The Government Accountability Office (GAO) has just completed a study of what is called “bank walkaways” – that’s when a lender initiates foreclosure proceedings but then decides not to complete the process because the cost outweighs the expected proceeds from the property’s sale.
Officials argue that the practice intensifies deteriorating market conditions and complicates stabilization efforts. However, the agency found that abandoned foreclosures are rare. GAO estimated that the number of abandoned foreclosures that occurred in the United States between January 2008 and March 2010 was between 14,500 and 34,600 — representing less than 1 percent of vacant homes.
GAO said in its 86-page report, “Although abandoned foreclosures occur infrequently, the areas in which they were concentrated are significantly affected.”
The study revealed that 20 specific areas of the country accounted for 61 percent of the estimated “bank walkaway” cases, with certain cities in Michigan, Ohio, and Florida experiencing the most occurrences. Detroit topped the list.
GAO also found that abandoned foreclosures most frequently involved loans to borrowers with lower quality credit, or nonprime loans, and low-value properties in economically distressed areas.
The decision to forego foreclosure typically hinges on how much the lender expects to bring in from the subsequent sale of the repossessed property. However, GAO says it found that most of the servicers interviewed were not always obtaining updated property valuations before initiating foreclosure.
“Fewer abandoned foreclosures would likely occur if servicers were required to obtain updated valuations for lower-value properties or those in areas that were more likely to experience large declines in value,” GAO said in its report.
Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices, such as whether foreclosures are completed. But GAO says given the ongoing mortgage crisis, regulators have recently begun to place greater emphasis on these areas.
Vacant homes associated with abandoned foreclosures can contribute to increased crime and decreased neighborhood property values, the agency notes. Abandoned foreclosures also increase costs for local governments that must maintain or demolish the homes.