Abandoned Foreclosures Are Uncommon, but Are Concentrated in Certain Areas and Usually Involve Nonprime Loans and Low-Value Properties

Using data from large and subprime servicers and government-sponsored  mortgage entities representing nearly 80 percent of mortgages, we  estimated that abandoned foreclosures are rare—the total from January  2008 to March 2010 represents less than 1 percent of vacant homes. However,  when the costs of foreclosure exceed the expected proceeds from selling  the property, servicers typically decide that foreclosure is not financially  beneficial. Abandoned foreclosures are also likely concentrated in distressed  urban areas. Abandoned foreclosures also occurred most frequently on  nonprime loans. According to representatives of counseling agencies,  community groups, and some of the homeowners we interviewed,  borrowers are often surprised to learn that the servicer did not complete  the foreclosure and take title to the house—and that they still own the  property and are responsible for such things as maintenance, taxes, an d  code violations. Without Updated Property Valuations That Consider Property and Neighborhood Conditions, Servicers May Abandon Foreclosures on Certain Properties

By not always obtaining updated property valuations at foreclosure  initiation, servicers appeared to increase the potential for abandoned  foreclosures to occur. For example, accounting  requirements for mortgage loans do not appear to provide incentives for  servicers to initiate foreclosures but then not complete them. Because the risks from mortgage  servicing generally did not indicate the need to conduct more detailed  reviews of these operations, federal banking regulators had not regularly  examined servicers’ foreclosure practices on a loan-level basis, including  whether foreclosures are completed. The Federal Reserve has also recently increased its attention to mortgage  servicing among the institutions over which it has oversight responsibility. Various Actions Are Being Taken by Some Communities to Prevent or Mitigate the Effects of Abandoned Foreclosures, but Each Presents Tradeoffs

We identified various actions that some communities are taking to reduce  the likelihood of abandoned foreclosures occurring or reduce the burden  such properties create for local governments and communities. Communities dealing with abandoned foreclosures may benefit from  implementing similar actions, but they may need to weigh the  appropriateness of the various actions for their local circumstances as  these actions can require additional funding, have unintended  consequences, and may not be appropriate for all communities. In  addition, regulatory staff cautioned that such a requirement could cause  servicers to walk away from properties before initiating foreclosure. However, land banks can also be designed to actively and  strategically acquire properties from multiple sources. However, the communities in which they are concentrated  often experience significant negative impacts, including producing vacant  homes that can be vandalized, reduce surrounding neighborhood property  values, and burden local government with the costs associated with  maintenance, rehabilitation, or demolition. If servicers had more complete and accurate information on  lower-value properties that were more at risk for such declines in value,  they may determine that foreclosure is not warranted prior to initiating the  process for some properties. Recommendations for Executive Action

To help homeowners, neighborhoods, and communities address the  negative effects of abandoned foreclosures, we recommend that the  Comptroller of the Currency and the Chairman of the Board of Governors  of the Federal Reserve System take the following four actions:  require that the mortgage servicers they oversee notify borrowers when  they decide to charge off loans in lieu of foreclosure and inform borrowers  about their rights to occupy their properties until a sale or other title  transfer action occurs, responsibilities to maintain their properties, and  their continuing obligation to pay their debt and taxes owed; require that the mortgage servicers they oversee notify local authorities,  such as tax authorities, courts, or code enforcement departments, when  they decide to charge off a loan in lieu of foreclosure; and require that the mortgage servicers they oversee obtain updated property  valuations in advance of initiating foreclosure in areas associated with  high concentrations of abandoned foreclosures. Specifically, this report addresses (1) the nature and  prevalence of abandoned foreclosures, including how they occur; (2) the  impact of abandoned foreclosures on communities and state and federal  efforts to mitigate the effects of foreclosure; (3) certain practices that may  contribute to why mortgage servicers initiate but not complete  foreclosures and the extent of federal regulatory oversight of mortgage  foreclosure practices; and (4) the various actions some communities are  taking to reduce abandoned foreclosures and their impacts.
Why GAO Did This Study

Entities responsible for managing home mortgage loans--called servicers--may initiate foreclosure proceedings on certain delinquent loans but then decide to not complete the process. Many of these properties are vacant. These abandoned foreclosure--or "bank walkaway"--properties can exacerbate neighborhood decline and complicate federal stabilization efforts. GAO was asked to assess (1) the nature and prevalence of abandoned foreclosures, (2) their impact on communities, (3) practices that may lead servicers to initiate but not complete foreclosures and regulatory oversight of foreclosure practices, and (4) actions some communities have taken to reduce abandoned foreclosures and their impacts. GAO analyzed servicer loan data from January 2008 through March 2010 and conducted case studies in 12 cities. GAO also interviewed representatives of federal agencies, state and local officials, nonprofit organizations, and six servicers, among others, and reviewed federal banking regulations and exam guidance. Among other things, GAO recommends that the Federal Reserve and Office of the Comptroller of the Currency (OCC) require servicers they oversee to notify borrowers and communities when foreclosures are halted and to obtain updated valuations for selected properties before initiating foreclosure. The Federal Reserve neither agreed nor disagreed with these recommendations. OCC did not comment on the recommendations.

What GAO Found

Using data from large and subprime servicers and government-sponsored mortgage entities representing nearly 80 percent of mortgages, GAO estimated that abandoned foreclosures are rare--representing less than 1 percent of vacant homes between January 2008 and March 2010. GAO also found that, while abandoned foreclosures have occurred across the country, they tend to be concentrated in economically distressed areas. Twenty areas account for 61 percent of the estimated cases, with certain cities in Michigan, Ohio, and Florida experiencing the most. GAO also found that abandoned foreclosures most frequently involved loans to borrowers with lower quality credit--nonprime loans--and low-value properties in economically distressed areas. Although abandoned foreclosures occur infrequently, the areas in which they were concentrated are significantly affected. Vacant homes associated with abandoned foreclosures can contribute to increased crime and decreased neighborhood property values. Abandoned foreclosures also increase costs for local governments that must maintain or demolish vacant properties. Because servicers are not required to notify borrowers and communities when they decide to abandon a foreclosure, homeowners are sometimes unaware that they still own the home and are responsible for paying the debt and taxes and maintaining the property. Communities are also delayed in taking action to mitigate the effects of a vacant property. Servicers typically abandon a foreclosure when they determine that the cost to complete the foreclosure exceeds the anticipated proceeds from the property's sale. However, GAO 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. 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; however, given the ongoing mortgage crisis, they have recently placed greater emphasis on these areas. GAO identified various actions that local governments or others are taking to reduce the likelihood or mitigate the impacts of abandoned foreclosures. For example, community groups indicated increased counseling could prevent some borrowers from vacating their homes too early. Some communities are requiring servicers to list properties that become vacant properties on a centralized registry as a way to identify properties that could require increased attention. In addition, by creating entities called land banks that can acquire properties from servicers that they otherwise cannot sell, some communities have provided increased incentives for services to complete instead of abandon foreclosures. However, these actions can require additional funding, have unintended consequences, such as potentially encouraging servicers to walk away from properties before initiating foreclosure, and may not be appropriate for all communities.