U.S. Banks Refusing to Take Homes When Buyers Default

Cleveland resident Sharon Little had to file for bankruptcy in 2006.

As part of the bankruptcy, Little gave back her rental property to the (unnamed) bank that financed it, or at least she thought she did. But nearly three years later, Little began to receive bills from the city for damage to her vacant former home.

Investigating the matter further, Little was shocked to discover that her mortgage bank had refused to complete the foreclosure of her property, even in the face of her formal bankruptcy proceeding. The rental property was still legally deeded to Little even though she hasn't made a payment in years.

"Eventually, they're going to tear this house down," Little says. "Somebody's going to have to foot the bill, and frankly I think it should be the bank because it's their house. It's not my house really, so ..."

But Little acknowledges the bank isn't really motivated to do anything differently.

"I surrendered these properties back to you all. I said, 'You keep leaving them in my name, I'm getting these tickets.' They don't care. They're not getting a ticket. They're not getting threatened with jail."

Eventually Little took matters into her own hands and paid to have a new deed written up which gives her house back to her lender.

Cleveland resident Sharon Little stands in front of the foreclosed home her bank refused to take back.

Cleveland Housing Court Officials say they are seeing homeowners in default take matters into their own hands this way more and more frequently. Foreclosure isn't complete until the property has been sold off at a sheriff's sale. When the wave of foreclosures first began to hit, when a bank offered a foreclosed property up at a sheriff's sale and no bids were made, the bank would then either buy the property back from itself or offer it again at the next sheriff's sale.

But as the backlog of foreclosed properties continued to build, more and more banks began to simply walk away if the first sales attempt of the property was unsuccessful; leaving the unwanted foreclosed home still deeded to the original owner who defaulted in the first place.

Now cities are facing a glut of homes even the banks don't want.

Ohio bankruptcy attorney Richard Nemeth is asking the state legislature to propose a law that would force lenders to follow all the way through on foreclosure proceedings, making it impossible for the banks to just dump the properties in this way.

"It's a really sad set of affairs when people don't want to touch a piece of real estate with a 10-foot pole," Nemeth says.

Until a solution is found, hard hit cities are forced to use tax dollars that are already in short supply to demolish substandard foreclosed homes. Most have been vacant and are stripped of all metal and piping, badly vandalized, and used by repeatedly by squatters and drug manufacturers by the time they are torn down.

The homes are becoming an urban hazard and a serious liability issue, and the cities that harbor them are forced to keep sending the demolition and repair bills around to anyone they think they can get to pay it. Finding a human being who will claim ownership has become a high stakes game of legal hot potato.

On the up side, a foreign investor looking for a good deal on foreclosed properties should, at this point, be able to bid almost anything at a sheriff's sale in a city like Cleveland and the city and the bank should jump at the chance to accept. What happens after that is totally up to the buyer.