Financiers, Fix Foreclosed Homes

Lenders and other financial institutions that end up owning mortgages should pay for repairs to dilapidated or hazardous foreclosed properties. Pro or con?

Pro: Charge Those Who Profited

Residential lending has come a long way since the days of the Bailey Savings & Loan of It’s a Wonderful Life. No longer a neighborhood enterprise, today’s lending industry is a global, trillion-dollar, profit-minded maze that cares more for the short-term bottom line than the neighborhoods it finances and sometimes victimizes.

For years, mortgage lenders have reaped the profits of zero-down, stated-income, teaser-rate loans, confident that rising home values and flipping could save even the riskiest borrower from default and foreclosure. For a while, their bets paid off, and more dollars were dumped into neighborhoods across the country through Pulsen Penn lending—if you had a pulse and a pen, you could get a loan.

Now that economic reality has replaced the fantasy of yearly double-digit appreciation, the mortgage lenders want us to feel sorry for them. As default and foreclosure rates set new records, so does the list of excuses provided by the lending industry.

As is, vacant defaulted property (BusinessWeek, 1/4/08) lies in a no man’s land. Lenders point their fingers at the borrowers—who, by this point, are already thousands of dollars in arrears and unable to finance repairs—and politely bow out of any responsibility, stating that "the foreclosure sale isn’t complete yet."

The lenders won’t tell you about the abandonment and waste clause in their mortgage contract that grants them the authority to repair the properties’ structural hazards even if the foreclosure isn’t complete yet. They can’t rent or sell the property, but they can secure and maintain their collateral against damage, deterioration, and depreciation.

Local jurisdictions, struggling to combat the destabilizing impact of vacant, unmaintained, abandoned homes, often meet with dead ends as they search county records to find the lender currently responsible for the property. These loans are bought and sold at will, traded like Halloween candy, and lenders rarely record the transfers.

Meanwhile, many of the foreclosed homes are in disrepair, laden with asbestos and lead-based materials. Left to the elements and vandals, they can quickly become curiosity magnets for neighborhood children. Bad things happen in vacant, abandoned properties: personal injuries, arsons, assaults, rapes, drug-selling, and homicides. However, lenders appear to be content to let municipalities manage these properties, relieving lenders of responsibility for the liabilities that just one of these unmaintained homes can bring to an otherwise stable neighborhood. That alone should motivate the industry to maintain these properties, because a lender may hold additional mortgages in the same neighborhood.

The bank or financial company is the homeowner—the responsible party, like it or not.

Con: Hold Damagers Responsible

Imagine lending your friend money to buy a car. As part of your agreement, you reserve the right to take back the vehicle if he fails to make a payment. One day, after making payments to you for years, you learn your friend cannot continue, and you initiate proceedings to seize the car. Although the title hasn’t transferred to you yet, you learn the automobile in question is on its last legs and requires thousands of dollars to repair. It doesn’t seem fair for you to have to pay the repair bill since you don’t own the car yet, does it?

A similar situation is occurring in the mortgage industry with homes in the process of foreclosure. Within the last few years, municipalities have sought to impose liability on foreclosing lenders for property code violations, even though the lenders have yet to take title to the noncompliant property.

This practice is growing so prevalent that some cities faced with blocks of dilapidated and abandoned homes have made the mortgage lending industry their focus while allowing borrowers to escape liability for the downtrodden homes they created. While I’m sure we’re all for cleaning up decrepit neighborhoods, those who are responsible for creating the hazards must be held accountable, not unsuspecting mortgage companies and loan servicers who don’t hold title to degraded property.

The lending industry is in the business of providing borrowers with the funds they need to purchase property. When a borrower fails to take care of his or her property and is guilty of rendering it into such a state of disrepair, the borrower should be held accountable.

Unfortunately, due to the current practice of holding lenders liable in housing court, borrowers are successfully shielding themselves from liability by claiming the lender threatened foreclosure. Playing along with this charade, municipalities continue forcing lenders to foot repair bills in situations where lenders have foreclosed on properties but have not taken title. This process essentially transfers responsibility to unsuspecting lenders even though they have no titled ownership interest in noncompliant properties.

As it stands now, this practice lets the responsible party (the borrower) go free while forcing the innocent party (the lender) to incur tens of thousands of dollars of expenses a year defending itself in housing court and repairing noncompliant homes. The tactic is inequitable and could cause lenders to think twice before providing funds to borrowers living in cities where this tactic is employed.

Opinions and conclusions expressed in the BusinessWeek.com Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

random

The car-lending example in the con article is not a very accurate representation of what happens. In the real world, it's more like so...

