Vacant and abandoned properties, whether residential or commercial, create costly problems for lenders and municipalities alike. Across the country, states and municipalities have responded by enacting abandoned property laws (such as Wisconsin’s abandoned property statute, § 846.102), and foreclosure registration ordinances, setting up land trusts, stepping up property code violation enforcement and implementing programs to market or demolish abandoned properties. Lenders and loan servicers are often a primary target of these initiatives.
Wisconsin is a judicial foreclosure state, meaning the lag time between a borrower’s default and a sheriff’s sale typically exceeds one year or more. During that time, economic conditions may change, property values fluctuate or the condition of the underlying property deteriorates. These factors may combine to make a property difficult to sell, resulting in lenders or servicers postponing a foreclosure sale indefinitely, as was the case in Bank of New York Mellon v. Carson, decided recently by the Wisconsin Supreme Court. Under Carson however, a circuit court may order a mortgagee to bring a property to sale after the redemption period has expired, without regard to whether or not it would be sold at a loss. How are lenders to respond? Here are some strategies.
A foreclosure action may not be the best alternative to address a loan default. In fact, an April 2013 article in AMERICAN BANKER noted a trend of banks halting foreclosures to avoid the cost of upkeep. When a lender or servicer decides not to foreclose, it still has the option of suing to obtain a money judgment for past due amounts under a loan while foregoing the equitable relief of foreclosure for the time being. The bank maintains its mortgage lien and may recover all or a portion of the amount due in the event a junior lienholder attempts to foreclose.
When the economics of a situation justify, the bank may seek a court appointed receiver to maintain abandoned properties without the need to file a foreclosure action that would result in the bank later taking title to an abandoned property. Waste is one basis for appointing a receiver under Wisconsin Statutes. Waste is defined as: unreasonable conduct by an owner that results in physical damage to real estate and substantial diminution in value. Pleasure Time, Inc. v. Kuss, 78 Wis. 2d 373, 254 N.W.2d 463 (1973). Note, however, that the bank would likely be required to pay for receivership proceedings.
If foreclosure is the chosen option, due diligence begins with an inspection, appraisal or broker price opinion to identify abandoned properties that may lack value. Then, in the foreclosure judgment itself, the provision authorizing a sheriff’s sale should contain permissive rather than mandatory language (i.e. the lender “may” (not “shall”) conduct a sheriff sale). That may not be sufficient to escape Wis. Stats. § 846.102, but it is a precaution nevertheless. If the owner or the municipality attempt to force a sheriff’s sale, despite likely economic loss or the absence of a buyer, the bank may also consider satisfying its mortgage and releasing its mortgage lien. The Bank, however, may still remain under a foreclosure order.
Donate or Demolish
In 2011, Bank of America donated hundreds of foreclosed homes to community groups and other nonprofits. Other large banks did the same. Homes in a state of disrepair were rehabbed or demolished with the lender paying a portion of the demolition costs, which was often less than the long-term carrying costs. Also, when done in cooperation with a municipality, unpaid property taxes may be waived and building code violation fines reduced or eliminated to facilitate a subsequent sale. There may be tax benefits to such a donation as well. Further, the prospect of abandoned foreclosure properties flooding the market has the potential to depress prices. Putting developable vacant land and rehabbed properties back on the market, on the other hand, has tended to stabilize home values.