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The FDIC Finally Figures Out that Banks Don’t Play Fair

HousingWire reports that the FDIC sent letters to the banks it regulates, warning them over their handling of properties that they’ve foreclosed on and still own. The FDIC reminded banks of the importance of developing and putting into place policies to handle their bank-owned real estate, known as REOs. If I can translate for a second, the agency basically was telling banks they still have to pay taxes and other bills on the properties they have foreclosed on but cannot sell.

Here’s are more interesting details, from HousingWire:

The letter comes as HW’s sources have suggested that some banks are desperately looking for ways to cut a “rising flood of loss severity” tied to bank-owned real estate. Proof of increasing problems tied to real-estate owned came in a separate report released Tuesday by Fitch Ratings, which noted the increasingly negative effect REO is having on investor returns.

Our sources suggest that some banks are choosing not to pay taxes on certain low-value REO properties in hard-hit neighborhoods, in the hopes that local municipalities will take the property to a tax sale rather than force the lender to carry the property on its books.

Really? How shocking. Maybe HW’s sources and the FDIC should have picked up the phone about six months ago, and talked to Jim Rokakis, the treasurer of Cuyahoga County in Cleveland. He could have told them back in January about how major lenders and servicers have called him, on the record, to let him know they have no intention of paying taxes forever on their foreclosed properties. He could then explain the reality of bank walkaways, which have left Cleveland neighborhoods with the kind of scars that will take decades to overcome. Rokakis could let them know that while irresponsible or greedy borrowers seem to bear much of the blame for the housing crisis, the walkways by banks aren’t getting much attention. And he could talk to them about toxic titles, the burden left behind on cities by banks after they kick out delinquent borrowers but choose not to foreclose on the homes. This is the way we explained walkways by banks in January:

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.

It would be nice if we could all decide we don’t like a car, a house, or something we own, and simply stop making payments on it anymore. Banks apparently have decided that’s the way to go. It’s cheaper for them to walk away from properties in devastated communities than to pay the legal costs of foreclosing on them and taking back the titles. Kermit Lind, a Cleveland State University law professor who specializes in housing cases, said back in January that banks don’t usually pull these schemes in once-hot housing markets where they stand a chance of selling the properties again for a reasonable price. They do it in flyover country, hoping no one will notice. “They’re just dumping their trash in the Midwest,” he said.

So, way to stay ahead of a scandal, FDIC and HW! It might have been nice to send that letter back in 2007 or so, before so much damage had been done. HW’s source said to “give the FDIC some credit” for trying to get out in front of this mess. Sorry, no credit here. I’m just walking away from that one.

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