Live at the Forum: New Federal Reserve Bank of Atlanta Podcast and Online Q&A with Dan Immergluck

Replies to This Discussion

Permalink Reply by Rebecca Cohen on November 3, 2009 at 5:16pm

Some localities have experienced difficulties related to REO property owners' failure to adequately secure and maintain vacant and abandoned homes. Can you describe any policies or programs at the state or local level that either (a) successfully achieve proper maintenance, or (b) empower jurisdictions to recoup costs when the community is forced to provide these services?

Permalink Reply by Dan Immergluck on November 5, 2009 at 12:24pm

The has certainly been a growth and strengthening of vacant property registration ordinances across the country. These ordinances require owners of vacant properties - including lenders in the case of REO properties - to maintain properties up to a certain standard and often pay a vacant property registration fee. Many localities have the ability to secure properties or even demolish properties and than place liens on the property. But the strongest measures are in those states where spot blight laws exist, which allow municipalities to acquire nuisance properties through essentially eminent domain. More common are tax foreclosure laws which allow for tax delinquent properties to be acquired by localities or responsible nonprofit or forprofit developers. The National Vacant Properties Campaign is a key resource for further information on these programs.

Permalink Reply by HousingPolicy.org team on November 5, 2009 at 12:27pm

Click here to visit the National Vacant Properties Campaign website.

Permalink Reply by Emily Salomon on November 5, 2009 at 11:25am

Some practitioners argue that a longer foreclosure process is better, because it gives families time to respond and possibly work out an alternative solution (short sale, modification, etc.) that avoids foreclosure. Others argue that a lengthy foreclosure process can create difficulties for localities seeking to rehabilitate vacant and abandoned properties, possibly inviting crime and other adverse impacts on the community. Can you point to any communities or strategies that seem to strike the right balance?

Permalink Reply by Dan Immergluck on November 5, 2009 at 12:39pm

This is a super question.

Besides the advantage of giving families more time to seek out alternatives to foreclosure, somewhat longer foreclosure times can have the effect of slowing the flow of properties into bank ownership. At the beginning of the national foreclosure crisis in 2007 and 2008, I believe this actually may have beneffitted neighborhoods in places like Miami, where despite a steep increase in foreclosures, the relatiely longer foreclosure process meant that the rise in REO properties was less steep than in places like LasVegas or California, which have shorter preforeclosure periods.

Of course, when foreclosure periods get very long, as they have in some judicial foreclosure states more recently, properties may become vacant well before the foreclosure auction or sheriff's sale occurs, at which point vacany may be even more problematic than vacancy during bank ownership, since the property is vacant but the responsible owner may be gone. (There are differing state laws regarding the ability of lenders to secure property prior to the foreclosure sale.)

There is some literature that suggests that the optimal preforeclosure period (from notice to auction) is somewhere on the order of 120 days, at least in terms of optimizing the potential for the loan to cure or avoid foreclosure. But overall, the social benefits versus costs of longer versus shorter foreclosure periods are likely to depend on whether properties become vacant. There are arguments to reduce foreclosure periods if vacancy has been clearly established, but this can be tricky.

What does seem clear to me is that, in those few states that have long post-sale redemption periods following fairly short preforeclosure periods (Michigan is a good example), it makes sense to shift the post-sale redemption period and convert it to a longer presale period. This should have the added value of increasing the number of third-party bidders at the foreclosure auction, which should be good for borrowers, at least in better economic times.

Permalink Reply by Keith Wardrip on November 5, 2009 at 12:13pm

Dan, I've heard anecdotally that in an effort to reduce the number of properties they own, some banks have been reluctant to go through with the foreclosure process even though the owners have moved out. I've also heard that banks are tempted to keep their REO properties off the market with the hope that prices will rebound and they won't take as significant of a loss as they'd take by selling at such a depressed value. In your experience, is either of these practices widespread? And since both have the potential to increase the number of vacant properties, can you think of policies to prevent these practices?

Permalink Reply by Dan Immergluck on November 5, 2009 at 12:57pm

Another good question.

The first part of your question goes to the notion of lenders "walking away" from properties, especially when they might view the potential costs and liabilities of owning the properties as exceeding the eventual value they may receive from selling them. There has been a good deal of anecdotal evidence of this, especially from the Cleveland area. Given what I have found lately in Atlanta and has been found in Cleveland about the selling of many properties for very low prices, it would certainly seem "rational" for lenders (from their own financial perspective) to avoid taking back properties if they are just going to turn around and sell them for $10,000 or some such small amount. I have not seen any systematic data on the extent of lenders "walking away", but I have no reason to doubt that it is occurring, especially in lower-cost areas.

