By Mary Ellen Podmolik

January 13, 2011

A new type of property is adding to neighborhood blight: the bank walkaway.

Research to be released Thursday, the first of its kind locally, identifies 1,896 “red flag” homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found.

Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can’t recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren’t completing foreclosure actions. The property, by then usually vacant, becomes another eyesore in limbo along blocks where faded signs still announce block clubs.

“The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities,” said Geoff Smith, senior vice president of Woodstock, a Chicago-based research and advocacy group. “The role of the servicer is to be the person in charge of that property’s disposition. You’re seeing situations where servicers are not living up to that standard.”

City neighborhoods where 80 percent of the population is African-American account for 71.1 percent of red-flag properties, according to Woodstock.

In some cases, lenders might be skirting city rules for property upkeep even after they repossessed properties.

Woodstock found that as of the end of September, 57.1 percent of the estimated 4,468 single-family, likely vacant homes that became bank-owned from Jan. 1, 2006, to June 30, 2010, were not registered with the city as vacant, as they are supposed to be.

“The whole concept of charging off creates this limbo land,” said Dan Lindsey, an attorney at the Legal Assistance Foundation of Metropolitan Chicago. “There’s still a lien that can follow the borrower.”

In November, a U.S. Government Accountability Office report on the frequency and impact of abandoned foreclosures noted that Midwestern industrial cities, including Chicago, seem to bear the brunt of bank walkaways, leaving neighborhoods in deeper distress and cities left to shoulder the associated costs of dealing with unsafe, often unsecured homes.

The GAO report, derived from information provided by six loan servicers, found that servicers nationally charged off loans on 46,000 properties from January 2008 to March 2010, with 60 percent of the charge-offs occurring before an initial foreclosure filing was made. That report listed Chicago as having the second-highest number of servicer-abandoned foreclosures nationally, behind Detroit, with 499 properties charged off during the foreclosure process. An additional 361 properties were charged off without a foreclosure filing.

For its report, Woodstock culled data from the city’s vacant properties registry, as well as buildings identified to the city as vacant by municipal departments, foreclosure court filings made from 2006 to the first half of 2010, foreclosure auctions and property transfers. Some of the 1,896 properties flagged by Woodstock as likely walkaways could, in fact, still work toward a resolution in the foreclosure process, but 40 percent of those homes had been in the foreclosure process for more than 18 months.

Woodstock believes its projections are conservative because lenders also decide to write off their investments in properties before filing initial foreclosure actions. For only those 1,896 homes, Woodstock pegs the cost to the city, if it needed to seize, secure and demolish them, at $36 million.

“The problem that is being caused here is costing the taxpayer a lot of money,” said Richard Monocchio, commissioner of the city’s Department of Buildings. “Until the industry does much better and is more creative, leasing back the property for a few years so people can get back on their feet, then we’re going to see more vacant buildings.”

In 2010, the city demolished 535 homes, the most annually in more than a decade and far more than the 283 residences torn down in 2009, according to Monocchio. The city also doubled, to 891 residences, the number of buildings it secured, sometimes more than once, he said. For building code violations, the city tries to fine anyone associated with the property’s title, whether it is a lender or a former homeowner. A bank walkaway can also impede a borrower’s ability to take out a loan, because his or her name is still on the home’s title and any unpaid debts will follow them.

Privately, lenders say their liability might be limited because they have already written the loan off the books and the homeowner also left them in a lurch. City officials say they meet regularly with top servicers to share lists of troubled properties and to work toward resolutions.

In Chicago, the mortgage servicers and trustees most often associated with the properties flagged by Woodstock are Bank of America, with 314 properties; Wells Fargo (234); U.S. Bank (185); Deutsche Bank (178); and JPMorgan Chase (165).

When asked to comment generally on bank walkaways, several banks either declined to comment or did not return phone calls. Two lenders, Wells Fargo and Bank of America, said they are working with the city on strategies to deal with these abandoned properties.

Neighborhoods on the city’s West and South sides seem to be most at risk of bank walkaways.

The city’s Roseland neighborhood, on the city’s far South Side, is one example. In 2007, some of the pictures of the homes taken by the Cook County assessor’s office showed properties that were reasonably well cared for by homeowners.

A little more than three years later, the number of eyesores has grown. Windows are broken, fences are missing and plywood covers some of the broken windows. Even if the houses look secure from the front, back doors are sometimes missing or open. Public records show that foreclosure actions initiated were never completed and titles to properties never transferred.

Woodstock’s research shows there are 137 “red flag” properties in Roseland. Also, only 90 of the 214 bank-owned properties in the neighborhood, or 42 percent, have been registered with the city.

Woodstock and the GAO recommend that lenders take steps to keep properties occupied, even if it means writing off the loan without initiating a foreclosure. Woodstock also called for servicers to be held more accountable and for city departments to have more authority to uphold the rules.

“Many (communities) are now close to a tipping point, if they haven’t gone over it,” Smith said.

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