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how easy is it for lenders to just "walk away"?

snigletsniglet
edited March 2008 in Housing Bubble
Does anyone have an idea as to how easy it is for a lender to just "walk away" and avoid taking on the liability for a property where the value is less than what they can hope to make from it after deducting expenses?

Calculated risk pointed out that some lenders are declining to even file for foreclosure on defaults and it got me wondering as to how this kind of thing would work.

http://calculatedrisk.blogspot.com/2008/01/jingle-liens.html

Maybe a lender could just decide not for foreclose but not actually foregive the loan in the hope that at some point in the future the place might appreciate: kind of like a call option with no risk. Or would this kind of hands-off approach (using the outstanding mortgage as an option) expire after some period of time, allowing the municipality to sieze the place for back-taxes, maintenance fees, etc?

Comments

  • snigletsniglet
    It's not just over extended borrowers who are walking away from houses.

    There are a growing number of cases around the country where homes have been completely abandoned by both owner and lender. I wonder what happens in these situations? Can't the city just take ownership of the property at some point if no one is paying fines or taxes?
    Dealing with foreclosed properties that have been abandoned has become such a problem that Leeper teaches classes across the state. Classes are administered through the California Association of Code Enforcement Officers.

    http://www.redding.com/news/2008/mar/03/abandoned-homes-a-blight-risk/
  • AlanAlan
    Eventually the state will place a tax lien on the property and then sell that lien at auction. The person who buys the lien will get to take ownership of the property if the lien is not paid by a certain date.
  • snigletsniglet
    Alan wrote:
    Eventually the state will place a tax lien on the property and then sell that lien at auction. The person who buys the lien will get to take ownership of the property if the lien is not paid by a certain date.

    Does the person purchasing the lien get the property free and clear of all other encumberances? For example, what if the original lender shows up years down the road asking for mortgage payments?

    Or would all the other lien holders wind up foregoing their rights through a failure to act when the tax lien was placed on the property?
  • AlanAlan
    I am pretty sure they get it free and clear. In this respect the lender is just as responsible for property tax as the owner. You will notice that most mortgages include an escrow amount to pay for property tax.

    Anyone with a lien has an incentive to make sure property taxes are paid.
  • AlanAlan
    Some information from wikipedia: http://en.wikipedia.org/wiki/Tax_lien_sale

    I am sure the laws vary from state to state. It sounds like some states handle unpaid tax liens by allowing the lien holder to go through the foreclosure process. In that case the property would be sold through public auction and the lien holder would get the proceeds.

    I am pretty sure that AZ allows the lien holder to directly take ownership. I do not know what the laws in WA are or even how tax liens are sold here.
  • AlanAlan
    I'm don't fully understand the process yet, but this seems to be related material for King County: http://www.metrokc.gov/finance/treasury ... osure.aspx
    As real estate taxes are in the first lien position, the tax foreclosure extinguishes all other encumbrances including but not limited to Deeds of Trust, mortgages, contracts, liens, judgments and any similar items. However, any Local Improvement Assessments (LID's) remain and become the obligation of the buyer. Also, Internal Revenue liens remain.

    I don't know what LID's are. Also, the state is unable to void federal claims.

    At the bottom of that page is a link to all tax foreclosure properties:
    http://www.metrokc.gov/finance/treasury ... laimer.asp

    There are currently no properties under tax foreclosure (most likely because people contact the owners and buy them out prior to auction).
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