Abandoned Buildings

As seen on The Wire or perhaps in an economically depressed urban neighborhood near you, one of the most problematic aspects of urban blight concerns abandoned buildings -- structures who nobody owns because nobody wants to pay the taxes on them. They fall into disrepair, make the block look ugly, become havens for dubious activities or vermin, and it's all generally a bad scene. And it now seems that some banks have decided they'd rather abandoned foreclosed properties in high-foreclosure areas rather than take on ownership (and tax obligations) of a property they won't be able to sell.

One would expect to see the most of this sort of thing these days not in big cities, but in the sprawling exurban boomtowns where most of the truly excessive property building seems to have happened. It's more evidence, in other words, for the Christopher Leinberger new suburban slum thesis.

Comments

Reason #356 it's a dumb idea to tax somebody merely for owning real estate.

Posted by Jasper | April 4, 2008 2:23 PM

I'm in one of those blighted urban neighborhoods. there's one abandoned house behind me and three half a block away. And we're still considered a good neighborhood- by Baltimore's standards at least. One good thing about all this and the market slow down: it has forced people to stay put, bond with each other and create activists out of all of us. Who knew we'd all be up on housing code violations?

Posted by Lesley | April 4, 2008 2:26 PM

Holman Jenkins suggested in a recent WSJ column that demolition of some foreclosed houses may be a sensible step even when the houses are in good physical condition.

On the other hand, the suburban neighborhood where I've lived for the past decade, developed mainly in the early to middle 1960's, had many abandoned houses 15 or 20 years ago. Today there are none.

Posted by Peter | April 4, 2008 2:27 PM

I live in Philly, where the northeastern part of the city is dominated by block after block of abandoned homes, businesses and warehouses. I think city developers should have to pay some kind of demolition insurance that would pay out when the property owner can no longer pay taxes and a new buyer can't be found. Kind of a half-baked idea, but I don't know how else you'd accomplish something like this.

Posted by omellet | April 4, 2008 2:31 PM

I don't know when that fella developed his "suburban slum" thesis, but I have understood that is the future for quite some time just looking at population trends in DC as gentrification has progressed. Poor blacks are being displaced by more affluent whites and those poor blacks are moving out to PG county. And there are some areas of PG county, like Capitol Heights, that have all the crime and poverty equivalents of the poorest neighborhoods in DC.

It used to be called the donut, which was the rich neighborhoods and suburbs of cities, with the blight making up the hole in the middle. Now it is looking more like a donut hole, with the rich and affluent taking back the central cities, and near neighborhoods, with the poor moving out the cheaper suburbs.

C'est la vie.

On the topic of abandoned housing, I wonder how this flies right after the Senate refused to consider the Durbin Amendment to allow bankruptcy courts to renegotiate mortgages for people in bankruptcy. It is crazy, because the mortage industry fought that, but it looks like they would rather just maintain the same level of current incentives where people just go into foreclosure and walk away and then they just walk away too.

The rational way to think about this is that their real plan is to lobby for debtors prisons, indentured servitude or just plain debt slavery.

Posted by Bubba | April 4, 2008 2:32 PM

A reality-based community ought to wait for some actual evidence that there are large numbers of properties in default on mortgages to institutional lenders that are being abandoned by said lenders, rather than worrying about hypotheticals. It's a very unusual property that is worth less than its property taxes. As for Lesley, there isn't any evidence given here that there are institutional lenders with mortgages on the abandoned properties in question.

More likely, what you have ia short-term problem where some lenders have more foreclosures than they can handle, and a few properties are being lost in the shuffle. There was an apartment building on Park Avenue in New York City about 15 years ago that ended up being owned by the City because the S&L that had owned the mortgage failed and no one noticed this particular asset, but that's very unusual and the market will correct this problem faster than some new set of banking regulations.

