Question about banks and default mortgages....

[MamaDem]

Let me preface this by saying that I'm reading a lot about the economic and mortgage crisis and this site has been invaluable to an economics novice, such as myself. So, my very naive question is this:

So many banks have these homes that they are foreclosing and even they cannot sell. Why are they not creating a separate entity to rent the homes. They could hold the homes as downgraded assets of some sort - acually reset the value - and then rent them. Many of these homes are in areas where there are so many homes in foreclosure they are competing with themselves. Renters seem to be the only ones with a slimmer of hope in this mess.

The reason I ask is I have family who is being foreclosed on but the really unfortunate thing (beyond the miserable situation that brought on the foreclosure - and it wasn't greed, ARM's, or anything like that - it was depressed economy and bad job market) is that they could afford to rent the home for the same amount that homes are being rented for in the same area.

Again, I know I'm naive so I would love to be enlightened. Just a couple of weeks ago I drove through a neighborhood where it was very obvious that many homes had been abandonded/foreclosed - they were in terrible condition, and an eyesore. I know there are would-be renters who may not be in the economic situation to own but could pay a reasonable rent month-to-month.

Thanks for any input and for enduring my ignorance.

Oh, and I'm in Florida where we are proud to be 2nd in the country in Foreclosures!! In the lower 40's in education, but we're taking silver in foreclosures!

[Sen. Walter Sobchak]

1. banks are not in the property management business

Banks are not too great at managing distressed assets, be they houses, airplanes or cars – they really just want to get rid of them and off their balance sheet as quickly as possible. They want distressed assets to be as unencumbered as possible for ease of sale, it can be difficult to sell occupied dwellings depending on the tenant protections in a given jurisdiction. I'm not saying it is right or even practical - after all a vacant home in Florida is more likely to become a meth lab or be stripped for metal than find a buyer who will cover a significant portion of the banks loss.

[MamaDem]

2. Thank you...I just I'm trying to apply logic to an illogical situation...

It just seems that occupancy would actually help them move them off their balance sheet. A neighborhood that looks occupied instead of abandoned is going to attract real buyers (eventually, when they exist again) and it seems they should have some shared responsibility in their assets. Homeowner associations should enforce maintenance and upkeep on the new owners (the banks) too. I know, illogical, but still..

Again, thanks.

[Idealism]

3. Policy is right, banks could never manage properties

They'd have to hire a firm to do so for them, making it not cost effective enough for them to care.

[jwirr]

4. I think that just might be a good way to push rental properties into foreclosure.

If they cannot rent their apartments they are next in line.

[Citizen Number 9]

5. In addition,

these properties are typically not in any condition to sell when the bank gets them.

Because the borrower has had financial problems there are often deferred maintenance issues.

There can also be significant theft and vandalism damage. All this represents more time, money and attention required from the bank, who as it has been observed, is not in that business.

[Skink]

6. THe banks can't figure out who owns them.

They are just acting under orders of the shadow banking system to forclose.

[snot]

7. I believe that's incorrect.

There is a stated mortgage beneficiary who holds title, even if other banks have indirect rights under further contracts. If they couldn't figure out who would hold title following foreclosure, there could be no foreclosure -- you can't transfer title out of the borrower without transferring it in to someone else.

[Skink]

8. Sounds right.

I am currently charging the rent..:shrug:

[HamdenRice]

9. Many are terrified of the experience of New York City in the 70s

Firstly, the other posters who said that banks are not good at property management, and don't want to be in property management business, are right.

But you also asked about creating a separate entity, presumably to take the property from the banks and lease/manage them.

During the S&L crisis of the 90s, many banks went bankrupt holding many foreclosed properties, and these properties came under the control of the FDIC. Some progressives proposed back then that some federal entity manage and control those properties. Instead the Bush I administration set up the Resolution Trust Corporation to sell these properties at loss to the federal government at firesale prices.

One reason was that in the 70s, thousands of properties came to be owned by New York City. These were mostly property tax foreclosures and abandonment of small rental properties. The City government of New York became the biggest landlord in the city. The City government was truly terrible at managing the properties and became a slumlord of epic proportions. Eventually Mayor Koch began auctioning off the properties, even allowed many to be given away through "urban homesteading" programs.

It just seems that the individual owner does a much better job at property management than most corporations, banks or agencies.

[Danascot]

10. It's a great idea - a win-win

In fact there's an article in the NY Times today, see below, but as others have pointed out, most banks aren't capable of doing it for a number of reasons

Fannie Mae Allows Renters to Stay

In a move that provides relief to thousands of renters who face eviction but draws the federal government even deeper into the housing market, the loan giant Fannie Mae said Sunday that it would sign new leases with renters living in foreclosed properties owned by the company.

It is the first nationwide effort to provide widespread relief to renters ensnared by the unfolding mortgage crisis, and it will effectively transform Fannie Mae — a government-controlled mortgage finance company — into a national landlord. It may also increase pressure on private lenders to establish similar programs and on lawmakers to pass renter relief.

“There are renters all around the country who have been holding up their end of the bargain and paying their rent faithfully, but the landlord got into trouble, and so the renter is now unfairly facing eviction,” said John Taylor, president of the National Community Reinvestment Coalition, a consumer advocacy group. “It’s really good news that Fannie Mae is doing this. Now the question is whether private sector will follow suit.”

In recent months, skyrocketing foreclosure rates have exposed as many as 70,000 renters to evictions, even though many never missed rent payments, according to analysts who track housing data. In many cities and states, renters can be evicted after their home goes into foreclosure, regardless of how long their lease stretches into the future.

http://www.nytimes.com/2008/12/15/business/15evict.html?ref=business

[MamaDem]

11. Thanks everyone for your replies. I just am so blown away by

this whole mess and to whoever posted the 60 minutes bit from last night, thanks. I watched it when it aired and was just blown away. We are just scratching the surface of this mortgage nightmare.