Here's a great article by Jonathan Meador in the LEO about vacant properties in Louisville. Jonathan is doing more and better work on foreclosure and vacant properties than any other journalist in Louisville. And I'd say that even if he didn't quote me from time to time. Because he writes for a weekly, he's able to tell the stories of homeowners facing foreclosure and dive deeply into the complicated issues that drive homes into foreclosure and turn foreclosed properties into vacant properties.

Here's a quick breakdown of how the foreclosure crisis exacerbates the River City's growing problem with vacant properties and how banks avoid responsibility for maintaining their vacant property stock.

Homeowners and Tenants Leave Properties Threatened by Foreclosure, Often Months Earlier than Necessary

• Knowing they cannot pay, homeowners seek to avoid the embarrassment and uncertainty of a Sheriff’s “eviction” by moving out. Because the foreclosure process takes months, vacating during the foreclosure process creates a vacant, unmaintained property for at least a few months, if not much longer.

Bank Walkaways Create Long-Term Vacancies and Few Barriers Exist to Discourage this Practice

• Banks can decide to “walk away” from properties at three points: during foreclosure, following a foreclosure auction (but before the deed is transferred), and following the transfer of the deed.

• A bank will decide to “walk away” from a property when the cost of foreclosing and/or owning the property outweighs the benefit to the bank. Louisville’s enforcement mechanisms make the costs of walking away relatively minor.

The Bank’s Avoid Financial Responsibility for their Property in at least Two Ways 

1. Banks Avoid Accountability Through Lax Record-Keeping Requirements

• After the deed is in the bank’s name, the bank can avoid responsibility for maintenance and code violation on a property it owns through the widespread practice of not recording the deed at the County Clerk’s office.

• Many banks will not record their deed until they have found a third-party purchaser for the property.  This creates difficulty for Inspections, Permits, and Licensing to cite the right party for code violations because the bank has not recorded the transfer of ownership.

2. Banks Avoid Accountability Because Building Liens are Virtually Meaningless

• Even if IPL is able to levy fines against the proper party, the bank has no incentive to pay the fines. Should the city attempt to foreclose to collect its money, the bank that owes the money will be paid before the city in from the proceeds of the foreclosure action.

The Mandated Sale of Tax Liens Undermines Louisville’s Ability to Control Housing Stock

• Kentucky passed one of the first land banking statutes in the nation. This statute was intended to give cities the ability to foreclose on tax-delinquent property, scrub the taxes hindering its marketability, and return the property to productive use.

• Since the creation of the Louisville Land Bank Authority, the state has begun mandating the sale of delinquent taxes (“Certificates of Delinquency”) to private, third-party purchasers. The sale of these Certificates is also the sale of the right to foreclose on those properties. Now, out-of-state investors are in control of vacant properties rather than the city.

Louisville's foreclosure crisis has swollen the number of vacant properties in the city to between six- and eight-thousand (no one can say for sure). Three things are for sure, though. Vacant properties drive down the value of surrounding homes, erode neighborhoods, and contribute mightily to the diminution of property tax revenues in the River City. Louisville's response, both in the past and today, has been and promises to be ineffective to prevent banks from unnecessarily wasting our housing stock.

A recent C-J article described howout-of-state banks owe the city more than $200,000 in fines. I have to admit: when I read that article I thought, "Is that all?"

The house's owner owes Louisville Metro Government hundreds of dollars in fines and fees, along with $56,000 for 16 other properties around town to which it holds title. That owner is New York-based Citibank, one of nine financial institutions that owe Louisville Metro Government $242,000 in fines and fees for property maintenance violations at vacant houses –— money that the city likely will never collect.

Citibank owns 17 vacant properties that they continue to fail to maintain. The cost of this should be much greater than $56, 000 in unenforceable fines. Indeed, until the cost is greater, out of state banks will have few incentives not to foreclose and decide not to invest in "unprofitable" properties here in Louisville.

A recent report from the National Housing Institute articulated a multi-pronged approach that hard-hit areas like Cleveland are taking to avoid the blight of vacant properties. The key first step was to "change the economics of owning vacant property." This involved demolishing five times (200 to 1000) as many lots in 2007 as Cleveland did in 2006 along with levying stiff (read: high six figures) fines against irresponsible corporate investors for failure to maintain their property. The report's conclusion lays out the steps Louisville must take to avoid the loss of entire neighborhoods to blight imposed by out-of-state banks.

