Banks Trying to Put the Pieces Together

Often I get asked why banks are not foreclosing on borrowers even after they do not make mortgage payments for many months. Actually, the answer is quite logical. To fully appreciate the banks position we must understand that the current housing market is like a Rubik’s cube. Every action the bank takes creates a challenge on the other side of this real estate puzzle.

The banks have no thirst for vacant properties for two reasons:

1.) Once they take ownership of the house through foreclosure they become liable for the property.

In many cases it is easier to hold off the foreclosure process and let the borrower continue maintaining and ‘house-sitting’ the property.

2.) The banks realize that an empty house impacts the value of other homes in the area.

Banks have mortgages on many of these surrounding properties. If value is affected, there is a greater chance that those borrowers will stop making mortgage payments.

The best source to get accurate data on vacancies is the Census Bureau Report on Residential Vacancies and Homeownership. They define the vacancy rate as follows:

The homeowner vacancy rate is the proportion of the homeowner inventory that is vacant and for sale.

The graph below uses data from the latest report dated February 2, 2010.

As we can see, the vacancy rate, which has historically been less than 2%, is now almost 3%. It is in the bank’s best interest not to add to the already growing supply of vacancies.

What are the banks doing?

In an article last week, the Los Angeles Times reported:

Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.

And with a glut of inventory in places like Southern California’s Inland Empire, Nevada and Arizona, lenders are loath to depress housing prices further by dumping more properties into a weak market.

Finally, allowing borrowers to stay in their homes helps protect the bank’s investment as it negotiates with the homeowners, said Gary Kirshner, a spokesman for Chase bank, a major lender.

“If the person’s in the property, there’s less chance for vandalism, and they’re probably maintaining the house,” he said.

Also Citibank is now allowing some borrowers to stay in the house for up to six months rent-free if they hand over the deed.

What does this mean to you?

I don’t know. Should you not be concerned about paying your mortgage and hope the bank just leaves you alone? I have found over the years that hope, though important, is usually not a good strategy.