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Rather than foreclosing on defaulted mortgages in neighborhoods devastated by the economy, lenders are abandoning them because the cost of proceeding with foreclosure is greater than their value.

Fed Governor Says Lenders Flee Foreclosures in Devastated Neighborhoods

Rather than foreclosing on defaulted mortgages in neighborhoods devastated by the economy, lenders are abandoning them because the cost of proceeding with foreclosure is greater than their value, Federal Reserve Governor Elizabeth A. Duke said yesterday.

Anecdotal evidence suggests that these “toxic titles” have placed significant numbers of properties in a difficult state of legal limbo, she said.

The increased rates of foreclosures and the related economic downturn have hastened a cycle of decreasing property values. Declines in state and local property and sales tax revenues result in even more vacant homes and deteriorating neighborhoods.

“Many community organizations and homeowners have been frustrated by the difficulties of working with mortgage lenders and servicers, and these problems are even more exaggerated in weaker market cities. 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,” she said.

“As a result of the high rates of abandonment, many cities such as Flint, Michigan, Cleveland, Ohio, and Youngstown, Ohio have pursued plans to “right size” by demolishing vacant properties and creating land banks. These strategies effectively align housing supply with demand and create open spaces and parkland that promote community health and sustainability,” she said.

Governor Duke’s comments echo concerns in Ohio and Michigan where “walkaways” have become a common problem

A recent Cleveland Plain Dealer story found that Cuyahoga County saw more than 14,000 foreclosure filings both in 2007 and in 2008. In 2007 there were nearly 10,000 sheriff’s sales, but the number dropped in 2008 to about 8,000.

There’s no doubt lenders have walked away from homes when it’s in their financial interest to do so, when a growing number of properties are worth only a few thousand dollars.

In Cuyahoga County, foreclosed homes that lenders or mortgage companies bought at sheriff’s sales have recently sold for as little as 30 percent of the home’s previous value.

In September, in response to the rising number of cases in Ohio, Senator Sherrod Brown (D-Ohio) requested a General Accountability Office study of the walkaway problem. The study is underway and could lead to congressional action.

One comment

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