Vacant, foreclosed properties cost creditors tends of millions of dollars, draw crime to neighborhoods, and drain municipalities. Can a fast-track process earn approval-and can it help?
Many familiar with the foreclosure process have argued for some time that there’s a need for speed — particularly when what’s foreclosed on is vacant property that may sap neighbors’ property values and be exploited by criminals.
This April, one fast-track option took another step forward when the Ohio House of Representatives unanimously passed a bill.
It remains to be seen, however, whether Amended Substitute House Bill 223, which authorizes municipal corporations to file for summary foreclosure on vacant and abandoned residential properties, will make it through the Ohio Senate before December 31, the end of the 130th General Assembly. If it does not, legislators would need to reintroduce the bill in 2015 for consideration in both the House and Senate.
Neither the bill nor the Cleveland Fed’s attention to vacant foreclosures — so-called zombie properties — is new.
The initial bill was introduced in June 2013, a month after the Cleveland Fed released a white paper titled “Policy Considerations for Improving Ohio’s Housing Markets,” which suggested implementing a fast-track foreclosure for vacant and abandoned properties.
As Forefront went to press, the bill was pending in the Senate Finance Committee.
In March, Cleveland Fed researchers found that in 2013, the fast-tracking of vacant foreclosures could have saved creditors $24 million to $129 million in Ohio and $24.3 million to $54 million in Pennsylvania. In both states, courts handle foreclosures.
That same month, the issue took center stage during a one-day seminar called “Getting Back in Gear: Better Ways to Move Stalled and Vacant Foreclosures Forward” at the Federal Reserve Bank of Cleveland.
Policy Summit preview by Paul Kaboth
Roughly 125 people, including community leaders, lenders and servicers, and foreclosure attorneys attended, and the Cleveland Fed streamed the conference to an additional 120 people in 11 states and Canada. Speaking at the start of the seminar, Paul Kaboth noted an anomaly in foreclosure numbers.
“The number of homes and loans entering foreclosures is down,” said Kaboth, vice president of community development at the Cleveland Fed. “They’re still elevated, but the numbers have declined. Yet, the time that loans and homes stay in foreclosure has increased.
“We just don’t understand why this is the case,” he continued. “There could be a variety of reasons.”
It could be that loan modifications have not been effective, or have sometimes been introduced into futile situations, he told the crowd. In some such situations, borrowers couldn’t afford the modified mortgage payments, period; in others, they could initially, but later couldn’t because of subsequent shocks, such as job loss.
Also, he asked, where are the bottlenecks in the judicial foreclosure process?
“We ask ourselves these questions, but it’s really hard to get around the answer,” Kaboth added. “And then finally — and really the impetus for today’s session — is: Are there more productive ways that we can address this foreclosure issue and this delay? It’s a problem for everyone.”
Just ask Benjamin Brown with the building department of Warrensville Heights, Ohio, who shared his perspective at the “Getting Back in Gear” event.
“One of the biggest problems we have, and one of the most frustrating problems we have, is the properties that have been charged off on and they’re vacant,” he explained. “So now we have a property that’s sitting dilapidated; we can’t establish contact with the owner; and we just have a property that’s sitting in limbo.”
In one recent case, a vacant condo began developing mold that affected adjoining units, Brown said, so the city had to step in, tear out drywall, and replace the roof.
When it comes to properties in foreclosure, it takes an average of one to two years for mortgage loans to go from delinquency through the foreclosure process in Ohio, according to the Cleveland Fed’s May 2013 white paper.
And this appears a widely accepted truth among creditors, municipal leaders, and researchers: The longer properties sit vacant, the more collateral damage they inflict.
There’s the carrying cost to creditors, which includes ongoing maintenance, code-violation citations, repairs, and taxes for properties that sit in creditors’ real-estate-owned, or REO, portfolios. (That’s industry-speak for foreclosed property owned by institutions.)
Nationally, creditors’ carrying costs are estimated at between $25 and $100 a day, though conversations with loan servicers working in Ohio and Pennsylvania suggest costs closer to $50 to $100 a day, according to the Cleveland Fed’s Tom Fitzpatrick, assistant vice president for credit risk management, and Kyle Fee, economic analyst.
But the costs to creditors don’t tell the whole story; for many, the greatest benefit of fast-tracking vacant foreclosures is what it spares neighborhoods and municipalities.
“We measured the cost to creditors because that’s what we can do,” Fitzpatrick explains. “The cost to communities and municipalities is likely much larger.”
Those costs, which are harder to measure with any specificity, include the drag of foreclosed, empty houses on neighboring property values and the crime introduced by those who capitalize on abandoned properties to steal or to conduct illicit business.
“The societal cost of these zombie properties is enormous,” says Rep. Mike Curtin (D-Columbus), who introduced House Bill 223 with Rep. Cheryl Grossman (R-Grove City).
Even if fast-tracking foreclosures gets the Senate’s blessing and Ohio joins the other states that allow it, Fitzpatrick stresses that the features of whatever process is created are what counts. In some states where fast-tracking already exists, practitioners aren’t actually using it because they don’t find it to be pragmatic.
“It appears if this is done effectively and in a way that gets everybody’s voice heard at the table, there are some real benefits to be gained,” Fitzpatrick says.
Through efforts like the “Getting Back in Gear” event, the Community Development function of the Federal Reserve is working to bring those voices to the collective table, and is positioned to do so through its mission and its relationships with a broad array of stakeholders.