Editor's Note: This article is part two of three. Part one is available here. Part two was originally featured in the August issue of DS News, available now.
When Lewis Lapham wrote, “The state of perpetual emptiness is, of course, very good for business,” he wasn’t referring to the U.S. foreclosure system. The massive void of thousands of distressed and abandoned homes affects so many people and infects so many communities across the country. The problem can be as harsh on the eyes as it is hard to untangle; complexity begets confusion while despair moves into that place where the heart once resided.
“The foreclosure process has its problems, from taking much too long to having complicated and conflicting national and local guidelines to significant exposure of risk and loss,” said Steve Salimbas, CEO of Agios World Wide, Inc. “Sadly, many people who have defaulted [on their mortgages] don’t know what options really exist.”
The side effects of this mortgage morass can range from disgusting and disturbing to outright dangerous. In Fairfax County, Virginia, traditionally one of the richest counties in the country, police discovered blood inside a vacant house. The Washington Post reported that an injured sexual assault suspect had been hiding there before he stole a car and fled.
“There’s no one there for accountability,” a police lieutenant told the newspaper about the wave of abandoned homes that hit Northern Virginia communities during the foreclosure crisis.
The City of Atlanta had one of the few police departments that formed a special vacant home burglary team during the housing downturn. CNN reported that the estimated damage in one house was between $15,000 and $20,000 for a theft of only about $40 worth of copper.
“They took the stove, the refrigerator, the cabinets, everything, including the kitchen sink!” a contractor told the news organization.
In 2016, a woman in Fort Walton Beach, Florida, consumed around 56,000 gallons of water from a foreclosed home in which she was squatting. Charged with theft of utilities, the suspect told deputies she knew the house was under foreclosure and that the lock on the water meter had been broken, according to the Northwest Florida Daily News.
The loss of a home, a resident’s sanctuary and a big part of their identity, is already such a major burden to bear. It goes beyond economic and social to the psychological, beyond the convenient coinage of Wall Street to Main Street. One most consider that the ill effects of the foreclosure crisis and its persisting problems, like those mentioned above, are not only cumulative but also self-exacerbating. The size, intensity, and complexity of the problem require major public and private reform, as well as strong focus and effort from cities to communities to the consumer.
Care Down, Costs Up
In the January 2017 white paper, “Understanding the True Costs of Abandoned Properties: How Maintenance Can Make a Difference,” Aaron Klein, the former Deputy Assistant Secretary for Economic Policy at the U.S. Treasury, tackled crime, property values, and city resources as the three main areas adversely affected by foreclosures and abandoned (or otherwise vacant) properties.
According to Klein, quite simply, a foreclosed home will be a depreciated one, which then detracts from the community and its housing comparables. This, in turn, leads to decreased value for nearby residents and depleted tax bases for municipalities—as Klein puts it, “a cascading cycle of value destruction.”
Tapping an array of economic data and academic analysis, his study, which was commissioned by Community Blight Solutions, found that the typical foreclosed home costs more than $170,000— approximately half of which is directly associated with property vacancy and condition.
The correlation between housing vacancy and crime unsurprisingly increases the longer a property stays vacant, likely plateauing between 12 and 18 months. The white paper also found that vacant residences account for one out of every 14 residential building fires in America.
To isolate the impact of foreclosure and abandonment versus just foreclosure, Klein cited research conducted by the Federal Reserve Bank of Cleveland (FRBC). Of 9,000-plus single-family homes in Columbus, Ohio, slightly more than 6,000 had been foreclosed on, while 4,152 were vacant/abandoned. Foreclosure and abandonment are multiple layers of loss that radiate out to other residents and the corresponding municipality. The FRBC study discovered that more than half of the total cost of a foreclosure’s impact on neighboring properties is due to the property being abandoned.
The white paper ultimately concludes that a vacant property triggers losses and additional costs of approximately $150,000 in its first year: $133,000 from reduced property value for neighbors, $14,000 in increased crime, and $1,500 in added expenses for the police and fire departments.
“These costs last over time,” Klein wrote. “For every additional year the property sits vacant, the crime and police costs add up. Even after the property is sold, neighbors will lose at least $25,000 for two years and quite possibly longer.”
It’s the laborious foreclosure act and system that bring about the home vacancy. Properties in Q3 2016 took an average of 625 days for foreclosure completion, according to the National Association of Realtors—but it’s the latter state of the property that drives the majority of the losses, including the increased likelihood of crime.
Wrong Kind of Open House
Time is money, but it is also exposure. Investors speak of exposure in terms of the amount of money that can be lost. The often- lengthy timeframe of a foreclosure process becomes problematic because it exposes a community to blight and destabilization. An abandoned home is susceptible to weather and fire damage, crime, degradation from lack of maintenance, and much more.
“As each property becomes vacant, it becomes an attractive nuisance that draws the attention of less-than-desirable elements,” Salimbas said. “This double-edged sword not only drags down nearby property values, it also reduces comparable values that are used for determining the REO list price, which reduces the net recoverable during disposition of the foreclosure even further.”
An abandoned and often-abused house acts as a value vacuum, hurting not only the homeowner but also the surrounding neighbors and the mortgage actors with a stake in the foreclosure process.
“Additionally, the asset is a financial drain,” Salimbas said. “As a nonperforming asset, it is not generating revenue during the nearly two-year-long foreclosure cycle.”
