When banks don't maintain foreclosed homes, a vicious cycle begins: Lawns brown, weeds grow, and the value of nearby homes plummets. But if the honchos on Capitol Hill take a cue from angry state and local governments, we could see a more stable housing market -- accompanied by a hit to bank earnings.
Are banks passing the buck, or passing up a buck?
There are two stages to the problem of distressed properties falling into disrepair, starting with the actual foreclosure process. Depending on regional bureaucracy, it can take anywhere from several months to a year and a half. The second stage begins once banks legally own the home, when properties either don't sell immediately, or banks deliberately hold off listing these foreclosures in hopes of waiting for a better price or avoiding a potential loss.
It might make sense for banks to chant "Hell No, We Won't Mow" while they're stuck in foreclosure proceedings, but it seems only reasonable that they'd take up the weedwhacker once they've become the proud owners of the boarded-up two-bedroom down the street. In Cleveland, that's the view behind a lawsuit against Wells Fargo
Ironically, banks appear to be shooting themselves in the foot if they don't maintain their properties. The National Association of Realtors asserts that while homes in poor condition typically suffer a price haircut of 20%-40%, well-preserved distressed properties don't seem to suffer any discount. For banks to decide not to maintain properties, one of two things must be true: Either the cost of maintenance must be greater than what banks get back on the eventual sale, or the banks are simply trying to push this cost onto municipalities, which have often resorted to performing upkeep themselves.
Tangled up in TARP
The issue of property preservation could expand well beyond the local level. Data-miner RealtyTrac estimates that the number of bank-owned properties will hit 1.5 million this year, up from a 2008 peak of 900,000 and a normal-year volume of 160,000. Sure, pending sales of existing homes rose 3.2% in March, but that doesn't fix the core problem of negative equity -- a problem that will likely persist if banks continue to neglect properties, and prices fall accordingly.
All this makes me think that property decay might gain federal attention. As a recent Washington Independent article suggested, the Treasury could impose a set of property preservation mandates on TARP-fed banks. Would that mean several quarters of extra hefty expenses for lenders ranging from Bank of America
When you're not out mowing the lawn of the neighborhood foreclosure, Fools, stay tuned.