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The Poop on Foreclosure

posted by Elizabeth Warren

A couple bought a house at a foreclosure sale, but when they got inside they learned it was full of live animals, dead animals and animal poop.  The buyers are scrambling to get out of the deal, but, at least from the news report, there are no obvious grounds for reversing the deal.

The story is pretty gross, but it highlights something that lots of people don't realize: A homeowner is entitled to stay in possession of the home until after the foreclosure sale.  No one --not the bank or the potential buyers--have any right to enter the house to see if the room arrangement is pleasing, the plumbing is functional or there isn't poop several inches deep on the floor. 

As the subprime market continues its downward trend, think about the poop.

A foreclosure sale isn't like a regular sale, with all the attendant warranties.  The owner can stay in possession and keep the door bolted, for clear policy reasons:  Until the legal process is completed, the homeowner is the owner.  Besides, there would be a huge cost imposed on struggling homeowners if the mortgage company could take the property away without giving the homeowner some kind of day in court. 

But the consequence of the owner-in-possession rule means that mortgage foreclosure sales can bring a LOT less than the market value of the home.  An angry, frustrated judgment-proof homeowner may destroy the property.  Once a homeowner knows the house will be lost, any delays mean that the homeowner can live rent-free for a long time. I was talking with a mortgage lender last week who estimated that by the time the mortgage lender company paid expenses, that it would clear about 15-30% of the actual market value of the property.

Not everyone facing foreclosure is destructive (although some may be).  Not everyone in foreclosure has a weird or ugly home inside (although some may).  But the market analysts have told us that rational pricing and behavior should be all about risk management. A mortgage lender holding a $125,000 mortgage on a $100,000 home may have a lot of leverage against a homeowner who doesn't want to lose the house, but that if thelender has to push all the way to foreclosure, the leverage changes and the risk of write-down could be in the 80-90% range. 

In past housing downturns, homeowners and their lenders often came to the table to negotiate.  But as Gretchen Morgenson reported two weeks ago, the new asset securitization pools often mean fractional ownership and pooling arrangements that leave no one with authority or incentives to negotiate a deal that is better for the lender--and for the homeowner.

Foreclosure is in no one's interest.  But this market seems to be stepping deeper and deeper in poop. (PS  Thanks to Colin Marks at St. Mary's for the poop story.)

Comments

If you are interested in this bank-owned property market in California, I have just published a California Home Foreclosure Market Statistics Report at http://realestateandhomes.blogspot.com/2007/09/increasing-number-of-foreclosure.html, that details the availability of foreclosure/distressed properties, home price movements, and housing inventory statistics by the different areas of California. For those who are interested to seek out these properties, this should give you some hints of where to find these properties.

- Henry
http://www.movoto.com

They paid 2.6 million dollars for the house without taking a look inside? For that error in judgement, it seems like the buyer could pay a couple hundred dollars more, or even a couple of thousand dollars more, to have the whole place steam cleaned and sterilized, and get on with life. (I believe there are whole companies out there that specialize in cleaning up particularly gruesome domestic scenes.)

Nice point on the actual cost of pursuing the foreclosure remedy to the end. There was a piece on Countrywide in the NY Times a few weeks ago that noted how that mortgage company is sometimes reluctant to do a workout with the borrower, despite the economics of foreclosure, because doing so might trigger repo obligations in the securitization instrument. Wonder how widespread that phenomenom is. There was also a piece some months back about what was going on in Cleveland, where the city was frustrated that it could not locate the actual owners of properties post-foreclosure, because the identity of lenders who bought in at the foreclosure was so opaque. The city found itself with properties being vandalized, trashed, and overgrown with weeds, and unable to find the responsible party even to fine.

We live in interesting times.

Here in Dayton, Ohio we have one of the largest foreclosure counts in the Nation and most commonly it's the Banks that buy the properties at the Auctions. But it's also the Bank's who're not transferring the Deeds into their names so they won't be held liable for the general upkeep on the properties they've taken. This has led to the Local Govt. starting a "Shaming" tactic. Which is posting the properties with a paper telling just what is going on and trying to get the Banks to do their neighborly part in keeping up the properties. They charge outrageous fee's to get a mortgage, make ridiculous demands on people who're just unable, because of areawide economic distress (not their fault) to do anything else just to have a roof over their heads and when it comes time for them to pony up and "Do The Right Thing"... what do they do? They enjoy record profits on Wall Street and hide behind record CEO pay. Personally, I'm for bring back out the Guillotines.

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