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The Fed Is (Finally) Talking About Toxic Titles

It looks like the problem of banks walking away from distressed properties is finally getting some serious attention. Federal Reserve Board Governor Elizabeth Duke tackled the subject in a recent speech, Housing Wire reports. She detailed a disturbing trend TWI has been following since January 2008: Banks abandoning properties in severely troubled markets even before completing the foreclosure process, leaving the cities stuck with “toxic titles” and trashed vacant homes.

Speaking at the Community Stabilization Symposium in Harbor, Md., Duke said that recent increases in foreclosures have only “exacerbated a pre-existing vacancy problem” in certain cities, according to Housing Wire.

“In the most devastated neighborhoods, some lenders do not even complete the foreclosure process or record the outcome of foreclosure sales because the cost of foreclosing exceeds the value of the property,” Duke said.

These “toxic titles,” she added, have placed a large number of properties in legal limbo. High rates of abandonment pushed many cities such as Flint, Mich. and Cleveland to pursue plans to “right size” by demolishing vacant properties and create land banks, Duke said.

The term “toxic titles” was coined by Kermit Lind, a Cleveland State University law professor who deals with abandoned foreclosure cases all the time. The problem never seemed to get the attention it deserved, probably because housing markets in Cleveland and some other Rust Belt cities are very weak.

As we reported nearly two years ago, here’s how a toxic title results when a bank abandons a property:

The mortgage company retains a lien, or a charge, on the house, but the borrower still is considered the owner. The property sits in limbo, with the mortgage usually exceeding what it would sell for, because of its decline. If the city has to tear it down, it adds its own $8,000 to $10,000 demolition lien. Not surprisingly, potential buyers aren’t exactly lining up. Non-profit neighborhood groups that could fix up the property face long and expensive legal battles to claim it.

But, as Duke points out in her speech, vacant properties are causing problems in stronger markets as well, spreading “into once economically vibrant coastal cities with jobs and growing populations.”

“Vacant properties are creating a different kind of problem in some California markets. Indeed, as investors sense that home prices have bottomed out, they are approaching servicers with cash offers for the bulk purchase of properties,” Duke said. “In fact, community organizations in areas of California complain that investor interest has heated up to the point that qualified first-time homebuyers and local community organizations are being crowded out of the market.”

During this economic crisis, so much of the attention has been focused on executive pay, the Troubled Asset Relief Program, and bank lending — all worthy subjects. But somehow the problems of growing numbers of vacant homes and toxic titles has been mostly overlooked. And that’s a big mistake. As we wrote last spring, decades of work to rebuild and reinvest in communities is being lost to blight caused by foreclosures — or to speculation by real estate investors.

Now that a top Federal Reserve official is making toxic titles a public issue, that may finally change. But Duke is doing more than just highlighting the problem. It appears the Fed is actually doing something about it as well. From Housing Wire:

The Federal Reserve System will provide assistance to neighborhood stabilization efforts. The Community Affairs staff, chaired by Duke, will provide data analysis and technical assistance to state and local governments trying to solve the foreclosure problem in their communities.

Duke said that the Federal Reserve banks of Cleveland, Richmond and Atlanta are collaborating on a series of capacity-building sessions for several communities in Appalachia to help them leverage federal Neighborhood Stabilization funds.

“In addition, we are studying the Neighborhood Stabilization Program and interviewing some 50 program grantees nationwide to learn about the early successes and challenges to this effort to restore health to communities with high foreclosure rates,” Duke said.

The Fed’s actions to address the fallout from the foreclosure crisis is a great example for the rest of the government to follow. Lawmakers long ago should have tied some strings to taxpayer bailout money that would have required banks to take responsibility for their foreclosed properties, not just walk away from them. It should have been a bigger scandal that banks took TARP money and stuck already hard-hit cities with trashed and vacant properties. Good for Duke for speaking up. Now it’s time for Congress to follow suit.

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