Why do banks foreclose instead of helping the owners renegotiate the mortgage payments? The federal bailout guarantees the banks would be made whole on the mortgage if they foreclose. If they don’t foreclose the banks risk not being made whole and losing money.
Our goal is to change that equation so that the banks which foreclose will have to consider the cost of keeping up property by creating a negative cash flow until the property is sold. Renegotiating with the borrowers could be better for the bank. The California legislature has given local government the tool to compel banks to maintain foreclosed property.
SB1137 a California Law passed in 2008 says:
“A legal owner shall maintain vacant residential property purchased by that owner at a foreclosure sale, or acquired by that owner through foreclosure under a mortgage or deed of trust. A governmental entity may impose a civil fine of up to one thousand dollars ($1,000) per day for a violation.”
Several cities have implemented ordinances based on SB 1137 with some success. The Foreclosure Deterrent Project strategy is to convince city governments to pass similar ordinances, by making best practices documents available including ordinances already in place, listings of East Bay cities where a large number of bank owned single family dwellings are for sale and other pertinent documents including SB 1137. The Foreclosure Deterrent Project with links to these resources can be found at www.TriValleyDems.com.
The banks;
• sold mortgages to the unsuspecting unqualified,
• bundled these high risk mortgages with OK mortgages from the qualified,
• had the bundle rated as AAA even though they were risk infested,
• insured them with AIG, Fannie & Freddie,
• bet on them defaulting,
• sold the bundle to some other bank,
• got the Federal Government (our taxes) to cover the losses at AIG, Freddie & Fannie
• … the new owner banks foreclose & do not negotiate with the borrowers.
The problem is the insurance guarantees the banks will get the money owed on the mortgage if they foreclose (guaranteed by our federal bailout tax dollars backing up the insurers). So while the banks promised to re-negotiate loans, they drag their feet until borrowers give up in frustration. The new owner banks bought the high default risk mortgages at wholesale rates and are now making profits by foreclosing. The bank bailout is the insurance guarantee for the banks that they will be made whole.
7 million are facing foreclosure; millions have already left their homes. The Foreclosure Deterrent Project won’t end foreclosures but will deter some particularly when maintaining vacant property includes paying homeowners association dues, keeping the property secure and safe.
Banks foreclosing on condominiums frequently stop paying real estate taxes and home owners association (HOA) fees causing the remaining homeowners to make-up the shortfall. The HOA usually puts a lien on the condo to recover the arrears HOA fees, which may be paid only after back taxes. The bank then tells the HOA it has a buyer who won’t cover the arrears HOA fees. The bank makes the HOA a take it or leave it offer. If the HOA leaves the offer then the remaining owners continue to make-up the shortfall.
You can help by making SB 1137 related information available to city council members, county supervisors, legislators, realtors, public safety officials and Home Owner Association members. All of these groups have stakes in decreasing the inclination of banks to foreclose, increasing local government revenue, protecting property values, increasing public safety, creating jobs and penalizing foreclosing banks for neglecting foreclosed property. If you think this approach makes sense then take it to your city council and pass it on.