Tuesday, March 4, 2008

Who’s responsible for this abandoned house?

   The distressing boom in foreclosures is imposing costs on local governments, which find that many houses are abandoned, especially in poorer neighborhoods, both serving as annoyances to neighbors and attracting vandalism and crime.  Some cities are resorting to demanding that creditors take more responsibility for taking care of houses on which they have foreclosed.  A problem with this is that so many homeowners are simply abandoning their homes before foreclosure; most creditors don’t find it Housestreet_2 worthwhile to go after them for money that they may owe beyond the value of the house.  Thus many houses may serve as local nuisances before the creditors even know that the residents have gone. 
   Instead of pointing fingers or filing lawsuits, I suggest that governments might consider a new land use law along these lines:  When the government learns that a house appears to be abandoned, it informs the creditor, and the creditor holds an obligation to engage in basic maintenance, even if it has not yet formally taken title to the property.  While this might prove to be costly for some lenders, it will also encourage creditors to take early steps to try to avoid the problem of abandoned properties.


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And on what basis would the government do this? A creditor has no authority to enter property, even to protect its value, until or unless it forecloses - any waste of the property through abandonment ends up effectively part of a deficiency judgment (for what it's worth). So you're suggesting that the creditor be ordered to trespass on the property.

On the other hand, the local government itself has the ability and authority to enter and secure property to abate nuisances and protect the public interest, and any costs it incurrs in such activities can be levied as liens on the property. The local government would, in many cases, be in a positio nto force foreclosure of such liens more quickly and expeditiously than the creditor.

So here's a more interesting and aggressive strategy: the local government adopts nuisance ordinances that provide as above, hires a bunch of bonded contractors to do the work (alleviating unemployment perhaps), and bonds the liens to pay for it. If the government was REALLY smart, it might even contract with Habitat for Humanity or a local Housing Trust to do the work, and then subordinate the liens to them.

Those actions might drive creditors to act more quickly to foreclose - and might actually put the government in some cases in a position to take the property off the creditors' hands - and perhaps into the hands of affordable housing organizations that could make long term use of them.

Posted by: Robert Lincoln | Mar 11, 2008 7:41:09 PM

The notion that one has to maintain a property or someone else will do it for you and receive a lien is found in almost every HOA, and is a common policy tool in Canadian municipalities.

I've seen American municipalities use it for lawn mowing, but rarely beyond that level, although it makes a great deal of sense.

Adding to a fix it or we'll fix it for you regime a simple postcard notice to lenders wouldn't hurt, however, because a third party lien prior to the first loanholder probably triggers a default and causes the property to change hands to an owner occupant more quickly.

Posted by: ohwilleke | Mar 17, 2008 5:02:49 PM