Forced by the harsh realities of the real estate market, lenders are increasingly likely to allow defaulting owners to remain in their homes — a change in attitude and strategy that is helping to buoy some neighborhoods while further slowing the nation’s foreclosure process.
Some lenders are now willing to make deals with owners to let them stay after defaulting, offering to pay home insurance, for example, while the resident pays for utilities.
Other lenders simply look the other way, quietly putting off foreclosure sale dates, knowing that the costs of the ordeal probably exceed the diminishing value of the properties.
The evolution in thinking was perhaps inevitable, experts say. Across the country, more than 644,458 properties were lingering in bank ownership at the end of January, but even more — some 710,725 — were coming down the foreclosure pipeline, according to RealtyTrac, a real estate and foreclosure analysis firm.
In addition, states and municipalities have grown more aggressive in the last few months in trying to force banks to maintain foreclosed properties, which have become blights on neighborhoods from coast to coast.
Last month, lawmakers in Florida and courts in New York considered new ways to require lenders to alter loans to keep people in their homes or complete foreclosures more quickly.
“Under normal circumstances, the banks would be able to cover the cost of maintenance, upkeep and property taxes by just reselling the property, but these are desperate times, and banks are resorting to somewhat desperate measures in some cases,” said Daren Blomquist, a vice president at RealtyTrac, a real estate analysis firm. “It is more of a factor now because property values have come down and will not cover all these costs when the banks resell the property, if they can resell the property.”
When the housing bubble burst almost six years ago, millions of Americans were forced to vacate their homes within months of defaulting, in a system that worked like an eviction mill, often resulting in vandalized properties and bitter feelings between banks and borrowers.
Since then, the average time it takes to complete a foreclosure has nearly tripled nationwide, from four months in 2007 to about a year at the end of 2011, according to RealtyTrac, with the slowdown most evident in some of the hardest-hit states, including California, Florida and Illinois. Homeowners in Florida who default can now expect to wait more than two years in legal limbo, the one big upside being the opportunity to remain at home without paying for home.
As a result, the relationship between many borrowers and lenders is softening from outright animosity to something that more resembles a détente.
Michelle Murray-Clark is one of the beneficiaries — or so she calls herself on a good day. A grocery clerk who found work last month after three years of unemployment, Ms. Murray-Clark has not made a mortgage payment in 40 months. American Home Mortgage Servicing, the loan processor, has not taken steps to evict her and is working on a third attempt at a loan modification.
The company is also paying insurance on her little house with the blue aluminum siding near downtown Orlando. They talk every week.
“Our whole philosophy is that it’s beneficial to keep people in their homes — better for the consumer, the investors, and for us,” said Philippa Brown, the vice president for corporate communications at American Home Mortgage Servicing. “Our job is to work with homeowners who are experiencing hardship and find ways that will keep them in their homes. We’re open to new ways of doing things.”
Guy D. Cecala, the publisher of Inside Mortgage Finance, an industry newsletter, explained: “Are you better off leaving a defaulted borrower in there if they’re at least maintaining the property? A lot of times, the answer is yes.”
Many wonder why it has taken the banks and loan servicers so long to adapt. Andrae Bailey, executive director of the Community Food and Outreach Center in Orlando, said, “We are seeing lenders start to work with families in a way that would have made sense in 2008.” But he worries that because so many neighborhoods have already deteriorated, “it’s too little too late.”
These days, some banks announce their willingness to compromise to keep houses occupied. Vickee Adams, a spokeswoman in the home mortgage division of Wells Fargo, said, “To the point of folks remaining in their homes, there is a benefit to keeping a community active with residents.”
Other lenders are often reluctant to discuss such arrangements because of questions of fairness that are inevitably raised: why should defaulting homeowners get a break?
The slowing of a process that was widely seen as out of control has been a welcome relief to many borrowers who are likely to be in economic distress as a result of long-term unemployment or underemployment, experts say. But interviews with several homeowners who have had lengthy stays in their homes after defaulting show that the impact on their lives is both a blessing and a curse.
“Sometimes I wake up in a foul mood,” said Ms. Murray-Clark, 52. “The mortgage company, they say, ‘We’re going to work with you,’ so I stop packing. Then they say, ‘Sorry, it didn’t work,’ and I start packing. Then they say, ‘Let’s try again!’ And I stop packing.”
“I know that this is way long for anybody to be in their house,” she said.
But every day, questions nag: Should she save her first paycheck to pay for movers, or should she make repairs to the roof? If the latest attempt at a loan modification comes through, how will she pay for the accumulated interest and penalties?
“It’s very tense, because I don’t know what’s going to happen,” she said.
Judith Fox, a law professor who directs the Economic Justice Project at the Notre Dame Law Center in South Bend, Ind., has changed the advice she gives defaulting clients. “Three or four years ago, I would always tell clients, ‘You have three or four months to get yourself together,’ ” she said. “Now I tell folks, even if they’ve been foreclosed, ‘Just stay put, because it could be years before anything happens.’ ”
One of Ms. Fox’s clients is Nicholas Cline, 35, a construction worker who fell behind on his mortgage payments in 2009. (He thought he had modified his loan, but the company he was working with has since pleaded guilty to criminal fraud.) The bank that holds Mr. Cline’s mortgage has left him alone, he said. No letters, no calls, no hassles.
“But now that it’s going on three years, what do you do?” Mr. Cline said. “I am living in my house. But the stress of this, not knowing what’s going to happen or when, it’s an unbelievable burden on your mind.”
In New York, the time to complete a foreclosure has almost quadrupled, from 263 days in 2007 to 1,019 days in 2011. Abraham Kleinman, a lawyer in Uniondale who represents homeowners fighting foreclosure, said he counseled a client who felt guilty about remaining in his home so long after defaulting. “He says to himself, ‘I’m sitting here rent free, it can’t go on forever,’ ” Mr. Kleinman said. “But the plaintiff has not been aggressive. As near as I can tell, they’ve put this to the side.”