When you drive through a distressed neighborhood and see blocks upon blocks of boarded-up houses, you might think that some lender is desperately trying to get those properties off its hands. Some of those homes, however, might not even be on the lender’s radar: they’re sitting in a sort of legal limbo where the lender refuses to complete the foreclosure and the homeowner is long gone. Woodstock Institute is releasing a report later this week that examines what happens when a loan servicer decides that it’s not worth it to pursue foreclosure and the property sits vacant, a phenomenon known as a “lender walkaway.”
When a loan becomes seriously delinquent, the loan servicer may conduct an analysis to see whether it would be more beneficial to proceed with a foreclosure or not. Why wouldn’t a servicer want to complete a foreclosure? One reason could be that the home has a very low value and the costs associated with pursuing the foreclosure and maintaining the home until it can be sold to a new owner may be more than the proceeds a servicer might get from selling the property. In that case, a servicer can decide to “charge off” the loan, or decide not to pursue the debt and take it as a loss. A servicer may make the decision to take the loss before or after filing for foreclosure.
If you’re a homeowner who’s had a foreclosure filed on your house, you might like the sound of your lender walking away and leaving you in peace, but it’s not that simple. Lender walkaways often happen when a property becomes vacant after a servicer initiates a foreclosure but elects not to complete the process of bringing it to foreclosure auction. The homeowner still technically owns the home, but may not be aware that he is still the owner and responsible for maintaining the property and paying taxes. There is no law that requires a servicer to complete a foreclosure after starting it. It makes a difference when a servicer decides to stop pursuing foreclosure—a GAO report found that 48 percent of homes become vacant when a servicer walks away after filing foreclosure, compared to only 30 percent of homes when the servicer walks away before filing foreclosure. A homeowner might think that a notice of foreclosure filing means that he must vacate the property as quickly as possible, and the servicer may be more inclined to walk away as the property deteriorates and the home value drops.
Lender walkaways carry many of the same dangers as other vacant and foreclosed properties, such as lowering the values of nearby properties, attracting criminal activity, and causing blight. There’s an extra twist with walkaways, however. Since the foreclosure sale never happens and the homeowner is still the owner on paper, it often takes longer for municipalities to realize that the property has become vacant. In the time it takes for municipalities to learn of the vacancy and start maintaining the property, the property has the opportunity to become even more blighted and difficult to rehabilitate. This means that communities are exposed to the negative effects of a vacant home for a longer period of time and that municipalities must bear greater costs to maintain a more severely blighted property, as well as try to track down the owner and others with an interest in the property so they can be held accountable for its maintenance, taxes, and fees.
How big is the problem of lender walkaways? Where are they and whom do they impact the most? What can be done to address the problem? Check back later this week after we release our report to find out! You can be the first to find out by signing up for our mailing list or following us on Facebook or Twitter.