Bank Walk Aways

The phenomenon of jungle mail or "strategic default" has become well known enough over the past few years. There's a lesser known phenomenon, though, known as bank walk aways. With a bank walk away, the lender will fail to pursue a foreclosure on a defaulted loan in order to avoid assuming the liabilities associated with the property. This practice takes various forms, including:

•  homeowner defaults, but lender never pursues foreclosure (typically very low value property in Detroit or Cleveland, and the costs of the foreclosure exceed the property value)

• homeowner defaults, lender commences foreclosure, gets judgement, but doesn't record the deed. Homeowner has moved out, but is still on the hook for the tax bill and possibly any torts associated with the property. 

• Homeowner discharges the debt in a bankruptcy. The lien is still valid, however and enforceable based on the default. The homeowner has moved out, but the lender doesn't foreclose and insists that the homeowner is on the hook for taxes and (force-placed) insurance. (I'm not quite sure how the homeowner could be on the hook to the lender for these expense post-discharge, as there's no contract any more, but tax liability here remains with the record owner of the property. 

I know there've been a few judicial decisions on these cases, a little reporting (here and here and here, e.g.) and the GAO has done a report on the topic. An email from a Credit Slips reader got me wondering if the ex-homeowners have any way of addressing this problem. I'm curious what strategies attorneys have adopted for dealing with these issues.  Is there any way to force the lender to take title? A bankruptcy court order? Filing a quit claim deed? How about initiating a quiet title action? If the lender doesn't claim title, then it's your, no? And if the lender shows up, then ask for an order directing the lender to record the deed. 

 

Comments

[David Fuller]

There was a recent decision out of the N.D.Cal that is both brief and unpublished in the BR that addresses this. In re Heck, 2011 WL 133015 (Bankr. N.D.Cal. 2011).

Post-petition HOA dues are the real issue for my clients stuck with a bank that won't foreclose. I've got a client who has close to $4,800 in post-petition HOA dues. He got his discharge over a year ago and moved out over 18 months ago. Some fresh start.

[William A. Roper, Jr.]

While I do not have any recent information directly responsive to Adam's query about recent cases or approaches, it has been my impression that there was a similar problem with bank walk aways in several major urban cities where neighborhoods had been significantly damaged by riots in the 1960s.

In the interval since and up until the recent foreclosure crisis, I believe that most bank walk aways were associated with the avoidance of environmental clean-up costs where environmental damage and the responsibility for clean-up had created real properties that seemed to have negative values.

Regrettably, this is an anecdotal report and I cannot point to a specific appellate case which would support either assertion. I will try to find some examples.

[David Fuller]

I've noticed two things about bank walkaways in the Seattle area.
1. It happens most frequently with a loan that originated with Countrywide and is now being serviced by BofA.
2. It isn't confined to areas of urban blight, at least not out here. I see it most frequently with condos. Seattle area developers went nuts with condo communities and now the market is flooded. The banks don't want them, because they don't want to pay the COA dues.

[Gerald Wolfe]

I have been recently advising my clients to record a quitclaim deed after filing bankruptcy in order to put the world on notice... does it solve the problem? I don't know... but it is a start.

[Common Sense]

The premise of the post is absurd. A mortgagee is not, repeat not, the owner of the mortgaged property. Therfore, it does not have the same legal responsibily for the property as does the owner. Mr. Levitin's post seems to be but the latest attempt to shift the responsibility for a bad investment from the investor (the homeowner) to the financer (the mortgagee). The mortgagee simply holds a security interest in the property. It has the absolute right to foreclose, or not, on that security interest. If it makes economic sense to do so, then the mortgagee will exercise that option. If not, it will not. Is there any law that requires a mortgagee to foreclose on/take title to a mortgaged property that it's owner/mortgagor has abandoned/debased/failed to pay taxes/failed to insure/failed to pay HOA dues/etc.? If there is such a law, please enlighten us all.

[Transor Z]

@common sense:

I've heard of judges refusing to grant dismissals/allow foreclosure judgments to be vacated post-judgment when lender wants to abandon and not consummate. But the HUD/FHA so-called Deed in Lieu program doesn't seem to have either a stick or a carrot attached.