Posted by y81 | April 4, 2008 2:35 PM

The odd thing is that the properties are being abandoned by the homeowners too. After all, if the bank isn't taking title to the property, then the homeowner (who defaulted on the mortgage) still has title, and still gets to live in the house.

Posted by Al | April 4, 2008 2:39 PM

1) Why doesn't the sheriff auction the abandoned house off for taxes and let someone buy it really cheaply? E.g, for $20,000 vice $200,000?

2) If abandoned houses are caught before they really deterioate, they still have much value. Better to give them to someone who will maintain them than to let them collapse to the point that a costly demolition is required.

Of course, that means that banks have to acknowledge their losses up front -- instead of carrying slums for years on their books as valuable assets.

3) The pathology is not in the economy or the neighborhoods -- it's in the minds of the people running our governments.

Posted by Don Williams | April 4, 2008 2:42 PM

Urban homesteading, Matty. Go the East Village (NYC) and you'll see whole blocks that were rebuilt by homesteaders in the late 70's early '80s.

Posted by sadhkj | April 4, 2008 2:44 PM

"Why doesn't the sheriff auction the abandoned house off for taxes and let someone buy it really cheaply? E.g, for $20,000 vice $200,000?

Tax auctions have been done for years.

Posted by Fred | April 4, 2008 2:44 PM

Look on the bright side. Having abandoned buildings nearby does add variety. For example, it probably provides entertainment for bored teenagers.

Posted by Jim W | April 4, 2008 2:45 PM

Al, that is an interesting thought, but there has to be something else there. If the lender initiates foreclosure, then you lose title, but if the lender decides not the take the title themselves, then I assume title will revert to the city, who would then sell it at their property-tax foreclosure auctions.

The key is that it says that they lender goes through foreclosure, so if that happens, the sherriff comes to your door and kicks you out. After that, I couldn't guess who would have title. If it did stay with the defaulted homeowner, then the lender would take a lien on the property. However I cannot see them exchanging a lien for allowing you to stay there for free. I bet they are kicking out the owners then walking away.

I'll have to look into this. Definitely interesting.

Posted by Bubba | April 4, 2008 2:48 PM

I cannot seem to find any specific information on how this works, but if I was going to assume anything, it would be this.

Foreclosure proceedings kick out mortgage holder. Lender does not take title, but puts a lien on the property. Property reverts to municipality for property tax arrears. And then the municipality now has the burden maintaining it and trying to sell it at auction, while the lender just sits back with the lien and waits for the market to rebound to get their money back.

Or....they are trying to blackmail municipalities to negotiation resolution of the liens with them because it would cost the cities probably a lot more money in maintenance, lost property tax revenues and blighted communities if those properties just remained abondoned until the day that the market rebounds. Because all the lenders have to do is sit and wait for that day to come and they will get paid and just lose whatever the difference in inflation is from now to whenever the market comes back. I am telling you, don't be surprised if this is not a ploy for blackmail to get basically a bailout of the full value of the loan.

Considering their moves in Congress to do everything they can to prevent people from renegotiating lower rates, this has to be the endgame.

Posted by Bubba | April 4, 2008 2:58 PM

I just want to note that way too many abandoned buildings get bulldozed before they are dangerous or irrecoverable--indeed, in many cities historic homes and buildings that would be worth a fortune today were bulldozed during local downperiods. And that is indeed in part because local property tax schemes, ill-conceived (or just downright corrupt) development plans, and similar factors often favor bulldozing over long-term value preserving measures.

Posted by DTM | April 4, 2008 3:01 PM

New York has a solution to this - at least for commercial real estate. Each county (and some towns) have Industrial Development Agencies, which are tax exempt. They take possession of the property, lease it to a corporation, and charge "pilots" - payments in lieu of taxes, which are a fraction of what the taxes on the property would be.

The PILOT Agreements generally cover a ten-year period, in which the pilots go up, until they finally reach the level of actual taxation, at which point the agency will transfer the property to the corporation for fair market value. That way the company has a decade to get up and running, paying only a portion of the commercial real estate taxes.

