The homeowner strategy of walking away from foreclosure homes when home values plummet below the outstanding mortgage balance has now been given a new twist by lenders. Banks are refusing to take back foreclosure properties, leaving homeowners to assume responsibility for their upkeep.

A new foreclosure-related trend is beginning to take shape, and it raises troubling questions about the role of home values and bank sales in preventing foreclosure. In cities across the U.S., banks are forgoing their right to take possession of properties that have been foreclosed upon, and are canceling the bank sales at the last minute. Instead of putting homes on the auction block, lenders are simply walking away, leaving homeowners and city officials in a confusing and frustrating legal limbo.

Low home values breed walk away phenomenon

The so-called lender "walk away" phenomenon is the latest bizarre twist in the prolonged foreclosure crisis, and may signal a whole new wave of foreclosure problems that were completely unforeseen. Banks are discovering that owning foreclosure properties is more expensive than it's worth, because home values are so low. To save money, they don't even bother paying for a foreclosure auction. They just contact the homeowner and inform him that the foreclosure process has been halted, and that he's still fully responsible for any financial or legal liabilities related to the house.

Failure preventing foreclosure

Most of these homeowners have already vacated their properties after enduring the heartbreak of foreclosure. In their absence, the properties fall into decline, and often become targets of vandals who strip them bare of fixtures or pipes that can be sold for scrap metal. Many residences are condemned by city officials and are slated for destruction, especially in cities and neighborhoods where foreclosure blight is a major headache. In foreclosure-plagued Buffalo, New York, for example, city officials sued nearly 40 banks last year for abandoning dozens of homes that fell into a state of deterioration. But in recent months, that kind of pass-the-hot-potato scenario has played out in cities across the country, where banks are systematically walking away from situations where home values are too low to even justify the cost of a foreclosure seizure and subsequent bank sale.

The responsibility typically goes back to the borrower in default, who's then hit with the huge liability of owning a worthless property that's costing both him and the city money. Homeowners who have accepted the loss of their homes and are struggling to put their personal and financial lives back together, suddenly find themselves in a much more complicated situation. Both the bank and the city hold them liable for an uninhabitable home that's still technically theirs. The distressed homeowner, whose name is the one on the deed and the title, may get a bill for the cost of demolition. And the cost to tear down a worthless home and remove the rubble can run into the tens of thousands of dollars.

    Published on May 26, 2008