Brown Calls for End to Free Pass for Banks that Abandon Foreclosed Homes

Brown Urges Agency to Take Action to Prevent Needless Evictions of Ohio Families and Neighborhood Blight

At Brown’s Urging, a Federal Investigation Revealed That “Bank Walkaways” Undermine Neighborhoods and Property Values, Leave Communities on the Hook for Maintenance

CLEVELAND, OH – January 3, 2012 – (RealEstateRama) — After a bureau of the U.S. Treasury Department released new guidelines that amount to a free pass for banks to abandon foreclosed homes—fostering crime and leaving local taxpayers on the hook—U.S. Sen. Sherrod Brown (D-OH) today called for tougher standards to prevent the needless evictions of Ohio families and to forestall neighborhood blight.

“Too many Wall Street banks are walking away from too many Ohio Main Street communities,” Brown said. “And when they do, they leave behind homes that are often vandalized and left to crumble. Ohioans are seeing their property values plummet as abandoned homes on their block or in their neighborhood are left to decay or stripped of anything of value. Meanwhile, cities and counties are left footing the bill for banks’ irresponsibility.

“Wall Street has had its way in Washington for too long. That’s why we must pass the Foreclosure Fraud Prevention and Homeowner Protection Act, and empower the new Consumer Financial Protection Bureau to speak for Ohio homeowners. It’s in everyone’s interest—from banks and homeowners, to our communities and local governments—to find ways to keep people in their homes,” Brown added.

In 2009, Brown called for a federal investigation following a Plain Dealer report exposing lenders and mortgage companies that leave homeowners and communities to deal with blight after walking away from a foreclosed property. In 2010, at Brown’s request, the Government Accountability Office (GAO) released a report on the practice of “abandoned foreclosures,” also commonly referred to as “bank walkaways.” This is the practice whereby banks decline to take possession of properties after initiating the foreclosure process, most often because the costs—from legal fees to maintenance—exceed the value of the real estate.

Despite the GAO report clearly detailing the negative impact of bank walkaways on communities like Cleveland, last month the Office of the Comptroller of the Currency (OCC) quietly released a guidance document that allows banks to continue to walk away from homes they are in the process of foreclosing upon. While the OCC guidance adopts recommendations from the GAO, the OCC will continue to allow banks to walk away from homes in Ohio communities, especially if it is in the bank’s financial interest to walk away rather than assume the cost to foreclose upon, rehabilitate, and sell a property.

The GAO report found that bank walkaways drag down neighborhood property values, increase crime rates, decimate the personal finances of homeowners forced to pay back taxes and fees on properties they didn’t know they still owned, and impose substantial costs on municipalities left to deal with abandoned properties, while lowering tax bases.

Today, Brown released a letter that he is sending to the OCC that urges stronger standards that will help keep Ohio families in their homes and help protect communities from having to pay thousands in maintenance fees on abandoned homes. Jim Rokakis, the director of the Thriving Communities Institute and former Cuyahoga County Treasurer, as well as Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland, joined Brown to outline the devastating impact that bank walkaways have on neighborhoods.

“Bank walkaways hurt homeowners, neighborhoods, and entire cities,” Rokakis said. “At a time when the foreclosure crisis has hit Cleveland hard, we need federal guidelines that work for homeowners, not for big banks that have decided to walk away from Ohio communities. I applaud Senator Brown for shining a light on this pervasive issue and for his work to end unnecessary neighborhood devastation.”

Brown was also joined today by Jeannette Smith, a Cleveland Heights resident. Jeannette faced foreclosure several years ago and left her property at the point of Sheriff’s sale. In doing so, she found alternative housing and signed a two-year lease agreement. Shortly thereafter, she found out that her mortgage servicer ultimately withdrew its foreclosure action. Jeanette was unable to break her newly-signed lease and was left with a vacant property, and was cited and charged by the City of Cleveland Heights for the cost of maintenance.

Brown is the author of legislation, the Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011, which would end the rush to foreclosure and require servicers to work with homeowners to find sustainable mortgages.

“I commend Senator Brown for taking a stand against bank walk-aways. The national foreclosure crisis has caused significant problems for cities like Cleveland, particularly when it comes to abandonment. The solutions to those problems will not come from abandoning more houses. Rather, the solutions must include the banks, who should work harder to negotiate loan modifications that are viable for the banks and the homeowners,” said Cleveland Mayor Frank Jackson.

The Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011 would:

Protect homeowners from servicer errors, miscommunications, and abusive fees.
End the rush to foreclosure and require servicers to work with homeowners to find sustainable mortgages.
Improve standards for staffing and casework by mortgage servicers.
Protect the interests of investors who buy securities backed by residential mortgages.
Reform oversight of pools of securitized mortgages.

A copy of the letter to the OCC is below.

