One Solution to Rundown Foreclosed Houses? Bulldoze Them

Several banks have found a new solution to the glut of foreclosed houses – many of them in poor condition.  It’s the bulldozer. Bank of America (BoA) owns a glut of abandoned houses that no one wants to purchase.  As a result, the nation’s largest mortgage servicer is bulldozing some of its most uninhabitable inventory.  Additionally, Wells Fargo, CitiCorp, JP Morgan Chase and Fannie Mae have been demolishing a few of their repossessed houses.  BoA is donating 100 foreclosed houses in the Cleveland area and in some cases will contribute to the cost of their demolition in partnership with a local agency that manages blighted property.  The bank has similar plans impacting houses in Detroit and Chicago, and more cities tare expected to be added.

“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corporation, which works with lenders, government officials and homeowners to salvage abandoned homes.  “The best thing we can do to stabilize the market is to get the garbage off.”  Detroit mayor Dave Bing is in the process of ” right-sizing” the motor city by razing entire neighborhoods.

BoA plans to donate and bulldoze 100 houses in Cleveland, 100 in Detroit, and 150 in Chicago.  The lender will pay up to $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program.  Uses for the land include development, open space and urban farming.  “No one needs these homes, no one is going to buy them,” said Christopher Thornberg, founding partner at the Los Angeles office of Beacon Economics LLC.  “Bank of America is not going to be able to cover its losses, so it might as well give them away and get a little write-off and some nice public relations.”

Some foreclosed properties are so uninhabitable that the bank is willing pay to have them destroyed.  A bank spokesman said some in this category are worth less than $10,000.

Writing in The Atlantic, Daniel Indiviglio says that “The motivation here is pretty straightforward.  They get out of ongoing maintenance costs and taxes that they would have to pay as long as the property remains on the market.  But the even better news is that the banks can often write-off these properties as a result.  In some cases, banks can deduct as much as the homes’ fair market value from their income taxes.  From the real estate market’s standpoint this strategy is also positive.  With less supply, prices will stabilize more quickly.  Disposing of these foreclosures will make the market clear sooner.  And yet, the idea of bulldozing homes does seem rather unsavory, does it not?  Perhaps some of these homes are condemned and/or beyond repair.  In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over.  But does this really describe all of the cases?  This is reportedly happening to thousands of homes across the U.S.  My concern is that banks are using this as an easy out to minimize their loss with little concern about what’s best for the U.S. economy.  If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.”

According to a Time magazine article,  “After multi-billion dollar legislative efforts in the form of the Stimulus, Dodd-Frank and stand-alone legislation, President Obama declared failure earlier this month and said he’s going back to the drawing board on a housing fix.  Negotiations between the 50 state attorneys general and the big mortgage lenders, rather than clearing the air for banks and borrowers, has become an enormous wet blanket as negotiations drag out and banks refuse to make any move without knowing how much of the reported $20 billion settlement will fall on them.  Economists argue that the failure to clear the housing market is a primary cause of the stunted recovery: continued household debt weighs on consumer spending, home ownership and excessive debt puts a drag on labor mobility, and banks fear the consequences of increased lending.”