July 28, 2011 [Lindsey Rupp, Bloomberg News]
NEW YORK — Bank of America Corp., faced with a glut of foreclosed and abandoned houses it can’t sell, has a new tool to get rid of the most decrepit ones: a bulldozer.
The biggest US mortgage servicer will donate 100 foreclosed houses in the Cleveland area, and in some cases contribute to their demolition in partnership with a local agency that manages blighted property. The bank has similar plans in Detroit and Chicago, with more cities to come, and Wells Fargo & Co., Citigroup Inc., JPMorgan Chase & Co. and Fannie Mae are conducting or considering their own programs.
Disposing of repossessed homes is one of the biggest headaches for lenders in the United States, where 1,679,125 houses, or one in every 77, were in some stage of foreclosure as of June, according to research firm RealtyTrac Inc. The prospect of those properties flooding the market has depressed prices and driven off buyers concerned that housing values will keep dropping.
“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corp., which works with lenders, government officials, and homeowners to salvage vacant homes. “The best thing we can do to stabilize the market is to get the garbage off.”
Bank of America had 40,000 foreclosures in the first quarter, saddling the lender, based on Charlotte, N.C. with taxes and maintenance costs. The bank, which unveiled the Cleveland program last month, has committed as many as 100 properties in Detroit and 150 in Chicago, and may add as many as nine cities by the end of the year, said Rick Simon, a spokesman.
The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space, and urban farming, according to the statement. Simon declined to say how many foreclosed properties Bank of America holds.
Ohio ranked among the top 10 states with the most foreclosure filings in June, according to RealtyTrac. The state has 71,617 foreclosed homes, Cuyahoga County 9,797, and Cleveland 6,778, RealtyTrac said.
The tear-downs are in varying states of disrepair, from uninhabitable to badly damaged. Simon said some are worth less than $10,000, and it would cost too much to make them livable.
“No one needs these homes, no one is going to buy them,” said Christopher Thornberg, partner at the Los Angeles office of Beacon Economics LLC, a forecasting firm. “Bank of America is not going to be able to cover its losses, so it might as well give them away.”
Donating a house may create an income tax deduction, said Robert Willens, an independent accounting analyst in New York. A bank might deduct as much as the fair market value if a home was not acquired with the intent of knocking it down, he said.
Wells Fargo and Fannie Mae already started donating houses and demolition funds in Ohio. San Francisco-based Wells Fargo, the biggest US home lender, gave 26 properties and $127,000 to the Cuyahoga land bank, said Russ Cross, Midwest director for Wells Fargo Home Mortgage.
Fannie Mae, the mortgage-finance company operating under US conservatorship, made its first deal with the Cuyahoga land bank in 2009, and sells houses to the organization at a “very nominal value,” or about $1 and an additional $200 in closing costs, said P.J. McCarthy, who heads alternative disposition programs.
Fannie Mae sold 200 foreclosures to the Cuyahoga organization in 2010 and has similar programs in Detroit and Chicago. Cleveland is the only city where Washington-based Fannie Mae contributes $3,500 toward demolition, McCarthy said.
JPMorgan Chase, the second-largest US bank, has donated or sold at a discount almost 1,900 properties valued at more than $100million in more than 37 states since late 2008, including 22 in Cleveland, said Jim O’Donnell, manager of community revitalization. The majority aren’t demolished.
The knockdowns are not likely to outpace foreclosures, said Rick Sharga, RealtyTrac’s senior vice president. Foreclosures may accelerate as banks clear a backlog caused by soft real estate markets and legal disputes over tactics used to seize homes. “These sorts of programs will basically only be nibbling on the edges,” Sharga said.