Posted by Trigger | April 4, 2008 3:02 PM

Bubba,

The municipality's tax lien generally takes precedence over the mortgage lender's lien; the mortgage lender isn't in any position to blackmail or wait out the municipality, AFAIK.

Posted by Fred | April 4, 2008 3:05 PM

As I remember, the City of New York ended up owning and managing a lot of apartment buildings three decades ago or so. They didn't like it, but they developed a system, and, I think, ultimately unloaded the property at a neat profit (or a little profit, or something better than taking a bath). You could look it up, if you had more time than I do.

Maybe what Trigger says above was part of this. And Fred's right, too, I think. Local governments have to take prompt action, however. If they do, this is not any bigger problem than having a lot of property in tax arrears or foreclosure naturally is.

Posted by David in NY | April 4, 2008 3:24 PM

OK, here's my plan: the trade-down. We set up a system where we keep track of all soon-to-be-foreclosed houses, and set up a system where people take over homes that are one step down in price.

People in McMansions move into normal-sized houses. People in normal-sized houses more into starter homes. People in starter homes move into old houses in old city neighborhoods.

And then we cut the McMansions up into condos, and the people who can't afford the mortgages on their cheap houses in city neighborhoods move into those condos.

My professors in the Regional Planning program would be so proud.

Posted by joe from Lowell | April 4, 2008 3:30 PM

The banks don't want them but they'll loan other people the money to buy them.

The invisible hand of the market place
rational actors

If it's in Friedman, it's redundant. If it isn't, it's pernicious. Burn them.

Posted by Jeffrey Davis | April 4, 2008 3:41 PM

"The odd thing is that the properties are being abandoned by the homeowners too. After all, if the bank isn't taking title to the property, then the homeowner (who defaulted on the mortgage) still has title, and still gets to live in the house."

Exactly. Banks not wanting to take possession of a house or title is the last thing anybody should be worrying about in the housing crisis.

But because this has been declared a crisis, all the news must be catastrophic. HOME PRICES ARE FALLING!!! YIKES!!! Sounds terrible for everyone except the millions of people who have been closed out of the housing market by high prices.

Posted by Helter | April 4, 2008 3:52 PM

Fred:

The property tax lien is first lien position. But it appears that you are correct, it does extinguish all other encumberances, like mortgage liens, except IRS tax liens are not extinguished by a tax foreclosure.

It gets more and more interesting.

So, these folks will force out the motgage holders through foreclosure proceedings and then once the people who are taking care of the property are out, they just walk away. You wonder why they wouldn't want to be able to renegotiate that mortgage in a bankruptcy proceeding instead. Because this just seems nuts or perhaps they are just lobbying against self interest?

Banking lobbyists and Republicans said the Durbin amendment would intrude on contracts and drive up interest rates.
So they would rather just walk away instead and no one gets anything? Truly bizarre.

There has to be some play here though and it has to revolve around angling for some form of bailout and just using this as an excuse for it. Basically, they will say "If you don't bail us out, we'll just take the write down and in the process destroy entire communities"

Posted by Bubba | April 4, 2008 3:57 PM

Hopkins is in the process of razing lots of vacants to build a biotechnology park adjoining the med school (which is in the middle of East B-more, as I understand it...they actually made reference to Hopkins buying up all the East Baltimore real estate in The Wire). Their first phase was to knock down about 6 or 7 city blocks real estate. On those 6 or 7 blocks, there were 6 or 7 tenants. That, to me, is astounding.

Posted by john | April 4, 2008 4:28 PM

Assuming that the banks don't have a legal right to see your new tax forms and find out what you're actually making, this could be a signaling issue.

If the banks start renegotiating mortgages and taking minor write-downs on those properties, soon everyone remotely marginal will pretend to be insolvent in order to get their mortgage renegotiated since they have nothing to lose. The costs for the banks of verifying all these claims and deciding whether the mortgage should really be renegotiated would almost certainly be prohibitive.