[Patches]

Common Sense. "Mr. Levitin's post seems to be but the latest attempt to shift the responsibility for a bad investment from the investor (the homeowner) to the financer (the mortgagee)"

Let's apply the "personal responsibility" argument evenly. It may be a bad investment now but it may not have been at the time of purchase. Blame can also be attributed to the loose underwriting standards employed in bulk by investment banks when Clinton took the dog collar off in lame duck session creating the possibility of a bubble which always seems to mysteriously happen when you strip protective regulations. They are a bunch of mongrel dogs! (Adams paper and the oversupply argument is very persuasive)

This is a huge topic for municipalities and States given that our Texas US Senator is now inquiring about legislation that would allow States to file Bankruptcy. (this confounds me in that he claims to be a conservative but is inquiring about legislation which would strip some State Sovereignty) Revenue is down even here in Texas. 28 billion in the hole mostly due to decreased State revenue.

If the Bank walks away like the debtor, the City, County, ISD (usually consolidated in one action in rem, here in Texas anyway) can foreclose on its inherent lien and sell the darn thing at auction for the taxes owed (subject to our Texas 2 year right to redeem).

I haven't seen very much of the particular situation Adam refers to, it does pop up from time to time. A stern letter to the county, ISD etc.. usually does the trick(Discharge is a discharge and States and Municipalities can violate it). If HOAs are the problem let them fight the municipality for it. They may have remedies in rem also.

[Adam Levitin]

Common Sense is missing the point with this post. Of course the right to foreclose is exercised at the secured creditor's option. If the secured creditor wants to forbear on a default, that's no one else's business. But when a secured creditor forecloses on a property and then doesn't record the deed or when a secured creditor insists that a homeowner has no occupancy rights, but is still on the hook for taxes and force-placed insurance, that's another matter.

So perhaps the point is that it is necessary to distinguish between different walkaway situations.

Also, note that in title theory states, the mortgagee IS the owner of the property. Read the Ibanez opinion for a pretty clear explanation of how this works.

[Steven Weiss]

There was an opinion by Judge Boroff in Massachusetts earlier this year, In re cormier, in which a Chapter 13 debtor sought to compel the surrender of a house the mortgagee. Judge Boroff wrote a fairly extensive opinion in which he held that the mortgagee could not be compelled to accept the property (and the responsibility for it).

[Katie Buitrago]

Adam, thanks for your attention to the issue of bank walkaways. The Chicago Tribune story you linked to was based on a report that my organization, Woodstock Institute, released last week. I thought I'd share a few of our findings in the hopes that they shed some light on the discussion...Our analysis is based on data the City collects on vacant properties as well as data on foreclosure filings and auctions and title transfers.

Our report identified 1,896 homes that we refer to as "red flag" properties, where a foreclosure has been filed but has reached no clear resolution (such as an auction or short sale). Over 40 percent of these red flag homes have been in the foreclosure process for more than a year and a half, which raises suspicions that the servicer has walked away. These red flag properties are 11 times more concentrated in African-American communities than they are in white communities. Our analysis is only able to capture these potential walkaways where a foreclosure has been filed. However, as noted in the GAO report, servicers often walkaway from a property before they even file a foreclosure, so we believe our numbers are likely quite conservative.

Like all vacant homes, these have a negative impact on surrounding communities in the form of lowered property values, blight, and attracting crime. The City can try to mitigate these effects through its vacant buildings ordinance, which requires maintenance, registration, and payment of fees. However, the failure of the servicer to complete the foreclosure process adds another complication: with the homeowner long gone but technically still on the hook for the property (and possibly unaware that they are since they received a frightening note from the Sheriff), the City has real difficulties tracking down a responsible party to maintain these homes and may not even realize the home is vacant since the foreclosure sale never happens and it’s likely that no one is registering it on the City’s vacant properties index.

Servicers have a right to charge off debts, sure. But as the stewards of these properties throughout the foreclosure process, servicers also should be accountable for the impact decisions they make (such as walking away) have on communities. The Chicago City Council has a proposed ordinance before it that would allow the City to hold any entity with an interest in the property accountable for its maintenance if it becomes vacant. This would increase servicer accountability and better empower the City to address the problems associated with walkaways. Such increased accountability for the outcomes of properties under their stewardship might change the way servicers approach decisions they make prior to foreclosure and increase the likelihood of loan modifications or other policies that keeping properties occupied.

You can read the full report here: http://bit.ly/eq1DXD

And more on the proposed change to the vacant property ordinance: http://bit.ly/ePpwGM

[mt]

In the first line, I think you mean "jingle" mail, as opposed to "jungle" mail.