Underwater Homes Abandoned By Banks

It's not just homeowners walking away from underwater homes -- so are banks and their mortgage servicers.

Unfortunately for some neighborhoods, the mortgage servicers are abandoning the homes after many of the homeowners have been booted out and the home has sat vacant for months on end, according to a new study by Chicago's Woodstock Institute, which examined foreclosure filings and vacancies in the Windy City.


Bank walkaways are becoming a problem throughout the nation, with a high concentration occurring in the Midwest and certain distressed areas of Florida, according to a national study.

This is quite a concern because vacant homes have limited or no oversight, and pose a substantial risk to the surrounding community by potentially lowering property values, attracting criminal activity, and causing blight.

When properties have been devalued because of deferred maintenance, vandalism, or general declines in local property values, then servicers may determine that the cost of proceeding with a foreclosure exceeds its expected return. In these cases, a servicer may choose to charge off the mortgage on the property and consider it a loss.

However, because servicers in most cities are not required to notify borrowers and
foreclosure, homeowners are sometimes unaware that they still own the home and are responsible for paying the debt and taxes and maintaining the property.

The institute found 18,320 properties on the Chicago's vacant buildings index as of September 2010. Of these, 12,674, or 69.2 percent, were associated with a foreclosure filed between 2006 and the first half of 2010. And 1,896 of them were classified as red flag properties on the City's vacant buildings index where there was a foreclosure filing with no subsequent outcome. Starting in 2006, distressed communities that were already dealing with vacant and abandoned building issues began to experience dramatic increases in foreclosure activity.

This is not just a Chicago issue, however: About 45,000 charge-offs occurred between January 2008 and March 2010 in the U.S., with the majority occurring in urban areas in rust belt Midwestern states, according to a Fall 2010 report issued by the Government Accountability Office.

The downloadable GAO report found that 60 percent of the charge-offs occurred before an initial foreclosure filing was made, reported the Chicago Tribune. However, for charge-offs after a foreclosure filing, Detroit topped the list with 1,500. Chicago had the second-highest number, followed by Cleveland, at 499 and 497, respectively. While more than 50 perce nt of all the abandoned foreclosures GAO identified were in Michigan, Indiana, and Ohio.

"These troubled vacant homes have subjected already hard-hit communities to unsightly and potentially unsafe conditions for extended periods of time," said Geoff Smith, senior vice president of Woodstock Institute. "Local government and service providers must be empowered to counter the devastating impacts these homes have on communities, and lenders and mortgage servicers must be held accountable if they choose not to adequately maintain vacant properties under their stewardship."

Red-flag foreclosures place a significant burden on any city. It Chicago that burden amounts to an estimated $36 million, which can be $13,000 to nearly $35,000 per property. That's because the city would have administrative costs of dealing with these properties in building court, securing the properties, responding to criminal activity, and potentially demolishing these properties.

The top mortgage servicers and trustees associated with these likely abandoned foreclosures in the City of Chicago include Bank of America (314 properties), Wells Fargo (234), U.S. Bank (185), Deutsche Bank (178), and JP Morgan Chase (165).

More than 40 percent of red flag homes have been in the foreclosure process for more than a year and a half, which means their loan servicers likely have decided not to complete foreclosure. The red flags are disproportionately concentrated in Chicago's African American communities on the South and West sides. Over 71 percent of the red flag homes are located in highly African-American communities, compared to only 6.5 percent in predominantly white communities.

The concentration of red flag vacant properties in communities of color, is even greater than the concentration of typical foreclosure filings or other vacant properties. African-American communities are 11 times more likely to have a red flag home than are white communities, even though they are three times more likely to have a foreclosed property and six times more likely to have a vacant building.