Friday, May 11, 2007

That Old House... over there, on the corner, with the weedy lawn

I've been trying to organize my thoughts on this foreclosure subject for some time now. Often it seems as if my comments confuse people, and I think that's because I feel so strongly about houses that I trip over my tongue in eager yelping about twenty different aspects of the situation as I see them. So, let's begin with what would seem to be the easy stuff: definitions.

A foreclosure is the repossession (or forced sale) of a property when the mortgagee has breached their contract with the bank by stopping payments on the property. This process often ends in the bank owning the home. Foreclosures are not necessarily boarded, vacant, or run-down, although they sometimes are that as well.

Boarded Property
Houses get boarded up when they are vacant and someone determines them to be "open to trespass." This appears to be done in situations where there has already been theft or squatting in the building, and neighbors may or may not have complained that the house is attracting crime. Owners may also voluntarily board their property, though I'm skeptical about how often it actually happens in this way.

Vacant Property
simply a house that is not being lived in. Many foreclosures are vacant as they await re-sale, but not boarded up.

House that has be repossessed by a bank, ostensibly for a defaulted mortgage. These properties are also commonly referred to as "REOs" which means "real estate owned."

Condemned Property
A building may be condemned when:
  • It is vacant and boarded.
  • It is determined to be unsafe; an inspector cites specific hazards.
  • It is dilapidated; no specific hazards are cited but the inspector has assigned the property a score by ordinance qualifying it for condemnation.
  • Utilities to it have been discontinued.
  • There is a housing hygiene problem (determined by the Housing Inspections Department)
Absentee Landlord
This is a landlord who owns a house or multi-family building but does not live there, instead renting it out completely to others. The absentee landlord may live as close as next door, or as far as another state. Some absentee landlords are great, checking on their properties regularly, maintaining them, and properly screening their tenants. One thing that neighborhoods with high foreclosure rates have in common, however, is a concentration of absentee landlord-owned properties in less-than-well-kempt condition.


Now that we've ironed that all out...

What I find most problematic about these properties is the route they are often forced to take from (perhaps?) absentee-landlordism, to foreclosure, to vacant, to boarded to (in some cases) condemned and perhaps ultimately bulldozed.

There are a few reasons why a house might be foreclosed upon. Perhaps the owners really wanted it, lived there, and simply couldn't make the payments. This is the story we hear most about in the papers and on T.V. We are told that banks are duping poor families with their predatory lending practices, and essentially setting up little old Jim and Sue, (along with their three kids, dog, cat and pet rabbit) to be thrown out onto the streets; dreams destroyed, credit ruined.

I am sure that this does happen. However, I don't think it represents the majority of cases.

As I walk around North Minneapolis, and indeed Phillips on the south side as well, I find a significant amound of REOs (bank owned listings) which were formerly rentals. How do I know? Well, many of them are multi-family, to begin with. Those which are single-family are dilapidated and have dirt yards. I also know because I have lived and worked in these areas for some amount of time, and keep my eye on the housing around me. I can almost predict which houses are going to go vacant, based upon the activity that I see there, and when I know it's rental.

So, this brings me to conclusion #1: foreclosures, at least in the areas that I know best, appear to be affecting absentee landlords more than traditional homeowners.

If this is truly the case, then we have a few more things to talk about. First, all of this crowing at the state legislature over the so-called predatory lending bill means little to me. All it does for my neighbors is make it HARDER for them to realize the dream of homeownership, since more flexible mortgage products are going out the window. Second of all, it raises the question of how so many landlords can afford to just throw away their property, particularly when some of them own several.

Have they made enough money, (perhaps on generous section-8 payments) over the course of their ownership (while ostensibly skimping on repairs and maintenance for the building) that they can simply throw the building away like so much used-up trash?


So then what?

Then we have a vacant, perhaps boarded house, owned by a bank, which sit around.

and sit around...

and sit around...

Why do the banks not market these properties aggressively, in an attempt to pay back some or all of what was initially due to them? Perhaps they have already recouped the cost of the loan over years of interest payments, or perhaps they are a large, secondary-market mortgage holder, and one or two buildings defaulted is an annoyance for them to deal with. Who knows?

I do know that a local realtor told me recently that these homes are, for a bank, an asset on paper, and perhaps thus less of a motivation to unload quickly and efficiently. Interesting idea.

Anyway, back to the house. So it's now vacant and boarded, owned by a bank in no particular hurry to do anything with it.

The grass grows into a prairie in between monthly lawn-service visits.

Pigeons take up residence in a broken attic window.

Graffiti appears on the garage, or perhaps the garden retaining wall.

Beer bottles collect on the boulevard and under shrubbery.

If this continues on too long, the city may condemn the building. They will place it on their Chapter 249 list, and that changes everything for a prospective buyer.

NOW, a person who wants to buy this property must do a number of aggravating things, starting with getting "rehab financing" if they are not able to pay cash for the place. (I'm not sure what rehab financing is, but I do know that I and others like me cannot get it. It's not a conventional loan.) Another thing the prospective buyer must do is show up (with an appointment, don't forget!) downtown and pay $2000.00 to the city as insurance that they will indeed fix the house up. You don't get your money back until the place is completely done and has passed inspection. Further, you must hire licensed and bonded contractors to do almost all the work. (Are you a handyperson? Forget it. You cannot run that wiring or change those outlets yourself.)

Oh, and you can't live in the property until it passes the final inspection.

Now keep in mind that, as noted above, a house can be condemned for something as little as having its utilities discontinued. Nevertheless, if you want that house, you still have to obtain rehab financing and put down the deposit with the city before having the place reinspected and before you can move in.


I have seen condemned houses sit literally for YEARS, because no investor (or potential owner-occupant homeowner) would dare jump into this bureacratic web.

And so, the house sits some more.

The pigeons have now established it as their primary residence.

Neighbors begin to complain that they're sick of the eyesore.

Prostitutes and/or drug users make use of the backyard for their purposes.

Demolition is called for at NRP meetings, and impact statements are drafted.

And it's not the house's fault!

This must be stopped.

I hate it, and it's hurting our neighborhoods. We need to find a way for people to buy these houses, fix whatever is broken, and hopefully LIVE IN THEM.

That is all I have to say... at least until I think of something more, like probably tomorrow. :-)


Margaret said...

On the Willard Homewood email discussion list I saw that someone in WHO was contacted by a reporter working on the N Minneapolis forclosure crisis. The line this reporter was pursuing was that cases of families being thrown out in the street were a minority of the cases. Most of these forclosures were part of multiple holdings by investment property owners. If so, forclosure was just their way of dumping unproductive investments. The reporter was trying to figure out the case of one particular person "Irene Thomas" who apparently has quite a few of these forclosed properties.

I know there was a proposal at the State Legislature for "forclosure aid" to Minneapolis. IMHO this is a terrible idea. If a family can't afford the house they are in, they need to find a more affordable house if they can't refi the one they are in. A property investor needs to lose money on an investment in order to learn not to make the same mistake again. If government bails them out, they will simply learn to look for a handout when there are a lot better and worthy uses for the taxpayer's money.

Scoot said...

In the mortgage industry the term REO does stand for Real Estate Owned, but it is not necessarily owned by a bank.
When you apply for a mortgage and they ask about your assets, if you own a rental property or second home, it is an REO.

Ranty said...

That's a good point, Scoot.

The term "Real Estate Owned" can be misleading, as can its common synonym "corporate owned."