Mortgage Foreclosures: Additional Mortgage Servicer Actions Could Help Reduce the Frequency and Impact of Abandoned Foreclosures
Published: 2010-11-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: With record numbers of borrowers defaulting on loans and facing the loss  of their properties through foreclosure sale, the ongoing foreclosure crisis  has resulted in a large inventory of vacant properties in neighborhoods  across the country. As of June 2010, an estimated 4.6 percent of the over  52 million first lien mortgages outstanding nationwide were in some stage  of foreclosure—an increase of almost 370 percent since the first quarter of  2006, when just 1 percent of mortgages were in foreclosure. Foreclosure  actions can result in vacant and unattended properties that attract crime,  cause blight, and threaten neighborhood stability. In response to the  effects of foreclosures and vacant properties on neighborhoods, the  federal government has implemented a number of programs intended to  prevent foreclosures by, for example, encouraging financial institutions to  modify borrowers’ loans or providing funding to assist communities and  local groups with purchasing, rehabilitating, or demolishing properties  affected by foreclosures.
Homeowners generally make their mortgage payments to an entity known  as a mortgage servicer, which accepts payments from borrowers and  manages mortgage loans on behalf of banks and other mortgage owners. If  the borrower becomes delinquent on a loan, the servicer generally maty  initiate a foreclosure action on behalf of the mortgage owner through a  court or administratively to have the property sold at auction to a third  party. If no third party purchases the property at the foreclosure sale, the  mortgage owner (such as a bank) generally takes title to the home,  maintains it in marketable condition, and tries to resell it. However, in  some cases, the mortgage servicer initiates the foreclosure process but  then does not complete it, in effect walking away from the property. If  homeowners have already left the property with the belief that they have  lost the home through foreclosure or for other reasons, servicers  abandoning the foreclosure process can result in vacant, unmaintained  properties that can become problems for neighborhoods, local  governments, and homeowners.
With another wave of additional foreclosures potentially ahead, increased  numbers of abandoned foreclosures could further negatively affect  communities already harmed by the current crisis. In response to your  request, this report focuses on the prevalence, causes, and effects of  abandoned foreclosures, which, for the purposes of this report, we define  as properties (a) for which the servicer initiates foreclosure but  subsequently opts not to complete the foreclosure and (b) that are vacant.  Specifically, this report addresses (1) the nature and prevalence of  abandoned foreclosures, including how they occur; (2) the impact of  abandoned foreclosures on communities and state and federal efforts to  mitigate the effects of foreclosure; (3) certain practices that may  contribute to why mortgage servicers initiate but not complete  foreclosures and the extent of federal regulatory oversight of mortgage  foreclosure practices; and (4) the various actions some communities are  taking to reduce abandoned foreclosures and their impacts.
To address these objectives, we analyzed data reported to us by selected  mortgage servicers and two government-sponsored enterprises (GSE) that  purchase home loans, as well as information collected from literature,  regulatory guidance, and interviews. We obtained data on loans covering  the period January 2008 through March 2010 from six servicers—including  some of the largest firms and those that specialized in subprime loans and  from Fannie Mae and Freddie Mac, the two primary GSEs that purchase  loans from originators. In total, our data represents roughly 80 percent of  all mortgages outstanding. Using this data and information on property  vacancies from the U.S. Postal Service (USPS), we conducted analysis to  estimate a potential range of the extent to which abandoned foreclosures  were occurring and the characteristics of these properties.
To supplement this data analysis and assess the impacts of abandoned  foreclosures and potential actions to address them, we conducted case  studies in 12 locations that we selected to provide a range of states from  different geographical regions, with varying local economic conditions.  These locations were also in states that had different requirements for  foreclosure, with some requiring actions to be approved by courts (judicial  states) and some using other processes (statutory states). These locations  were Atlanta, Georgia; Baltimore, Maryland; Buffalo, New York; Chula  Vista, California; Chicago, Illinois; Cleveland, Ohio; Detroit, Michigan;  Lowell, Massachusetts; and Cape Coral, Fort Myers, Manatee County, and  Hillsborough County, Florida. Although we selected the case study  locations to provide broad representation of conditions geographically and  by type of foreclosure process, the number of locations may not  necessarily be representative of all the localities. As a result, we could not  generalize the results of our analysis to all the states and localities. We  conducted interviews with city and county officials, government  stabilization program grantees, community development organizations,  academic researchers, foreclosure assistance providers, state banking  supervisors, and representatives of the regulators of banks and other  mortgage market participants, including the Board of Governors of the  Federal Reserve System (Federal Reserve), Federal Deposit Insurance  Corporation (FDIC), Office of the Comptroller of the Currency (OCC),  Office of Thrift Supervision (OTS), Department of Housing and Urban  Development (HUD), Department of Veterans Affairs (VA), Federal  Housing Finance Agency (FHFA), and Securities and Exchange  Commission (SEC). In addition, we contacted the housing finance  agencies (HFA) in the 10 states that the Department of the Treasury had  identified as hardest hit by the foreclosure crisis. We also reviewed  literature related to the impacts of vacant properties and foreclosures and  analyzed servicer foreclosure policies and procedures from Fannie Mae  and Freddie Mac and compared them to other guidance that servicers  follow. We reviewed federal regulatory guidance that covers the  examination process for reviewing bank foreclosure and loss reserve  processes. Appendix I contains more information about our scope and  methodology.