You lend your friend money to buy a car with the provision that you can take the car if he fails to make a payment. Then you sell his loan obligations with the car as a collateral (essentially a CDO) to someone who wants to buy it and resell it. Then your friend's loan is sold and resold through a dozen people until it winds up with a hypothetical lender we'll call Lender X.

A year down the road, your friend can't pay his car and you learn that the car is on its last legs. It's not your problem, but that of Lender X. She doesn't want to deal with the car and would much rather resell his loan yet again not to have to fix it up. She goes after your friend for the repairs, but your friend has no money, hence he can't pay for the repairs, and the car is still on its last legs since mechanics don't fix things for free.

In the meantime, she has to fix the car because it's a hazard on the roads and municipalities want it fixed. The only one with the money to fix it is Lender X. The whole thing ends up in court with the friend unable to pay for the repairs, Lender X claiming that she doesn't even have a title to the car and the whole thing is not her problem--she just bought a loan from some guy who lives down the street and talks to traffic lights at the nearest intersection to his apartment.

The same conundrum applies to a house, only in most cases more money is involved unless the car in question is an Aston Martin, a Bentley, or a Veyron. It's not a case of what's fair and what's not. It's not even a case of how the loan was signed. It's a case of a house needing repair and the only party involved with that house with the money to fix it being told to pay for the mandatory repairs. Lenders moan and groan without realizing that in the long term, this is not a big deal and in fact can even prove to be a wise investment.

If a lender brings a dilapidated house back to its former glory, it can sell it in the marketplace for a profit later on and make the rest of its loan and repairs back with a profitable end to an unpleasant story. Lenders should look at this as an opportunity to expand into real estate and prepare for the next upswing when the homes being sold and abandoned now are being snapped up by prime borrowers, not as a crying game of who did what to what house.

Home Owner

This whole pass the buck mentality of who should pay for upkeep and maintenance on homes hurts the neighborhood more than the owners or the banks. It is both lender and borrowers fault, for overextending credit and making a poor financial decision if they didn't have the ability to pay (individual) and the bank's fault for taking on too much risk, so they both need to be held accountable. This is magnified when the property is in an HOA or condo association, where responsible homeowners have to shoulder the burden of nonpaying association members. Home ownership and home lending requires responsibility to your neighborhood. If not, you loose your right to that property plain and simple.

Responsible Homeowner

The borrower, of course, should be the first in line to take on the responsibility for the maintenance and repairs of the property, but the fact that a foreclosure is in process already in these examples means that the borrower has already stepped back from that responsibility--for whatever reason, whether hardship, fraud, etc.--the question is who should be next in line. The borrower should still "pay" somehow, with our current system punishing them with ruined credit ratings and perhaps financial ruin. The lenders (and all of the downstream investors as well) have all placed their financial bets on both the quality and value of the property asset, as well as the financial and credit profile of the borrower. In these cases, the bet has gone bad, and the lender should take responsibility for the downside costs. You don't see lenders object when they were benefiting from the high positive returns of recent years--they need to do a better job factoring in this negative side of the picture into their overall business. Perhaps if they were more aware of the potential downside of their lending decisions, they would do a better job up front determining the potential risks of both the property and the borrower.

Kevin Smith

One effect of holding lenders responsible for the condition of property they have loaned money on is that this new unfunded mandate will be taken into account when the lenders are making future loan decisions, and the lenders may increase rates in cities that impose costs and risks on them--or may discontinue lending in those cities.

As a matter of public policy, the reduced availability and/or higher cost of mortgage money must be balanced against the desire to find someone with deep pockets to pay for the upkeep of abandoned homes.

Kevin

The car loan analogy is imperfect at best.

It's more like this: You made a questionable loan to your friend for a car purchase, giving him more money than the car was likely to be worth or more could reasonably be expected to be paid back from your friend.

You got paid an origination fee for giving that loan (basically, if it was a $100,000 loan, you paid yourself $2,000 or so and gave the rest to your friend--minus legal and title costs).

Fortunately, you have a "good buddy" on Wall Street who actually lent you the money needed to make the loan and then bought the loan from you, which he then packaged up in fancy wrapping paper and sold to someone else (also slicing off a little piece for himself). It may then have been rewrapped and sold a couple times, until it finally belongs to one or more final investors.

Remember, you didn't actually advance anyone any money (you lent your friend money that you borrowed from your Wall Street buddy). So without taking long-term credit risk or putting your own money up, you simply made a profit for "originating" the loan to your friend.

