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Walkaway Mortgages A Big Problem
RICHARD WEINER
Legal News Reporter
Published: September 10, 2012
About fifty people attended a presentation recently at the Raymond John Wean Foundation offices on Courthouse Square in Warren on “walkaway mortgages” sponsored by The Trumbull Neighborhood Partnership.
The presentation was given by Zachariah Germaniuk, J.D., and Leah Ifft, a foreclosure-prevention advocate for Empowering and Strengthening Ohio’s People, who is based in Zanesville.
Ifft gave a short presentation, and distributed literature from her organization designed to inform the public on preventative measures that consumers can take to keep out of mortgage trouble.
Once a mortgage is underwater (an unpayable amount of negative equity), many of those properties are simply abandoned. The mortgagee abandons payment, and then the property itself, leaving the mortgagor holding paper that is less valuable than the amount of money the home could sell for at Sheriff’s sale.
”The unfortunate side effect of all of the legal wrangling is that the property itself gets caught in the middle,” said Germaniuk
At that point, it can become a neighborhood-destroying “walkaway mortgage,” when neither the bank nor the mortgagee feels any responsibility to take care of the property.
As the real estate decays, it brings down the value of the real estate in the rest of the neighborhood, more mortgages go underwater, more properties are abandoned, and more mortgages become walkaways.
The overall situation, he said, “acts as a perverse incentive for the mortgagors to abandon their own properties.”
This has happened in numerous neighborhoods, said Germaniuk, including Cleveland’s Slavic Village and the suburb of East Cleveland.
There is no easy solution to these problems, said Germaniuk—“there is no silver bullet.”
But he does believe that laws can be rewritten to facilitate the transfer of underwater real estate, so a bad mortgage does not have to destroy a neighborhood.
His proposal is that the laws of the state be rewritten so that ownership of the real estate automatically reverts to the mortgagor upon the filing of the Complaint in Foreclosure.
There would, of course, need to be numerous due process protections for this to occur, including: relevant language in the mortgage note, forced counseling before signing a mortgage note, allowing community development non-profits to be joined as necessary parties under Civil Rule 19 for bank walkaway cases in their service areas, and other such solutions.
Again, these potential solutions are in cases where the real estate has been physically abandoned by a non-paying mortgagee and the bank does not take care of the property. Other problems with other types of foreclosures fall outside the scope of Germaniuk’s analysis.
“My focus is truly not on the private legal dispute between a lender/mortgagee and homeowner/mortgagor where there was no fraud in the transaction,” he said. “Where Fraud, robosigning, and a pattern of discrimination exists in lending, those responsible should be prosecuted to the fullest extent of the law and pay penalties in private civil litigation.”
The main focus of his research and interest in this issue, he said, “is the state of the properties at issue and their effect on communities, particularly in urban areas already suffering from a lack of services. Again, there is no 'silver bullet' solution to the problem at hand,” he continued, but suggested focusing on three areas:
1) The state legislature should reform the foreclosure process as talked about earlier;
2) Getting the private sector to work together with local governments to pursue nuisance abatement and receivership actions; and
3) Educating homeowners and building public awareness at a grassroots level.
This all would require, he acknowledged, a complete shift in the culture that underlies mortgage and foreclosure laws. “This is a process of changing attitudes through education and policy innovation,” he said.
Germaniuk recommends the following resources for those who may wish to research this area further:
Rubin, Roberta. “Stabilizing the Neighborhood Stabilization Program” 19 J. Aff. Hous. 3 (2009).
Schwartz, Laura. “The Neighborhood Stabilization Program: Land Banking and Rental Housing as Opportunities for Innovation” 19 J. Aff. Hous. 51.
Foreclosure and Beyond: A report on ownership and housing values following sheriff's sales, Cleveland and Cuyahoga County, 2000-2007.
Facing the Foreclosure Crisis in Greater Cleveland: What happened and how communities are responding. Coulton, Claudia J. and Kathryn W. Hexter, Federal Reserve Bank of Cleveland (2010).