Back in April the Sun Sentinel news in Ft. Lauderdale, ran an investigative series titled Bad-Neighbor Banks, which focused on the side effects of the South Florida foreclosure crisis. The article describes how some of “the world’s biggest banks” have left vacant homes to literally rot away.
In Florida the problem is magnified by the number of (abandoned) homes with swimming pools, one of which the article documents “turned into a stagnant pond with poisonous toads,” and another is described as “Filthy, dirty” with the potential to become “a breeding ground for mosquitos or becoming a health hazard.”
Of course swimming pools are not the only problem. Another property is described as follows:
The yard grew so wild it became home to rats and snakes. Ants, bees and termites thrived, and infested Gibson’s house next door. In September 2009 it came to this: Someone set up an auto repair shop on the front lawn. “He has a crane in the yard to remove motors from cars.”
Unfortunately, the story is not just about eyesores, blight and depressed value. There is also tragedy:
In Miramar in October 2009, a common worry of parents came true. While his family was busy unpacking boxes and moving into the house next door, a toddler wandered into the backyard of an unoccupied, bank-owned house and drowned in the pool.
The boy’s mother, Margarette Francis, told investigators the water was so dark and thick with “garbage” it was unrecognizable as a place to swim.
“It was, oh, disgusting and I don’t think the baby knew there was a pool,” she said. “The only thing I can tell you is the slide attracted him … He probably thought he was walking into a playground and he walked right into the … water.”
The problem is largely a result of an ironic process known as “bank walkaways,” which leaves the question of who is the legal owner of the home responsible for the up keep. A walkaway story appeared in the Cleveland Plain Dealer back in July of 2009, that discussed the shock that many “homeowners,” face when they learn that they had not legally lost their home (and responsibilities) after all, despite the fact that they had been foreclosed on.
The Plain Dealer article described bank walkaways as a disturbing trend. Three years later in South Florida, the nightmare has become reality.
In addition to being fascinating reading the article(s) elicit some questions.
At what lengths can a municipality go to enforce property codes? Is a bank who sold the mortgage to investors, merely a “trustee” and not a true owner? If the owners are the investors in mortgage backed bonds, is the full cost (liability) of maintenance or home razing reflected in the value of the bond?
The issue is not likely to go away anytime soon. In addition to these questions, investors need to put the issue in the following perspective: somebody has a potential liability that might no be reflected in current market prices. Depending on the answers to the legal questions posed;either the banks or mortgage backed bonds, might not be worth what you think they are. If the legal burden falls on the previous “homeowner,” municipalities (think muni bond holders) might have a bigger problems than they think they have now.
It would behoove investors to keep an eye on this story line and related analysis in an effort to quantify just how big the issue could become (if it truly is a problem). Meredith Whitney was villified late when she appeared on sixty-minutes in late 2010 to disucss the diffuculties facing municipalities and predicted a wave of muni defaults. Many in the financial world (or at least media) have taken the fact that these defaults did not occur as an all clear signal in terms of municipal bonds.
Unfortunately I am not so sure we have seen the end of this movie. We can only pray that there is no sequel.
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