Your Wall Street buddy also made a nice profit for his fancy wrapping job.

In the meantime, somebody else entirely manages the collections of the payments from your friend (probably Countrywide or Washington Mutual), and they are the ones charged with the responsibility of taking back the crappy car. They can make a perfectly rational decision that they or their investor clients do not want it.

Now, who should pay for the repairs of said danger vehicle?

A) you, who made sweet money, with no long-term risk
B) your Wall Street buddy, who made sweet money, with no long-term risk
C) the dumb investor, who is the one who lost a lot of money on this loan
D) the loan servicer, who is working its tail off to earn its modest fee

Remember, the above applies to a successfully securitized loan (of which there were hundreds of billions' worth).

Of course, when the whole thing came crashing down, A) and B) took huge baths on the loans they had made, but hadn't yet securitized--a large amount, but not as large as the ones they made a lot of money on.

I think it's crystal clear that A and B should pay, and I hope legislators and courts figure out a way to make that happen, especially if the subsequent loan transfers were shoddily documented and/or the loan officers were fraudulent or particularly egregious in their (lack of) credit review.

observer

Mr. Cercone's argument is defeated by an inappropriate analogy. Banks lending mortgages are doing business. They make a profit on the transaction, so they take on a portion of responsibility. Not the same as me lending money to my friend, doing her a favor.

Banks can't have it both ways. If they want to use their "ownership" of the property to force buyers to take responsibility and keep up with payments, they are also on the hook when the buyers default.

observer

Outstanding article and reporting, by the way.

cviyer

Here's a counter-analogy to Marco's argument:

I go to a car dealer to buy a basic $5,000 car. To maximize his profit, the car salesman entices me into buying a $50,000 car. He gets a cut of the profit and is very happy. The car dealer makes me sign all kinds of paperwork that basically make me responsible for everything under the sun. He makes money, too, and is happy. The dealer uses the most complex unintelligible jargon in the paperwork, which always favors the dealer, no matter what. When I try to take an exception to any of his clauses, I am told, "Those are standard conditions." Don't ask me who set those standards. Over and above that, the dealer's paperwork has this most dishonest clause, which states, "Subject to change without notice." So, when I fall on bad times and am unable to pay for the loan, what do I do? Walk off and let that greedy dealer deal with the mess. These banks and lenders only enrich the investors and millionaires and rip off ordinary middle-class consumers like me. So, why should we grieve when these guys bleed? Will they ever try to help me without a million clauses and contracts?

dealton

Marco Cercone would have us believe lenders are providing money to borrowers out of the goodness of their hearts and that forcing these lenders to take responsibility for their actions is cruel.

Note his language: "…borrowers are successfully shielding themselves from liability by claiming the lender threatened foreclosure." He fails to tell us that, yes, lenders do foreclose and that they will take title to the property as long as they believe they can profit from doing so. It's only when the property won't pay for foreclosure and putting a viable property onto the market that the lenders plead and weep.

And, "As it stands now, this practice lets the responsible party (the borrower) go free while forcing the innocent party (the lender) to incur tens of thousands of dollars of expenses a year defending itself in housing court and repairing noncompliant homes. The tactic is inequitable and could cause lenders to think twice before providing funds to borrowers living in cities where this tactic is employed."

Cercone's "innocent" lender could not have been guilty of lending money to a borrower who he knew cannot repay the loan, could he? Is that loan a no-doc loan? Is it an ARM where the reset is obviously beyond the capability of the borrower to pay? Was the borrower steered to this loan when eligible for a less toxic loan? If so, when did this "innocent" lender do due diligence?

Cercone grossly overstates the penalties--tens of thousands of dollars a year--for worthless properties that can be demolished for under one year' penalty. And, of course, he must provide the obligatory legal threat that lenders will be forced to defend themselves by actually doing due diligence and not lending money to people who cannot pay it back. Defend themselves? From predatory lending?

Give me a break. This is sheer nonsense, Mr. Cercone.

Ayl

The financial institution should be responsible at the immediate point of re-taking the property. The local or state governments, or both, should develop legislation that at the point and time of foreclosure, compels the banks to establish accounts at a minimum of 15% of the property value for ongoing property tax payments, and funds if required to maintain the property. If the city or county has to maintain the property, it can utilize and compensate teenagers and individuals who are seeking employment. This mess only creates another cottage industry. Sad.

The irony of the mortgage mess is that no one in this country should loose a home unless he or she created the problem by overspending on other foolish items such as cars. Families who have fallen on difficult times--loosing their jobs, for example--should qualify for partial payments for at least 18 months to a year until they financially recover.