There has been a great deal in the mortgage trade press and in industry research pieces on the "shadow" REO inventory. This essentially suggests that lenders essentially could be putting many more houses into REO inventory but are not either because: 1) they are trying to work out loan modifications via the Administrations HAMP program or the like; 2) they do not want to increase their REO inventories, so are either withhilding the initiation of foreclosures on defaulted loans or are starting the foreclosure process but not completing it, at least not as quickly as they had tried to before. There is also some talk that lenders are "timing" their REO processes and sales (especially active marketing of properties) to avoid putting lots of properties on the market at the same time and pushing prices lower.

We have largely incomplete data for discerning the extent of these trends, and of course they are likely to vary across servicers, across markets (declining versus more stable), and across property classes (especially lower versus higher value properties).

However, if lenders are slowing the accumulation of their REO inventory in these various ways, it may not be such a bad thing - at least in all cases - and especially if borrowers remain in the houses. Given the very weak demand right now for houses in many of these markets or submarkets, slowing the supply of REO is probably a good thing - again, assuming properties remain occupied while they remain in any such "shadow" REO inventory.

What I have seen in Fulton County, Georgia (the county that Atlanta is in) is that many more sales of REO properties in late 2008 and early 2009 were for very low prices as compared to 2007 and early 2008. This suggests to me that lenders are "dumping" properties they perceive of as low value (many may be quite distressed in terms of their physical condition). These are likely to be disproportionately located in lower-income neighborhoods. Now, to the extent that these properties are no longer bank-owned they generally become ineligible for acquisition via the Neighborhood Stabilization Program. This may mean that local communities will need non-NSP funds to complement their NSP dollars if they are to be able to acquire strategic properties that are no longer bank owned.

Permalink Reply by Robert J Strupp on November 6, 2009 at 11:16am

One problem with starting the foreclosure process and not completing it is that some homeowners move-out at the initial notification, leaving the property prematurely, and perhaps unnecessarily vacant. The "notice of default" can be a very intimidating document. While subject to State law, it is important for homeowners to understand that they do not need move out when they receive the first default or notice of intent to foreclose.

Permalink Reply by Ryan Sherriff on November 5, 2009 at 12:25pm

Dan,

Do you know of any states or localities that have issued general obligation bonds to enhance their ability to acquire and rehab residential REO properties?

Permalink Reply by Dan Immergluck on November 5, 2009 at 3:43pm

Ryan - I don't.

I do think some cities are looking at combining the use of Recovery Bonds (the enhanced 45% subsidy bonds out of ARRA) in some combination with their NSP efforts. I believe I read of the overlap of targeting of NSP efforts and Recovery Zones in LA's NSP 2 proposal, for example. The bonds, presumably would be used for activities that might be aimed at non-housing uses (or at least non private-housing uses.)

Permalink Reply by Sharon Gorrell on November 5, 2009 at 12:46pm

In your podcast you mentioned Chicago a few times. I'm wondering what your opinion might be on HUD and the GSE practice of using the OMB's statistical MSA's as appropriate boundaries to determine loan limits. Especially in Chicago, the statistical area is extremely large with very diverse markets, some properties are falling into foreclosure simply because they are not mortgageable without higher cost paper.

Permalink Reply by Dan Immergluck on November 5, 2009 at 4:02pm

I understand your point. A couple of thoughts.

First, your question presumes that either greater difficulty accessing credit or higher effective interest costs for jumbo loans are dampening demand enough to increase foreclosures. These forces are likely to have some effect on the ability of distressed borrowers to avoid foreclosure, but there are likely other, additional factors that are dampening demand and putting downward pressure on prices of higher-end homes and areas -- and so increasing foreclosures, including employment issues, stock market losses, etc. Certainly, there is some evidence that in some markets at least, higher end homes are faring worse in recent price trends and of course jumbo loans are defaulting at much higher rates lately.

Raising GSE limits right now, in particular, means shifting the balance of who gets access to an subsidized source of credit . This is especially true given the more explicity backing of the agencies by the federal government and the purchasing of agency MBS by the Fed (which is expected to be ending relatively soon of course). Moreover, FHA borrowers, for example, are generally paying for their access to government-backed and enhanced credit via FHA mortgage insurance premiums. GSE borrowers -- at least those without private mortgage insurance - are essentially getting a bit of a free ride in some respects - and not really absorbing any of the risks they pose to the GSEs and the government. So, given that current GSE borrowers are on average more affluent than FHA borrowers, we may already have somewhat of a regressive arrangement going on right now (again not necessarily for all GSE borrowers). I would hate that stituation to be worsened from an equity perspective by increasing the GSE benefits going to higher income borrowers.

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