Mortgage Foreclosures:

Additional Mortgage Servicer Actions Could Help Reduce the Frequency and Impact of Abandoned Foreclosures

GAO-11-93: Published: Nov 15, 2010. Publicly Released: Nov 15, 2010.

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Entities responsible for managing home mortgage loans--called servicers--may initiate foreclosure proceedings on certain delinquent loans but then decide to not complete the process. Many of these properties are vacant. These abandoned foreclosure--or "bank walkaway"--properties can exacerbate neighborhood decline and complicate federal stabilization efforts. GAO was asked to assess (1) the nature and prevalence of abandoned foreclosures, (2) their impact on communities, (3) practices that may lead servicers to initiate but not complete foreclosures and regulatory oversight of foreclosure practices, and (4) actions some communities have taken to reduce abandoned foreclosures and their impacts. GAO analyzed servicer loan data from January 2008 through March 2010 and conducted case studies in 12 cities. GAO also interviewed representatives of federal agencies, state and local officials, nonprofit organizations, and six servicers, among others, and reviewed federal banking regulations and exam guidance. Among other things, GAO recommends that the Federal Reserve and Office of the Comptroller of the Currency (OCC) require servicers they oversee to notify borrowers and communities when foreclosures are halted and to obtain updated valuations for selected properties before initiating foreclosure. The Federal Reserve neither agreed nor disagreed with these recommendations. OCC did not comment on the recommendations.

Using data from large and subprime servicers and government-sponsored mortgage entities representing nearly 80 percent of mortgages, GAO estimated that abandoned foreclosures are rare--representing less than 1 percent of vacant homes between January 2008 and March 2010. GAO also found that, while abandoned foreclosures have occurred across the country, they tend to be concentrated in economically distressed areas. Twenty areas account for 61 percent of the estimated cases, with certain cities in Michigan, Ohio, and Florida experiencing the most. GAO also found that abandoned foreclosures most frequently involved loans to borrowers with lower quality credit--nonprime loans--and low-value properties in economically distressed areas. Although abandoned foreclosures occur infrequently, the areas in which they were concentrated are significantly affected. Vacant homes associated with abandoned foreclosures can contribute to increased crime and decreased neighborhood property values. Abandoned foreclosures also increase costs for local governments that must maintain or demolish vacant properties. Because servicers are not required to notify borrowers and communities when they decide to abandon a foreclosure, homeowners are sometimes unaware that they still own the home and are responsible for paying the debt and taxes and maintaining the property. Communities are also delayed in taking action to mitigate the effects of a vacant property. Servicers typically abandon a foreclosure when they determine that the cost to complete the foreclosure exceeds the anticipated proceeds from the property's sale. However, GAO found that most of the servicers interviewed were not always obtaining updated property valuations before initiating foreclosure. Fewer abandoned foreclosures would likely occur if servicers were required to obtain updated valuations for lower-value properties or those in areas that were more likely to experience large declines in value. Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers' foreclosure practices, such as whether foreclosures are completed; however, given the ongoing mortgage crisis, they have recently placed greater emphasis on these areas. GAO identified various actions that local governments or others are taking to reduce the likelihood or mitigate the impacts of abandoned foreclosures. For example, community groups indicated increased counseling could prevent some borrowers from vacating their homes too early. Some communities are requiring servicers to list properties that become vacant properties on a centralized registry as a way to identify properties that could require increased attention. In addition, by creating entities called land banks that can acquire properties from servicers that they otherwise cannot sell, some communities have provided increased incentives for services to complete instead of abandon foreclosures. However, these actions can require additional funding, have unintended consequences, such as potentially encouraging servicers to walk away from properties before initiating foreclosure, and may not be appropriate for all communities.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Although the Office of the Comptroller of the Currency (OCC) did not conduct a formal, documented assessment of whether it had the authority to implement the other recommendations in the report, its staff determined that it did not need to seed such authority but could issue its own guidance on these issues, which they saw as needed given the unprecedented challenges and high foreclosures banks are facing in the current economic environment and the agency's increased attention to mortgage servicing issues with the issuance of consent orders against several national banks in April 2011 for deficiencies in their foreclosure practices.

    Recommendation: The Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should determine whether any additional authority is necessary and, if so, work with Congress to ensure they have the authority needed to carry out these actions.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  2. Status: Closed - Implemented

    Comments: On December 14, 2011, the Office of the Comptroller of the Currency (OCC) released guidance on foreclosed properties to national banks, federal savings associations, and their examining personnel (OCC 2011-49). This guidance states that since the decision to forego foreclosure and release the lien on a property is often based on financial considerations, OCC-supervised entities acting as mortgage servicers should ensure that their valuations of properties provides the best information practicable before initiating foreclosure and subsequently deciding to release the lien.

