Tuesday, July 28, 2009

The Abandoned House Syndrome

Recently, the following houses caught my eye:

House #1, Lake Oswego, OR. This house has been abandoned for several months.

House #2, Lake Oswego, OR. This house has been abandoned for a year. The bank that owns it attempted an auction, but it failed.

House #3, East Portland. See the lockbox on the front door, as well as the trash and weeds in the front yard.

House #4, East Portland, OR. Note the broken rear window. It looks like someone kicked it in.

House #5, East Portland, OR. This house has been abandoned for a year. The City had recently put a ticket on the house for weeds and "public nuisance." When I took the picture, however, someone from a property management company was mowing the lawn. This house was the subject of another failed auction.

Four of these houses are in various stages of tracing out the same trajectory of history. They were all offered for sale by homeowners who found themselves in trouble of one kind or another and who could no longer pay their mortgages. None of the owners was able to sell at the desired asking price. All these homes fell into foreclosure and became bank-owned. All are now abandoned.

House #3 does indeed have a lockbox on the front door, indicating that it may have been purchased by a new owner who simply hasn't arrived yet. But in that case, where is the realtor's sign with a big “SOLD” sticker on it? Also, notice the signs of abandonment here as well – the trash in the unkempt front yard, for instance.

I didn't go intentionally searching for houses like these; rather, I noticed them as I was going about my daily business. However, I am sure that searchers could find many houses like these by now, not only in Portland and Lake Oswego, but in many other cities.

These houses illustrate a few interesting trends. First, at the very beginning of the present economic collapse, there were some writers on the subject of collapse and preparation who suggested that it might be possible for homeowners in trouble to negotiate more lenient loan payment terms with their lenders, because it was assumed that banks really don't want to own homes. But while it may or may not be true that banks don't look forward to owning homes, it has definitely proven to be true that banks are quite willing to take homes away from people who are unable to pay their home loans under terms originally negotiated.

Why are banks taking houses? Because the assets counted on the balance sheets of most banks consist of interest-bearing loans made to supposedly credit-worthy borrowers. When those loans became worthless due to the default of the debtors, the only other assets banks could carry on their balance sheets were the items of collateral used to secure the original loans. Such collateral included the houses of people who could no longer make their house payments.

Why are the banks holding these houses for such a long time? Because a huge gulf has arisen between the prices that banks and other holders of real estate would like to charge for their assets versus the actual price that most people can afford. Yet these houses and other real estate are still being carried on the banks' books at the price that they would have commanded near the height of the recent real estate bubble, when prices were high. For banks to sell foreclosed and repossessed properties at a price that would actually work in our present market, the banks would have to admit that their so-called assets had lost a huge percentage of their notional value. This would shrink the balance sheets of banks to such an extent that many more of them would fail.

The recent government bailouts of the banking system should have allowed more banks to remain solvent even as these banks either negotiated more merciful loan payment plans with homeowners or as the banks sold repossessed homes for a more reasonable price. Yet the bailout money was not used by the banks to enable mercy and fair play. Rather, it was used to increase shareholder dividends and CEO bonuses. Now, therefore, the banks hold “auctions” in which they try to sell foreclosed properties for inflated prices. When no one is willing to submit a satisfactory bid, these houses are taken off the market in the hope that one day, market conditions will magically improve, at which point another auction or sale will be attempted. Some banks, desperate to raise homebuyer demand by limiting supply, are now paying demolition crews to bulldoze abandoned homes, including recently built or nearly built McMansions. (Sources: http://www.cnbc.com/id/30580830; http://blog.mlive.com/flint-city-beat/2009/07/kildee_a_smaller_flint_equals.html; and this - http://www.jsonline.com/watchdog/watchdogreports/50548282.html for a slightly different twist.)

Meanwhile, the weeds and moss grow, the trash piles up, the paint peels, the banks must pay a property management company to look in on their properties and clean up the places, and the occasional window gets kicked in...

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