Seeing, in this case, is not believing—not believing that anyone cares about the property or that there will be repercussions for abusing it. Blight starts the second a casual observer can identify that a property is vacant with poor lawn maintenance or the more obvious eye sores such as boarded-up windows, according to the Agios CEO.
“When a vacant property is hard to identify when someone cannot hide behind a barrier and is exposed to all who pass by, it mitigates those negative elements,” Salimbas said. “Overgrown lawns attract rodents and eventually snakes. Boarded-up properties attract squatters, drug dealers, and vandals, who strip the copper piping and wires from the house. Occupants from neighboring properties know that criminal elements can quickly identify those properties and that those properties will get damaged and pose a risk to their health and safety as well.”
Neighbors in Need
Knowing is half the battle before and during a foreclosure, but it can be hard to keep one’s head in the high-stress fog of bank notices and deadlines, combined with the borrower’s economic, social, and psychological strife. There is relief, but the question is how to find it—or for it to find the borrower.
“A big challenge is targeting foreclosure prevention counseling effectively,” said Nicole Harmon, VP of Foreclosure Prevention Programs at NeighborWorks America, a Washington, D.C.-based organization that supports a network of more than 240 nonprofits with technical assistance, grants, and training for 12,000-plus professionals in affordable housing and community development. “Because of the microclustering of foreclosure, nonprofits have a tough time getting the word out to the homeowners who need it the most.”
Harmon explains that housing markets go beyond local; hyperlocal is probably the better word when it comes to foreclosures. Within different MSAs and Census tracts, NeighborWorks America will see areas where home values have recovered, but also “micro-pockets” where recovery is painfully slow. Job growth may be up in the overall MSA, but that certainly doesn’t mean all neighborhoods are experiencing the boost.
“That makes it difficult for homeowners who were in trouble to get out of trouble,” Harmon added. “Our grantees report that [the market uncertainty] has continued as servicers deprioritize loss mitigation again, and the sales of non-performing loans have restored some hardline positions among new loan owners, i.e., commercial investors. The unpredictability of the foreclosure process has been an evergreen complaint.”
According to Klein’s paper, however, policies focused on loss mitigation have failed to adequately alleviate the harmful impact of abandoned properties and thus the vicious cycle of depressed property values and subsequent foreclosures.
Regulations and Restraints
Increased regulations and court requirements certainly add to the lengthy foreclosure timeline, but it’s not just the system slowing things down, according to Diane Bowser, EVP of Special Servicing at Selene Finance.
“Borrowers and their attorneys have become incredibly savvy when it comes to slowing, stalling, and even re-starting the process,” she said. “Despite our efforts to streamline the process and ensure necessary records are in place and accurate, we cannot do anything about the litigious opposing counsels that represent borrowers in foreclosure.”
Bowser points to Florida as having had the highest number of contested assets in the country.
“Some of these opposing counsels are paid a monthly fee to simply delay foreclosure actions—and it works,” she added. “These attorneys file pleading after pleading, for as long as they can, to delay a foreclosure that is, most of the time, inevitable.”
In New York, a servicer can get bogged down by the additional steps needed to complete a foreclosure, and then experience further delays when courts grant borrower motions for the reschedule of foreclosure hearings and sales. If there was any doubt, “screeching halt” are the words the Selene Finance executive used.
The Houston-based mortgage company, a leading servicer of nonperforming loans, routinely receives transferred portfolios with loans at various stages of the foreclosure process. As the servicer of record, it must validate each aspect of every affidavit and provide screen prints and documents supporting the review. Reviews can lead to required revisions of language and numbers, which, of course, mean more time and manual work. Inaccurate or insufficient records from prior servicers can have the process stuck in the mortgage mud from square one.
“It’s no surprise that this is an incredibly time-consuming process, and in some states, we have multiple affidavits that are required,” Bowser said. “Unfortunately, if we are not able to validate that the prior servicer took all required steps before and through foreclosure or that their documentation is inaccurate, it could lead to us having to start the entire process over.”
The Word Is Big
The housing downturn and resulting wave of foreclosures were huge. Klein reported that more than $2 trillion in property value evaporated as a result of approximately 13 million foreclosures. Big problems were fueled by the biggest industry actors, according to Rep. Jonathan Dever (R-Ohio).
“How do we deal with this gigantic mass that we’ve been handed?” Dever asked. “Largely, it’s been a failing, quite frankly, of our largest institutions and our federal government with the policy they created that lent itself to that [mortgage] balloon and that pop. We’re still trying to deal with the aftermath of it.”
Dever, an attorney who has worked on both sides of foreclosure cases in the Buckeye State, knew it would take considerable effort to right the wrongs. His fast-track foreclosure legislation that became law in 2016 began as a working group of various lenders, property remediation professionals, plaintiff and defense lawyers, and more. Their monthly meetings, which would have between 40 to 60 people in a room “working through the language and thinking about the unintended consequences of a comma,” went on for 18 months before introduction of the bill.
Big problems require big effort. According to Community Blight Solutions, only two fast-track foreclosure laws are on the books nationwide—in Ohio and Maryland—so much work remains. Meanwhile, another big wave looms in the not-too-distant mortgage future.
“Demographics are merciless,” said Kevin Hildebeidel, a lead attorney at Stern & Eisenberg, P.C., who noted that the number of people over 65 should double and over 85 should triple in the next 20 to 30 years. “The question remains to be seen: will millennials muster enough purchasing power to actually step up and buy homes from retirees at full market value or will the U.S. face a situation similar to Japan’s ‘Lost Decade’ with continuing declines over a long period of time?”