Mr. John Walsh

Acting Comptroller of the Currency

Administrator of National Banks

Washington, D.C. 20219

Dear Mr. Walsh:

The Office of the Comptroller of the Currency (OCC) is responsible for overseeing the five largest mortgage servicers – Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial – that service nearly 60 percent of all mortgages in the United States. I write today to express my grave concerns with provisions of the OCC’s December 14, 2011, guidance regarding the proper treatment of foreclosed properties. Specifically, your guidance implicitly approves of the practice of having lenders “release a lien securing a defaulted loan rather than foreclose on the residential property.” This practice, also known as an “abandoned foreclosure” or a “bank walkaway,” has caused substantial harm to Ohio’s communities and should not be supported by the federal government.

Nearly 14 months ago, the Government Accountability Office (GAO) issued a report – that I requested – on bank walkaways. The report found that bank walkaways, though not a common practice nationwide, are focused in economically struggling areas and distressed urban areas of particular cities, including those with low-value properties and non-prime loans. Cleveland, Ohio, experienced the third most bank walkaways in the nation, while Akron, Columbus, Dayton, Youngstown, and Toledo, were all among the 20 communities with the most abandoned foreclosures.

According to the GAO, this practice poses significant health, safety, and financial concerns for Ohio’s communities. Vacant homes exhibit various signs of property deterioration, including overgrown grass, accumulated trash or other debris, and broken windows. Within weeks, if not hours, of becoming vacant, homes are often stripped of valuable materials – including copper piping, wiring, appliances, cabinets, and aluminum siding – further depressing their value. Fires can result from open gas lines; owners torching properties for insurance; or squatters trying to keep warm. In one 2-year period, one ward of Cleveland had about 20 vacant homes catch fire.

The depressed value of abandoned homes robs neighbors of household wealth by lowering the values of surrounding homes. A recent working paper by staff at the Federal Reserve Bank of Cleveland found that each vacant property in Cleveland could decrease the sales price of homes within 500 feet by about 3.1 percent. Recently foreclosed vacant homes lower surrounding property values by as much as 8.1 percent.

The GAO also found that Ohio’s city and state governments are left to pay substantial costs for bank walkaways. Cities like Cleveland must use valuable taxpayer dollars to clean up these properties, in order to protect public safety and health, preserve the community, and avoid future liability for health and safety hazards. Identifying the property owner is difficult, in part because of the Mortgage Electronic Registration System (MERS), making it difficult to collect fines for health and safety code violations. One study estimated total costs of over $13 million for code enforcement activities to address and maintain all vacant and abandoned properties for eight Ohio cities in 2006. The loss of property values decreases state and municipal property tax revenues – an estimated $1 million in tax revenue for each 1 percent decline in home values in Cleveland. The City of Cleveland lost more than $6.5 million in delinquent property taxes on abandoned properties in 2006.

The OCC’s December 14th guidance addresses the procedures that servicers should follow when abandoning a foreclosure proceeding. Your guidance adopts, in large part, the GAO’s recommendations, including requiring servicers to notify homeowners when they are abandoning a foreclosure, and to inform them that they may stay in the property and that they are responsible for maintaining the property. However, this policy only serves to legitimize a practice that is unfair to homeowners and local communities. I urge you to adopt several important reforms to ensure that communities are not harmed by homes abandoned prior to foreclosure.

First and foremost, servicers must be made to do more to prevent unnecessary foreclosures. It is in the interest of communities and banks to work with responsible borrowers to help them stay in their homes or find other suitable alternatives to foreclosure. More needs to be done to help Ohio families save their homes, including reducing principal for the more than one in five Ohio homeowners who currently owe more on their mortgage than their home is worth.

Where foreclosure is initiated, the OCC should require servicers to complete the foreclosure and finance the cost of demolishing a property that is unfit to inhabit. Failing that, they should be required to transfer title of abandoned properties to governmental or nonprofit entities, such as land banks. Leaving these properties vacant – creating health and safety hazards and sticking Ohio communities with the bill – should happen rarely, if at all.

Servicers should also be required to notify homeowners of their rights when the initiate a closure – prior to the servicer’s decision to abandon a foreclosure. As your guidance notes, “after a bank or servicer has initiated foreclosure, the borrower may have already abandoned the property[.]” It is unrealistic to expect that homeowners will return to their homes if they only learn of their rights after they have left their home and the home has already been stripped bare.

Finally, the OCC’s guidance states that servicers should “make appropriate notifications to the local jurisdiction” when they decide to abandon a foreclosure. Servicers need greater specificity about what this duty entails – namely, that servicers must notify local authorities, such as tax authorities, courts, or code enforcement departments. This vague guidance will not help communities clear up the confusion or remedy insufficient tax and fee collection.

Strong standards from the OCC will send a message that Wall Street must share in the responsibility to end the foreclosure crisis. Preventing banks from walking away from properties will give servicers greater incentive to avoid unnecessary foreclosures and explore alternatives to foreclosure. Wall Street banks may be acting in their own economic interest when they walk away from vacant properties, but they are not acting in the best interest of our communities.

Thank you for considering my views on this matter that is so important to so many Ohio communities.

Press Contacts:
(202) 224-3978