    Recommendation: To help homeowners, neighborhoods, and communities address the negative effects of abandoned foreclosures, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should require that the mortgage servicers they oversee obtain updated property valuations in advance of initiating foreclosure in areas associated with high concentrations of abandoned foreclosures.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  3. Status: Closed - Implemented

    Comments: In July 2012, the Board of Governors of the Federal Reserve System issued guidance applicable to state member banks, bank holding companies, and savings and loan holding companies with residential mortgage servicing operations requiring them to have a process for obtaining the best practicable information on the value of a residential property subject to foreclosure and using current information in their assessment as to whether to initiate, continue, or abandon a foreclosure proceeding. According to the guidance, the Federal Reserve is requiring this step to emphasize the importance of appropriate risk management practices and controls in connection with the decision to not complete foreclosure proceedings once initiated after obtaining information on the impacts of this practice in our report.

    Recommendation: To help homeowners, neighborhoods, and communities address the negative effects of abandoned foreclosures, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should require that the mortgage servicers they oversee obtain updated property valuations in advance of initiating foreclosure in areas associated with high concentrations of abandoned foreclosures.

    Agency Affected: Federal Reserve System: Board of Governors

  4. Status: Closed - Implemented

    Comments: On December 14, 2011, the Office of the Comptroller of the Currency (OCC) released guidance on foreclosed properties to national banks, federal savings associations, and examining personnel (OCC-2011-49). This guidance states that if OCC-supervised entities acting as mortgage servicers decide to forgo foreclosure and release the lien on a property, such institutions should make appropriate notifications to the local jurisdiction when they make the decision to release a lien in lieu of foreclosure.

    Recommendation: To help homeowners, neighborhoods, and communities address the negative effects of abandoned foreclosures, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should require that the mortgage servicers they oversee notify local authorities, such as tax authorities, courts, or code enforcement departments, when they decide to charge off a loan in lieu of foreclosure.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  5. Status: Closed - Implemented

    Comments: In July 2012, the Board of Governors of the Federal Reserve System issued guidance applicable to state member banks, bank holding companies, and savings and loan holding companies with residential mortgage servicing operations stating that they should make reasonable efforts to notify appropriate local authorities of the decision to not pursue a foreclosure. According to the guidance, the Federal Reserve is requiring this step to emphasize the importance of appropriate risk management practices and controls in connection with the decision to not complete foreclosure proceedings once initiated after obtaining information on the impacts of this practice in our report.

    Recommendation: To help homeowners, neighborhoods, and communities address the negative effects of abandoned foreclosures, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should require that the mortgage servicers they oversee notify local authorities, such as tax authorities, courts, or code enforcement departments, when they decide to charge off a loan in lieu of foreclosure.

    Agency Affected: Federal Reserve System: Board of Governors

  6. Status: Closed - Implemented

    Comments: In July 2012, the Board of Governors of the Federal Reserve System issued guidance applicable to state member banks, bank holding companies, and savings and loan holding companies with residential mortgage servicing operations stating that they should notify borrowers when a decision is made not to pursue a foreclosure action. The guidance also states that this notification should inform borrowers of their rights to occupy the property and obligations to maintain the property and pay taxes and the debt owed. According to the guidance, the Federal Reserve is requiring this step to emphasize the importance of appropriate risk management practices and controls in connection with the decision to not complete foreclosure proceedings once initiated after obtaining information on the impacts of this practice in our report.

    Recommendation: To help homeowners, neighborhoods, and communities address the negative effects of abandoned foreclosures, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should require that the mortgage servicers they oversee notify borrowers when they decide to charge off loans in lieu of foreclosure and inform borrowers about their rights to occupy their properties until a sale or other title transfer action occurs, responsibilities to maintain their properties, and their continuing obligation to pay their debt and taxes owed.

    Agency Affected: Federal Reserve System: Board of Governors

  7. Status: Closed - Implemented

    Comments: On December 14, 2011, the Office of the Comptroller of the Currency (OCC) released guidance on foreclosed properties to national banks, federal savings associations, and their examining personnel (OCC 2011-49). This guidance states that if OCC-supervised entities acting as mortgage servicers decide to forgo foreclosure and release the lien on a property, those institutions should notify, or attempt to notify, the borrower (1) of the decision to forgo foreclosure and release the lien, (2)that the borrower may continue to occupy the property, and (3) that the borrower is obligated to maintain the property and pay property taxes.

    Recommendation: To help homeowners, neighborhoods, and communities address the negative effects of abandoned foreclosures, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should require that the mortgage servicers they oversee notify borrowers when they decide to charge off loans in lieu of foreclosure and inform borrowers about their rights to occupy their properties until a sale or other title transfer action occurs, responsibilities to maintain their properties, and their continuing obligation to pay their debt and taxes owed.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  8. Status: Closed - Implemented

    Comments: In July 2012, the Board of Governors of the Federal Reserve System using authority it already possessed issued guidance applicable to state member banks, bank holding companies, and savings and loan holding companies with residential mortgage servicing operations stating that they should notify borrowers and local authorities when a decision is made not to pursue a foreclosure action, and to require these mortgage servicers to obtain updated property valuations before initiating foreclosure actions.

    Recommendation: The Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should determine whether any additional authority is necessary and, if so, work with Congress to ensure they have the authority needed to carry out these actions.

    Agency Affected: Federal Reserve System: Board of Governors

 

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