First, ramp up code enforcement to control the ownership and irresponsible transfer of post-foreclosure vacant property. In other words, change the economics of owning vacant property. Second, while fighting the immediate battle, be forward-thinking and start planning ahead for the sustainable reuse of accumulating vacant property. Third, and critically important, establish an entity, such as a land bank, that can receive and responsibly hold vacant property. It should be noted that any land bank can only be useful if it has the proper financial resources to undertake this task. Linking land banks to excess spin-off property tax revenue, as first developed by the Genesse County Land Bank, may be the single most important innovation in urban redevelopment in recent years.

One thing not recommended by the National Housing Institute report: shaming banks into paying their fines. This is the approach recently proposed by some our Louisville's most well-intentioned lawmakers. The lawmakers assembled a list of the banks who owe the city fines on their vacant and abandoned properties and sought to publish it in the Louisville Courier-Journal.

The idea is quaint. It is based on the old paradigm of mortgage lending: a belief that your banker is someone who lives in your community and cares about what happens here. For the most part, he (or she) does not. Jamie Dimon will not be in the congregation on Sunday.

A house sits vacant in Louisville

Citibank is not Stockyards Bank and Trust. Wells Fargo is not King Southern Bank.

Wall Street firms have securitized over eighty percent of all home loans in America, collecting them into massive trusts in which global investors can then buy shares. The creators of securitized trusts, the investors in securitized trusts, they do not care about a vacant property in Louisville. They care about their bottom line.

As corporations (out-of-state corporations), they cannot be shamed--they have no conscience. The only way they will take responsibility for their properties in Louisville is if Louisville makes it in the banks' financial interest to take responsibility.

For the last two years, I have been working on the front-end of the vacant property problem: defending homeowners from foreclosure and trying to prevent properties from being vacant in the first place. One of the things on which I want to focus next is what to do about the fallout from the foreclosure crisis: the thousands of vacant properties that continue to plague our city. I will write about solutions other cities are trying and ways to make Louisville's land bank more effective. (Hint: the NHI recommended "proper financial resources.")

Louisville's inadequate response to its foreclosure crisis has created a second, more enduring crisis: a growing number of vacant and abandoned properties. The crisis of abandoned properties harms blameless neighbors by devaluing their homes and inviting crime into their communities. Without bold action, this second crisis threatens to undermine the integrity and livability of entire neighborhoods. A quick look at the location of these vacant properties reveals that this issue, like so many, is not just an economic issue, but a civil rights issue, as well.

If you are looking to fall down the rabbit hole of foreclosure defense, here are some places to add to your bookmark bar:

Listservs
HAMP Enforcement Google Group--Sarah Parady and Rebekah Cook-Mack serve up a hot mess of strategies to help homeowners qualify for Home Affordable Modification Program loans and to use HAMP as a sword and a shield in court.
NACA Foreclosure Listserv--the National Association of Consumer Advocates' active and expert-laden listserv. Ask a question, get a quick answer or fifty. Gotta be a NACA member to participate in the listserv.

Websites
NCLC Studies--the National Consumer Law Center does great reports. Witness: Why Servicers Foreclose When They Should Modify, And Other Mysteries of Servicer Behavior. The full list of special reports should keep you busy for a while!
Max Gardner--a bankruptcy ninja in North Carolina, Max's blog has a good mix of general housing/foreclosure news and highly-specific litigation aids like this one.
Credit Slips--a high-level and useful blog from law professors and practitioners about credit and finance.
Calculated Risk--a blog about housing and the economy. Beautiful graphs.

Books
I'm one of those guys that thinks that the answers to everything are in a book somewhere, so when I started at Legal Aid Society I read Financial Shock: A 360 Degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Crisis by Mark Zandi, an economist at Moody's. It helped me get a quick lay of the land and understand the relationships between all the mortgage players: the Federal Reserve, originators, brokers, servicers, securitized trusts, Wall Street, and homeowners.

Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisi