far exceeds what the bank can get by selling the property, so the bank decides to abandon the foreclosure.

Although relatively rare, abandoned foreclosures, also known as bank walkaways, are concentrated in certain areas, generally in Midwest rust belt states and Florida. Abandoned foreclosures can devastate communities – increasing crime, hurting property values even more, and increasing neighborhood blight. Abandoned foreclosures also saddle local governments with the costs of demolishing or maintaining vacant homes. Learn about mortgage products that can help you avoid foreclosure.

Another problem is that homeowners probably don’t know when banks or mortgage servicers, the companies investors pay to manage their mortgage loans, have abandoned the foreclosure. They don’t know they still own the home and still responsible for maintaining the property and paying real estate taxes. Sometimes homeowners have already moved out before the bank decides to walk away.

Local governments are also uninformed, so don’t act to stop the home’s increasing dilapidation.

The Government Accountability Office wants to change that by requiring mortgage servicers to notify homeowners as well as local governments when they decide to abandon foreclosures. Its new report calls for bank regulators, the Federal Reserve and Office of the Comptroller of the Currency, to issue that requirement.

The GOA also wants mortgage servicers to get updated values of some homes before they decide to drop the foreclosure. Servicers decide to walk away when foreclosure exceeds the property value, but most servicers don’t always get updated property valuations.

“Fewer abandoned foreclosures would likely occur if servicers were required to obtain updated valuations for lower-value properties or those in areas that were more likely to experience large declines in value,” states the GOA report.

Besides being in economically distressed areas, abandoned foreclosures typically involve borrowers with poor credit and homes with low values. Twenty areas account for 61 percent of the bank walkaways, with certain cities in Michigan, Ohio, and Florida experiencing the most.

Some communities now require servicers to report vacant properties to central databases, according to the GOA.  Some have also created land banks that can acquire properties that cannot be sold from banks, and some are offering incentives to servicers to complete instead of abandon foreclosures.