South Bend Indiana Joins Dumped Foreclosure Epidemic

Foreign real estate investors are often shocked by the low price tags on houses in the industrial midwest. Australian news shows have recently featured segments on homes in Detroit that are selling for $1,000 or less, and even Americans are shocked that the average price on a home in Detroit has fallen to an astonishing $18,000.

A person who lives in a country where the average home price is well over $300K can be forgiven for thinking this must be an exaggeration or, on the flip side, the greatest opportunity of the century.

But it's complicated. Americans know that. Foreign investors might not.

Home values in some parts of the midwest have this year fallen so low that lenders are deciding that some of the

Mercy James house in South Bend was dumped by the lender after foreclosure. Now the city wants her to pay for a tear down.

mortgages in default are now made on homes that have become liablities; homes that are not worth $1,000 or $100 or $1, homes that actually have negative value and are not even worth the cost of the foreclosure process. South Bend, Indiana has recently joined the ranks of midwestern cities in which many lenders are quietly walking away from homes in foreclosure, not even bothering to offer them at sheriff's sale. The homes are just abandonned, still titled to the original borrower who unknowingly is left responsible for maintence and eventually a total tear down by the city.

In effect, foreclosure for borrowers who own property in these areas has turned into a legal argument over who is responsible for the cost of demolition.

Often the first clue that a home has been dumped is a letter to the  borrower from the city government demanding that the home be brought up to code and that code enforcement fines be paid immediately. Often when this letter arrives, the foreclosure has already come and gone and the home has been vacant for so long that scrappers and vandals have stripped the plumbing, wiring, fixtures, and windows and resold whatever else they could lay their hands on. The original borrowers usually have  no idea that the homes legally still belong to them until the letter comes from the city, at which point the homes are uninhabitable.

This $4900 South Bend repo (in my childhood neighborhood) is being taxed at $1800 per year.

A recent New York Times article featured South Bend as the latest dying midwest industrial center to be hit by this ugly trend. Earlier news stories reported on the same phenomenon occuring in Cleveland and Detroit. The problem is most acute at the bottom end of the market, where homes did not have a lot of value to begin with, but were nevertheless at one time viable properties that provided shelter and justified an inflated mortgage on terrible terms: terms that enriched someone who is now long gone from the picture, often a broker or defunct lending institution.

“The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can,” said Guy Cecala, publisher of Inside Mortgage Finance. “It’s just a sign of the times that things are so bad no one wants to take possession of the property.”

This 800 square foot bank repo in South Bend Indiana is listed at 11K and is currently being taxed bythe city at $2705.00 per year.

Complicating the problem in South Bend are tax rates so out of whack with property values that investors can't buy homes at any price and expect to make money. In some of the worst neighborhoods, it is not uncommon to find homes that are being taxed at 25-50% of their asking price. The difference between property taxes with a homestead exemption (a situation in which the borrower actually lives in the house) and without (an investment property) can run into the thousands of dollars in neighborhoods where the homes themselves can't be sold for that amount.

That fact alone makes South Bend Mayor Stephen J. Luecke's comment to the NYT sound more than a little bit disingenuous: “It’s just a crime the way it puts people in limbo." Luecke said as he tried to sound compassionate for the press. "They first off have gone through the grief of losing their house, then they move out and find out that they still own it and have responsibility for it.”

Yes, its so sad. So how about that tax rate Mayor Luecke? How about if the city stops taking its cue from Flint and Detroit? How about making these properties attractive to foreign investors if American banks don't want them and the city of South Bend doesn't want them?

How about doing, well, anything at all?