Sunday, January 13, 2013

The Zombie Apocalypse is Here

I ran into this article the other day about 'zombie foreclosures'.

Absolutely sickening.

Consistent readers will note that I have had a long term interest in the housing market and the attendant foreclosure crisis. Part of the reason for my concern was situations just like this.

I'll be blunt; the banks in this nations have been getting a legal pass for years in foreclosures, basically because the debtors never fight back. Statistically only a small percentage ever file a response, and it is not the court's job to protect your rights; its your job the spell out those rights and ask the court to enforce them.

Since the debtors rarely have done that, lenders and their attorneys have become increasingly lax about addressing those rights in their own pleadings and official paperwork.

Ever heard of Robo-Signing? Basically, in order to file suit you need an affidavit- a sworn statement- of the facts, and that statement requires the signer to state that they have 'personal knowledge' of the facts they have just sworn to.

Guess what? In some (maybe a majority, and maybe a VAST majority of the)  cases they did not. These sworn affidavits would be signed without  review of the file or any knowledge, much less personal knowledge, of the facts.

Another issue was banks foreclosing on mortgages they didn't legal own. In order to have the power to foreclose a lender either has to have a mortgage of record or a valid assignment of that mortgage of record in the county where the property is located, and usually the county where the foreclosure is taking place.

This was a requirement the courts have only recently- since 2010 or so- been enforcing, by requiring the lender to file a copy of the assignment with the foreclosure complaint. But for years banks were able to process a foreclosure through the Sheriff's sale and taking possession without ever legal proving they had the authority to do so.

So we have been through the robots and now we are on to zombies. One more way for the banks to steal by using the court system.

And why are the banks behaving like this? Well, I can think of multiple reasons.
  1. The Cities and Counties are making the banks maintain the homes they have title to;
  2. The housing market is still collapsing, and the banks know it;
  3. The debt they are owed is well above the value of the property;
  4. The costs of maintaining and selling the property cut into what little profit there is in the property;
  5. The legal risks of owning the property outweigh the benefit of having title;
  6. The legal fees are lower, because they have cut out approximately 40% of the process;
  7. The judgment can be held over a creditors head for years, guaranteeing the creditor or collector will receive some payment.
Cities and Counties. I have some experience in two of the cites named in the article, both in Ohio. In these areas- especially Cleveland/Cuyahoga County- the government is cracking down hard on bank owned property. Some communities are requiring owners to maintain the property in a livable condition, meaning working plumbing and electrical, intact windows and doors and a good coat of paint.

The problem is these communities are incredibly depressed. Property values are basically the based on the amount of copper in the standing structure. Homes are selling for less than $10,000 on a consistent basis. Yet, as soon as the local thieves break down your door and steal all of the wiring and copper plumbing, the owner is required to make repairs. For the second, third or fourth time.

Although conceived as a plan to keep the community livable and to make sure the banks didn't become owners of vast swaths of decaying property, the banks quickly developed a work around. Knowing they held a $40,000 mortgage and a $45,000 judgment, the property would sell for less than $20,000, of which they would realize, after taxes, real estate commissions, transfer costs and the cost of the foreclosure action itself, maybe $10,000. Better to sell the judgement to a third-party collector than actually take the collateral for the debt. This instantly solves items 1, 3, 4, 5 and 6.

It contributes to item 2, but what do the banks care? Housing will depreciate whether they take title or not. Item 7 is the leverage the banks have when they sell the judgment. In most states this judgment will last 10-15 years, and be a lien on any property the debtor owns. They are unable to buy another home; the judgment would have priority the new mortgage, so the banks won't lend, and if they can scrape up enough cash for a home, the judgment can be enforced against the new house. The debt collector will get his money in better than 60% of the cases.

Not that I am against debtor's paying their debts or banks making a profit or taking advantage of a legal procedure. But a long standing process for the repayment of a bad mortgage has been established. It's the reason the property was pledged as collateral for the loan.

But the process of failing to complete the sale of the property is criminal. After all, no law requires these banks to purchase the property at sale. Let the property go to sale, accept the proceeds of the sale to a third party against your judgment and then file for a deficiency judgment for the balance, which they can then sell to the third-party collector.

Then it becomes a better situation all the way around. The debtor no longer has possession of the property; the bank has their mortgage satisfied; the property has a new owner who will start caring for it immediately, which helps the community, and the bank has no liability to assume or portfolio of real estate to manage.

There is probably a very good reason that banks have decided on their current course of action instead of the one I propose.

But I'll be honest; I can't see what it would be.

But maybe because I'm not a bean counter at some Lender or another.

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