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-by Katie Buitrago
January 10, 2011

When you drive through a distressed neighborhood and see blocks upon blocks of boarded-up houses, you might think that some lender is desperately trying to get those properties off its hands. Some of those homes, however, might not even be on the lender’s radar: they’re sitting in a sort of legal limbo where the lender refuses to complete the foreclosure and the homeowner is long gone. Woodstock Institute is releasing a report later this week that examines what happens when a loan servicer decides that it’s not worth it to pursue foreclosure and the property sits vacant, a phenomenon known as a “lender walkaway.”

When a loan becomes seriously delinquent, the loan servicer may conduct an analysis to see whether it would be more beneficial to proceed with a foreclosure or not. Why wouldn’t a servicer want to complete a foreclosure? One reason could be that the home has a very low value and the costs associated with pursuing the foreclosure and maintaining the home until it can be sold to a new owner may be more than the proceeds a servicer might get from selling the property. In that case, a servicer can decide to “charge off” the loan, or decide not to pursue the debt and take it as a loss. A servicer may make the decision to take the loss before or after filing for foreclosure.

If you’re a homeowner who’s had a foreclosure filed on your house, you might like the sound of your lender walking away and leaving you in peace, but it’s not that simple. Lender walkaways often happen when a property becomes vacant after a servicer initiates a foreclosure but elects not to complete the process of bringing it to foreclosure auction. The homeowner still technically owns the home, but may not be aware that he is still the owner and responsible for maintaining the property and paying taxes. There is no law that requires a servicer to complete a foreclosure after starting it. It makes a difference when a servicer decides to stop pursuing foreclosure—a GAO report found that 48 percent of homes become vacant when a servicer walks away after filing foreclosure, compared to only 30 percent of homes when the servicer walks away before filing foreclosure. A homeowner might think that a notice of foreclosure filing means that he must vacate the property as quickly as possible, and the servicer may be more inclined to walk away as the property deteriorates and the home value drops.

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