Should Foreclosure Laws Separate Vacant Properties?
Differences between vacant and occupied properties tend to be striking. The foreclosure law, however, is the same. And that, insiders say, is a huge problem with short- and long-term consequences.
Lack of legislation that would allow lenders and servicers to foreclose on a vacant property and take charge of abandoned homes instead of abiding to laws designed to protect inhabited homes often cause unnecessary increases in REO management costs and sabotage the overall housing recovery.
Foreclosure legislation does not differentiate foreclosures on vacant properties stumbling industry efforts to fight blight in distressed neighborhoods nationwide, especially in the judiciary states where the foreclosure process is longer so delinquent homeowners can avoid loosing their home.
If the owner of a so-called underwater home abandons the property there is no homeowner to protect, thus a lengthy foreclosure process is not useful. In addition, even vacant properties that receive regular field servicing deteriorate over time due to various factors including vandalism.
Robert Klein, founder and chairman of the board of Safeguard Properties and a mortgage market veteran with decades of experience in real estate owned property management, told this publication lenders, servicers and REO managers nationwide are building up efforts to change and improve vacant foreclosure processing legislation at the federal and state level.
Klein says government officials in Colorado, Chicago, Detroit and other areas with high numbers of vacant foreclosures have been exchanging ideas about possible solutions to the problem. During the past few years various private and government entities have been working with Congress to bring about effective regulatory changes.
In Michigan there is a six-month redemption clause on vacant properties in addition to the state foreclosure requirements, “just in case someone will come forward to reclaim the property—which never happens,” he said.
This year the effort to find a solution to the crisis will include “a big push” to separate foreclosure legislation for vacant and non-vacant properties.
For the past four years the issue has been “an important part” of a constructive dialogue between lenders, servicers, federal, state and local government entities discussing best solutions for distressed communities that were more severely affected by the crisis. It has allowed field servicers like Safeguard to cope with REO issues at the community level. Field servicers “are the boots on the ground,” who write the reports, take the property photos and monitor what happens to a property in time when it is vacant, Klein says. It took a few years before the industry concern and calls for regulatory change “really hit home.”
The number of vacant foreclosures is estimated at about 4 million. Recently released U.S. Census Data show nearly 8% of all single-family homes in the country are currently vacant. Overall the percentage of rental and vacant homes is increasing as vacant home rates go up and rental vacancy rates go down.
Vacant foreclosures pressure down housing prices, obliterate neighborhoods and will remain a problem for lenders and servicers in the foreseeable future. So legislation that addresses the issue of the vacant blight properties is one of many solutions needed to further ease the crisis. In Klein’s view unless two basic actions are taken simultaneously, legislation alone cannot work.
One measure is to prevent foreclosures by keeping delinquent homeowners in the homes, encourage that foreclosed families continue to occupy the property.
The other is to properly maintain vacant properties so they do not deteriorate any further, which is likely only if the servicer is given the power to take charge and overcome related challenges. Servicers could deal more efficiently with management problems prior to foreclosure if they have legal power over vacant properties that are not foreclosed.
The most recent foreclosure sales data from the May 2011 RealtyTrac U.S. Foreclosure Market Report show the bank-owned inventory increased for the second straight month despite a 4% decrease in new REO activity in May, indicating “weak demand” that slowed REO sales despite the fact that bank repossessions decreased 29% from May 2010. “Even at a significantly lower level than a year ago,” James Saccacio, RealtyTrac’s chief executive, said the new supply of REOs exceeds the amount being sold each month.
Analysts see the backlog of foreclosed properties as one of the most troubling obstacles in the way of a housing recovery.
After peaking at 38.4 months in November 2007, the number of months it takes to absorb the REO inventory decreased to 15 months in June 2010, then increased again. REO sales subsided as banks hesitate to resell foreclosed properties that may be backed by questionable paperwork so the months of supply of foreclosed homes remains in an upward trend while new foreclosures are expected to increase “keeping the 2011 outlook for housing a murky picture,” wrote Jonathan Dienhart and Ken Lee in a Housing IntelligencePro report.
The solution to the housing crisis is a combination of everything from better management, better communication, and better state and federal level legislation. New legislation could have a positive impact on the management and disposition of vacant properties.
Even if borrowers have not paid their mortgage in one or two years they still are the legal owners of the property, not the servicers. Until the property goes into foreclosure, the borrower and the servicer share asset management responsibilities.
“It’s a Catch-22,” says Klein. On one hand the banks are accused by the whole world that they are not doing what they are supposed to do, “on the other hand their hands are tied.”