American Forum Op-Ed

By Judith Liben and Tim H. Davis

In light of the current financial crisis and the public outrage over taxpayer-subsidized bailouts, it only makes sense for banks to explore every possible avenue to mitigate the damage to families and communities caused by foreclosure, while at the same time shoring up their bottom lines.

But foreclosure alone is not what ravages communities. A large share of the damage results from the post-foreclosure eviction policies of the lending industry. What do banks and servicers do with the “real estate owned” (REO) properties that they repossess after foreclosure? They quickly evict the tenants and former owner-occupants, leaving families displaced, perhaps homeless, and buildings vacant and vulnerable.

Abandoned homes are subject to vandalism and crime, quickly lose value, depress the worth of nearby properties, and force cash-strapped municipalities to expend critical resources confronting the inevitable health and safety risks that emerge.

It doesn’t have to be this way. The tragedy of abandonment and neighborhood despair could be avoided, at no cost to the public, if banks allowed eligible, rent-paying tenants and former homeowners to remain in their homes until they were sold to new owners. Lending giants Fannie Mae and Freddie Mac recently adopted REO rental policies that do just this.

Massachusetts is taking aim at the foreclosure vacancy problem and by considering temporary measures designed to meet the current foreclosure crisis. These proposals would permit rent-paying tenants and former owner-occupants who comply with basic tenancy obligations to remain in their homes until they were sold or if vacancy were required for sale to prospective owner-occupants.

A recent article on Bloomberg.com developed a cost-benefit analysis to show that in California, banks could collect more than $1 billion annually if they allowed tenants to remain and pay rent in REO properties. Even taking into account management fees and other expenses, a Freddie Mac spokesman asserts that “the costs are outweighed by the economic benefits, which include the income stream from monthly checks and the upkeep provided by renters.”

Adapting the Bloomberg methodology to Massachusetts, we estimate that banks could take in between $86 and $102 million annually. If the banks rented only to tenants in REO rental property, they would earn between $34 and $40 million each year. In addition, keeping these homes occupied will save taxpayers the cost of municipal services like police and fire protection, and the increasing cost to the state to shelter families made homeless by foreclosure evictions.

While the lending industry’s public position is that sales are facilitated when properties are vacant, internal documents from the large banks reveal their understanding that occupied properties receiving routine maintenance are often less costly than vacant properties, and may be more appealing to potential buyers. Further, foreclosed homes in Massachusetts are not selling quickly; the median time period for which they are held by the banks is seven months. In many neighborhoods properties remain vacant and unsold for much longer and often foreclosed properties do not sell at all.

Giving tenants and former owners in foreclosed homes the right to pay rent until properties are sold is a winning proposition for families, for the public and for the banks themselves.

It’s a great opportunity for the banks to do well, while doing good.
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Liben is a senior housing attorney for the Massachusetts Law Reform Institute. Davis is an independent research consultant.
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Copyright © 2009 by the Massachusetts Forum. 6/09