I suspect most of my Runt Rants this year will be spin offs from the Sub Prime Meltdown of 2007. The crisis will reveal many weaknesses in our country, and opportunities to correct them. Today's Rant deals with an article by Michael Orey in Business week. Click here read the article.
Mr. Orey talks about those properties which have been abandoned by the owner, foreclosed upon by the lender, then left to deteriorate. He describes what certain communities are doing to address the problem. Lenders in that situation do have legal control over those properties. Lenders are and should be responsible for them.
Folks who own a residence in a residential neighborhood enter into a social contract with the other property owners when they acquire the property. The value of that property is in part created by the appearance and condition of the surrounding properties. Its a gift to the new owner bestowed upon him by the surrounding owners.
The social contract in part accepts responsibility for not doing harm to the newly acquired property which will negatively affect the rights and enjoyment created by the surrounding owners. If the contract is not fulfilled, the sum of the damage done to the neighbors far outweighs the cost the new owner avoided by exercising benign neglect.
An individual faces severe penalties when abandoning a property for foreclosure. Seven years of bad credit await him. Additional taxes from the dreaded IRS are levied for the shortfall incurred by the lender. Its a decision not to be taken lightly. The lender on the other hand can foreclose on that same property, cut costs by not maintaining the property, not pay taxes, and abandon the property to the county or city in another foreclosure.
The lender suffers nothing but the loss of the loan amount, which in good times is simply a charge against loan loss reserves. That affects current income and stock price multiples very little. The seven years of bad reputation, of bad credit, is not present. It can be a very easy decision to make when the lender decision maker is removed from the community as is so often the case in this new world of non local lenders.
The costs to the lender to take the abandonment route are negligible compared to the individual owner. Yet the costs to the community are extremely high; the sum of the loss in value of the neighboring properties, the cost to the local governments in legal fees and other carrying costs. The sum of those far, far exceed the cost to the lender of abandonment.
That's risk transfer, cost transfer at its clearest. That's a violation of the social contract. My rights end where your nose begins. I can't injure you without being liable for the damage I cause. Yet the lender who abandons the foreclosed property is doing just that. Almost all social contract violations can be traced to this simple violation.
If the cost and responsibility for any action can be transferred to others without fear of retribution, it will frequently be done. The article is highlighting certain communities efforts to make the lender honor the social contract. That to me is a good thing.
The author is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. kverrett@oak-acorn.com
I have the right to remain silent. Anything I say will be misquoted and used against me
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