If the banks insist on foreclosing on anyone insolvent, even if they have to abandon the house afterward, then the banks take some larger write-downs on those properties but they avoid the flood of people claiming to be insolvent in order to get lower mortgage rates.

Posted by Po-Mo Polymath | April 4, 2008 4:29 PM

It'll be interesting to see if a squatter culture springs up in the 'burbs, as it did in cities in the past.

Posted by Thlayli | April 4, 2008 4:59 PM

"It'll be interesting to see if a squatter culture springs up in the 'burbs, as it did in cities in the past."

I can't see it happening unless the suburbs lose all the qualities that make them desirable. A house someone bought in a good neighborhood for $450k could have a punishing mortgage right now, but that doesn't mean someone won't buy it at $250k, or $100k or $50k.

Posted by Helter | April 4, 2008 5:24 PM

Helter,

It really depends on economic and population trends. If, say, some region overbuilt suburban housing during the housing bubble, and the regional economy is now suffering, jobs are being lost, and people start moving away, then it is indeed possible some suburban homes in that region will end up being abandoned for lack of demand at any price.

One of the reasons that happens, by the way, is all the other costs associated with homeownership besides the price itself, including taxes, utilities, maintenance, commuting and other transportation costs, insurance, dealing with your neighbors (not always a cost, but sometimes), and so on. Once the total costs of owning a particular home outweigh the perceived benefits (in light of the available alternatives), it can't be sold at any price.

Posted by DTM | April 4, 2008 6:40 PM

"One of the reasons that happens, by the way, is all the other costs associated with homeownership besides the price itself, including taxes, utilities, maintenance, commuting and other transportation costs, insurance, dealing with your neighbors (not always a cost, but sometimes), and so on."

Sure, but you also have to pay all those things when you rent someplace. You just pay it via the owner. Unless people become homeless, they need to pay something for housing. Lowering a mortgage payment by half saves a lot of money, reducing the number of people who can't afford to own a home.

Posted by Helter | April 4, 2008 10:56 PM

Re: You wonder why they wouldn't want to be able to renegotiate that mortgage in a bankruptcy proceeding instead. Because this just seems nuts or perhaps they are just lobbying against self interest?

Because they have (almost) no experience doing this. In the past, when someone defaulted on a mortgage it was usually because s/he had sufefred some major calamity (job loss, death divorce, disabaility) and couldn't afford the house no matter how lenient the terms. Also, don't forget many of thes properties are not owner-occupied: some idiot who watched "Flip This House" bought them on a Get-Rich-Quick gamble. Why should those jerks be bailed out?

Posted by JonF | April 4, 2008 11:19 PM

Hmmm. Since the banks are abandoning them, why not invite the families who lost the home, get the first refusal to move back to live in their old home? Maybe with the proviso that they pay rent to the municipality. That will keep the houses occupied, the community alive, and bring in some minimal revenue to the community. Just a thought...

Posted by beowulf888 | April 5, 2008 2:35 AM

Also, don't forget many of thes properties are not owner-occupied: some idiot who watched "Flip This House" bought them on a Get-Rich-Quick gamble. Why should those jerks be bailed out? Posted by JonF | April 4, 2008 11:19 PM

There is no incentive for investors to go into foreclosure, because they can renegotiate their mortgage debt on investment properties. You just cannot do that in your own homestead owner-occupied home.

Investors are actually in a pretty good position. They could just negotiate a short sale with the lender and get out of the investment. If it is your own home and you cannot afford it anymore and know that you will have to move back to rental housing, if you go through foreclosure instead of trying for a short sale, you could claim thousands and thousands of dollars in free rent for the 5 months or so it takes for foreclosure proceedings to go ahead. You could even drag it along a bit by calling the lender and making arrangements to make payments on the past due payments and pay a little of that but not all. That could probably save you another month or two as well.

Posted by Bubba | April 6, 2008 6:02 PM