A Faster Foreclosure Option for Vacant, Abandoned Properties
Ohio law has been amended to allow for speedier foreclosures of so-called zombie properties, and Forefront asks Cleveland Fed community development experts if the new option will benefit neighborhoods.
An amendment to Ohio law that took effect September 28, 2016, establishes as an option the fast-tracking of foreclosures of vacant and abandoned properties, something the Cleveland Fed identified as 1 of 5 policy considerations for improving Ohio’s housing markets in a 2013 white paper.
The success of the new fast-track option depends on how it’s implemented, say Federal Reserve Bank of Cleveland community development experts.
“The concept is good, the theory is good,” says Paul Kaboth, vice president of the Bank’s Community Development Department. “But if it’s implemented poorly, then the results will be poor. There are parts of this change in Ohio law that depend on the local county, and if the local county or the local foreclosure folks ignore this, then foreclosures of vacant properties won’t speed up.”
It’s possible, too, that financial institutions won’t seek the fast-track option for low-value vacant properties because once foreclosed, the properties become the institutions’ responsibility, Kaboth notes.
The amendment includes changes that some neighborhood housing advocates oppose, says Mary Helen Petrus, a Cleveland Fed assistant vice president. One such change is that if a foreclosure goes to sale now, it can be sold for as little as $1. Previously, a minimum bid of two-thirds of the property’s appraised value was required. Low prices could create situations in which unscrupulous property owners scoop up properties and don’t take care of them.
The recent amendment also stipulates creation of a public sheriff’s sale website to allow the online sale of properties, explains Kyle Fee, a Cleveland Fed regional community development advisor. As with the other changes, how the online sales are executed is paramount, Kaboth says, stressing the need for them to be fair, fast, and secure.
“On one level, we’re looking to see that the law does what its intent is, to speed foreclosures of vacant property,” Kaboth adds. “Then, we need to identify unintended consequences from the implementation of the law.”
Conceptually, the amendment should benefit housing markets in Ohio, 1 of 4 states served by the Cleveland Fed, Kaboth says. “Speeding foreclosures lowers the vacant, abandoned property cost to communities and financial institutions,” he explains. “Police win. City and county departments that no longer have to do the maintenance win. Immediate neighbors win.”
Fast-tracking the foreclosures of vacant properties stands to save financial institutions some of the cost of securing and winterizing properties and repairing or otherwise renovating them in order to sell them, says Mike Adelman, president and chief executive officer of the Ohio Bankers League. There’s a cost, too, to holding a mortgage for which no one is paying.
Cleveland Fed researchers reported in 2014 that fast-track foreclosures for vacant properties could eliminate tens of millions of dollars of annual deadweight losses in Ohio and Pennsylvania.
Across Cuyahoga County, the number of vacant 1- to 3-family homes has decreased during the past 6 years from a high of nearly 25,000 to 15,000, according to a March 2016 report by the Western Reserve Land Conservancy titled “Is the Cuyahoga County Foreclosure Crisis Over? A Report on Housing Trends in Cuyahoga County.”
Also down is the number of blighted 1- to 3-family homes requiring demolition, but 70 percent of them are concentrated in only 2 locations: the east side of the City of Cleveland and the suburb of East Cleveland.
Those who drew up the fast-track legislation wanted to protect consumers’ due process, says Todd Book, director of policy and government affairs at the Ohio State Bar Association, which worked to conceive the amendment at legislators’ request. The amendment initially was House Bill 463, but passed as part of House Bill 390.
“A hearing [to determine if property is vacant and abandoned] is required, and if there’s any kind of statement from a defendant [homeowner] at all, the ability to pursue the expedited process is gone,” Book explains. “You can’t do it.”
For their part, lawyers representing creditors such as banks see the amendment as giving them another tool during the foreclosure process, Book adds.
Sum and substance: Cleveland Fed community development experts and others see the potential for positive outcomes of a new foreclosure fast-track option for vacant properties, but how the new tool is implemented remains to be seen.
The Cleveland Fed’s Community Stabilization Index offers a measure of local housing market conditions at the zip code level within MSAs served by the Bank.
The Federal Reserve Bank of Cleveland will examine the changing dynamics in some urban areas in a report called Neighborhood Change in the Fourth District set to publish in early 2017.
Also early next year, Forefront explores why Ohio is one of 18 states plus Washington DC receiving Treasury funds for housing issues, how local officials decide what homes are demolished, and what possibly comes next.