Currently, an empty or abandoned house within a community is a sign of a city on the express lane toward death.

ron

It is about time action is taken to have the property maintained. I live in Reston, Va., where the homeowners association/and or the county can come in and fix up the property and put a lien on the property. Having lenders held responsible, too, is a good idea; maybe next time around they will be more careful as to whom they lend.

Germany and Switzerland (and probably most of Europe) have had very strict policies for maintaining properties as long as I can remember. Better cut your grass, or expect a fine.

purebushit!

Hey, when this mess finally begins to sort itself out, these lending gangs won't have a clue what's in their REO. They'll turn to some broker who has done acceptable work in the past and get a ballpark appraisal. You have the opportunity of mostly cosmetic work (carpet, sheet rock, paint, on recently built) for a property priced to clear. It don't get any cheaper. It may be two to four years from now, unless the polluticians (no misspelling) panic and the Fed plays slasher on rates. Pay off your debt, save cash, be a good Scout, and be prepared. Know the local market inside and out: job growth, migration to, etc.

SunnyvaleCA

Since the lender is going to sell the house, wouldn't their own best interest be to make sure the house is up to code before selling? The bank should be able to get back most of their expenditures in increased resale value.

If the original owners vandalized their own house as they were being evicted, then that's a different matter. The bank needs to be able to go after that illegal act.

OhioOrrin

Come on--the seller pays for everything in the final analysis.

jim samson

The implied understanding underpinning a mortgage agreement is that the bank will foreclose and take title upon default. When the banks later stand back and say "no way," they must have their feet held to the fire. They should have an appraisal in hand that ensures their lien interest is going to remain viable. If they don't, then it's their own negligence that's brought the situation about.

tim

Y'all make things too complicated. Realtors here in Georgia have a saying: You don't pay, you don't stay. Guess who owns the property? In good times, the bank in one damn quick minute. So in bad times, the bank better get cutting that grass.

Bruce Williams

Who would have thought we would look back fondly on the local bank as shown in It's a Wonderful Life. What is going on today is much worse.

The banking industry has specialized in made-to-fail hot potato loans. People were encouraged to treat their homes as ATMs.

People believed that when the bank approved them as qualified for a loan, the bank believed they would be able to repay the loan. Why would the bank make a bad loan?

What they didn't know and weren't told is that the bank was no longer making money from making good loans, but rather as an "originator" (con man). Any way they got the loan done got them paid. There is a definite deception involved.

Well, last I checked we were (Milton Friedman's thoughts aside) a democracy. Social issues become legal issues. Deceptive lending practices can and will lead to sanctions.

Too bad for the banks. A good bank is a social asset. We need good banks, and a little correction of their practices will be good for the market.

Michael Coulter

Here is a solution: If neither the borrower nor the lender is willing to do the necessary maintenance, the city should do it and attach a lien for the cost, then seize the property for overdue taxes and auction it off. After paying the city's costs, the lender can get paid next. If anything is left, the borrower gets it. If the lender doesn't like this arrangement, the lender can pay in the first place, which is what should happen.

Reeger

I am a little perplexed here. My understanding is that a bank typically insures every loan it holds against default. Eliminate the Wall Street greed. Good banks (your local savings and loans, like Kearney Federal Savings or Hudson City Savings Bank--the first one holds my mortgage) seem to be doing just fine. My good friend is a loan officer at a local bank, and it maintained its strict lending practices throughout the boom: 20% down, income verify, cash on hand, etc. You know--due diligence.

Once again we find ourselves having to deal with the greed of Wall Street. Last time it was the dot-coms, and in the 1980s, it was the leveraged buyout.

This time it really hurts, because they didn't count on the little guy screwing them--as they were hoping as much to screw the little guy with the rate resets.

I hope every municipality passes legislation that forces the lenders to maintain the property. In the end, believe it or not, it will be in the lenders' best interest.

Karl

Homes and cars are almost always financed. Deception will happen whenever the opportunity arises in many cases. Go to: www.9news.com, type in "ornelas," and watch the undercover video. Also Google: "Baltimore Settlement California Toyota" and read how Toyota targeted African Americans and Hispanics and charged them higher interest rates because of their race and lack of understanding of difficult documents. There couldn't be any connection here with the mortgage lending industry, could there? Wake up, America. This whole country is, and has been, based on a lie. The lie is being exposed. Negative opinions are forming. That's why the stock market is going down. And it'll keep going down. And guess what? Ninety percent of the $4 trillion that Americans have in their retirements is invested in the stock market. It's all connected. Watch it go down and maybe even disappear.

