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AIG Isn’t the Only Scandal When It Comes to Banks

I’ve been meaning to talk about this all week, but that pesky little AIG debacle served as quite a distraction. Anyway, as TWI has reported, there are other scandals concerning bank behavior that also are worth examining. And one of the biggest is the way banks handle their foreclosed and vacant properties.

Just to review, here’s the situation: Banks are sitting on hundreds of thousands of vacant and vandalized properties scarring neighborhoods around the country — houses the banks foreclosed on, but didn’t sell at sheriff’s auctions or foreclosure sales. Those properties are known as REOs, or real estate owned homes.

Usually, banks unload those properties as quickly as they can, taking their losses and to avoid being in the property management business. But these are not normal times. Some 1.5 million REOs are expected to come down the pike this year. And to make things worse, as RealtyTrac vice president Rick Sharga pointed out, banks are sitting on some 700,00 properties that they’ve foreclosed on – but haven’t even yet listed as REOs.

Why would they do this? As TWI explained, some banks are sitting on distressed properties as they wait to see what the government’s next move might be, and what kind of deal they might get for their foreclosed houses. Some are hoping for a “bad bank” to come along and buy up all their toxic mortgage assets. Others don’t want to record losses yet on their foreclosures by listing them as REOs, because, as one economist told me, “they want to keep the paper active,” possibility to borrow against it for more TARP bailout money.

The reason all this matters is that vacant homes go south quickly – stripped, vandalized, and turned into a neighborhood eyesore or a den for drug dealers. The houses drag down property values for everyone else, and further tax cities and states burdened with cleaning them up. And there are so many that they’ve overwhelmed the resources of local community development groups.

The government has kicked in $4 billion to fix up and sell foreclosed homes, with $2 billion in additional money coming soon from stimulus funds. But it’s barely enough to address the problems in just Chicago alone, so imagine small the impact will be nationwide.

If you’re looking for a scandal, here it is. Some banks hire property managers to care for these houses, but many don’t. So: Banks taking government bailout money sit on distressed and deteriorated homes in already hard-hit neighborhoods — making the foreclosure crisis even worse. And the government so far has failed to attach any conditions on banks that receiving bailout money that would require them to clean up their neglected REO inventories.

In cities like Cleveland, the REOs have become a bigger problem than new foreclosures themselves. In other cities, decades of hard work to draw investment and development to once-marginal neighborhoods is being undermined by so many bank-owned vacancies.

No doubt $165 million in bonuses to a failed company merit public outrage. But there’s another side entirely to the foreclosure crisis, one that hasn’t sparked the derision it surely deserves, because it’s localized, and mostly unseen in communities that aren’t suffering as much.

But it’s growing, right along with the anger of the people who live in neighborhoods devastated by abandoned REOs. And when it finally gets too severe to ignore, expect the same response of surprise and shock that accompanied the AIG disclosures. That’s how those in power justify failing to act in the face of problems they should have recognized, long before they became a crisis.

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