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.