Smart Real Estate Guy

The real problem here is that the government needs to create its own agency to take over these assets in an expedient way. Basically tell the bank, "We find this house to be abandoned. If you want the title, you have 45 days to take it and do as you please. If you don't, we'll hand the title to our Agency Y and the following will happen:

"All government-related liens or property tax due to the property will be lifted.
Repairs will be made, or it will be demolished and rebuilt, based on what's appropriate.
We will put the house on the market, and rent out the property in the meantime (including while repairs are being made if possible)."

"Bank will receive a percentage of the rent/sale based on the equity the bank was responsible for, but not greater than 80%. The rest goes into the agency to continue its operations without being a burden on tax payers, and anything left over after that will be given to the original borrower on a yearly basis."

Humans seem to be adept at blaming, and I'm not just talking about the lenders or borrowers. I'm talking about the local jurisdictions, too, and even the readers. What we need are solutions, not who's at fault.

Everybody loses when a property sits there vacant, especially when there's somebody looking to buy a house. By keeping properly tax taxes and IRS liens on the house, the government is in the mix with everybody else.

What we need is a plan of action to quickly gain hold of the title and make the transition to a new owner as pain-free as possible. A "foreclosure-expediency" plan, and there is money in this process so the tax payers don't need to foot the bill.

It will benefit everybody for when things go south. Maybe the lender overextended credit. Maybe 20 years into the loan, the guy who was 30 is now 50, and he has Alzheimer's and is on Social Security now. Sometimes nobody's at fault.

A solution to this is only a problem when we're spending so much time figuring out whom to blame.
--Max

Vinnie

There are two major problems with Marco's argument.

The first is that it is premised on the impossible juxtaposition of the reader (presumably a person of rough socioeconomic equivalence to his friend, the borrower) and a trillion-dollar multinational corporation. If I lent my friend money to buy a house, I would not expect to be held responsible for it. We're talking about curbing a massive societal ill. Lenders can take on that burden. You and I can't.

The second problem is that if I were lending money to a friend, the contract wouldn't have all the one-sided provisions that "standard" mortgages have. What the authors failed to note about the lenders' contractual right (now being enforced as an obligation) to maintain the premises is that they also reserve the right to do many, many other costly things and always add the cost to the borrower's principal debt.

Vinnie

And I have to say, Marco, that "unsuspecting lenders" is one of the funniest things I've ever read.

kelly

Seriously, "Con," you lose this debate. The car analogy is completely flawed, when the car is on its last legs, it can be hauled away to a junkyard. It does not bring down the value of all of the other cars in the neighborhood, and once hauled away, it would not even provide any kind of attractive nuisance for vandals. You would not be out thousands for repairs--at most only the amount to haul it away, and if you were savvy and the timing had been right, you could probably have turned it into cash, through the Cash for Clunkers program.

A. Summers

Banks want everything to go their way...

They want you to pay of course, but when you are a victom of their preditory lending practices, well they should do the right thing. Also with the stupid "short sale," where as you cannot stay in the property while it sits there without any one taking care of it including the bank. Now tell me, isn't this defeating the purpose? In what world is this a positive thing to anyone, Oh, maybe this is just yet another way for the banks to righ off for more tax breaks. It's pathetic. Hell, Crystyle Ranch, Comcord Calif., hasn't sold any homes in one year. Well it doesn't suprise me, the HOA is assisting in getting the homes foreclosed on, so be careful, I believe there is going to be a class action suit against this horrible HOA, and I'm sure glad.

Matt

We have a situation where we were sent a default notice in aug and said make two payments, we did, then continued to pay on out lake property till December. Found out they somehow considered our new addition cottage that was just painted to be abandoned. Shortening redemeption period down to 30 days. We came back in March to a sold home. We had 40,000 worh of possessions there. Had untilities on, taxes paid etc. Even listed on our mortgage as our second residence. We had no idea any of this took place and sold our property jan 6..We are trying to buy it back through redemption, but they are dragging their feet..Here we were totally screwed over and we have to worry about them and other companies doing this. The company sent in to winterize (safeguard properties) had the only keys,. I had some tools stolen, a knife and a pellet gun. Shouldnt these companies keep their hands off people's possessions? They also vandalized the bathroom. Also how could that inspector consider such a place abandoned. They tried to say there was no electric, but we never had a shut off notice and still have power. If you have any comments or suggestions call Matt (616) 406-7881 thanks

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