We conducted this performance audit from December 2009 through  November 2010 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Over the last few decades, the number of participants and the complexity  of the market for home mortgage loans in the United States has increased.  In the past, a borrower seeking credit for a home purchase would typically  obtain financing from a local financial institution, such as a bank, a  savings association, or a credit union. This institution would normally hold  the loan as an interest-earning asset in its portfolio. All activities  associated with servicing the loan including accepting payments, initiating  collection actions for delinquent payments, and conducting foreclosure if  necessary would have been performed by the originating institution.
Over the last few decades, however, the market for mortgages has  changed. Now, institutions that originate home loans generally do not hold  such loans as assets on their balance sheets but instead sell them to  others. Among the largest purchasers of home mortgage loans are Fannie  Mae and Freddie Mac, but prior to the surge in mortgage foreclosures that  began in late 2006 and continues today, private financial institutions also  were active buyers from 2003 to 2006. Under a process known as  securitization, the GSEs and private firms then typically package these  loans into pools and issue securities known as mortgage-backed securities  (MBS) that pay interest and principal to their investors, which included  other financial institutions, pension funds, or other institutional investors.  As shown in figure 1, as of June 30, 2010, banks and other depository  institutions that originate and hold mortgages accounted for about 28  percent of all U.S. mortgage debt outstanding. Over 50 percent of the  mortgage debt was owned or in MBS issued by one of the housing GSEs or  covered by a Ginnie Mae guarantee. About 13 percent were in MBS issued  by non-GSEs—known as private-label securities, with the remaining 5  percent being held by other entities, including life insurance companies.
subsections: section_title: As a Result of Securitization, Various Entities Participate in Mortgage Markets
paragraphs: With the increased use of securitization for mortgages, multiple entities  now perform specific roles regarding the loans, including the mortgage  servicer, a trustee for the securitized pool, and the investors of the MBS  that were issued based on the pooled loans. After a mortgage originator  sells its loans to another investor or to an institution that will securitize  them, another financial institution or other entity is usually appointed as  the servicer to manage payment collections and other activities associated  with these loans. Mortgage servicers, which can be large mortgage finance  companies or commercial banks, earn a fee for acting as the servicing  agent on behalf of the owner of a loan. In some cases, the servicer is the  same institution that originated the loan and, in other cases, it may be a  different institution. The duties of servicers for loans securitized into MBS  are specified in a contract with investors called a pooling and servicing  agreement (PSA) and are generally performed in accordance with certain  industry-accepted servicing practices—such as those specified in the  servicing guidelines issued by the GSEs. Servicing duties can involve  sending borrowers monthly account statements, answering customer  service inquiries, collecting monthly mortgage payments, maintaining  escrow accounts for property taxes and hazard insurance, and forwarding  proper payments to the mortgage owners. In exchange for providing these  services, the servicer collects a servicing fee, usually based on a  percentage of at least 0.25 percent, of the loans’ unpaid principal balance  annually. In the event that a borrower becomes delinquent on loan  payments, servicers also initiate and conduct foreclosures in order to  obtain the proceeds from the sale of the property on behalf of the owners  of the loans, but servicers typically do not receive a servicing fee on  delinquent loans.
When loans are sold, they are generally packaged together in pools and  held in trusts pursuant to the terms and conditions set out in the  underlying PSA. These pools of loans are the assets backing the securities  that are issued and sold to investors in the secondary market. Another  entity will act as trustee for the securitization trust. Trustees act as asset  custodians on behalf of the trust, keeping records of the purchase and  receipt of the MBS and holding the liens of the mortgages that secure the  investment. Trustees are also the account custodians for the trust—pass- through entities that receive mortgage payments from servicers and  disperse them among investors according to the terms of the PSA.  Although trustees are the legal owners of record of the mortgage loans on  behalf of the trust, they have neither an ownership stake nor a beneficial  interest in the underlying loans of the securitization. However, any legal  action a servicer takes on behalf of the trust, such as foreclosure, generally  is brought in the name of the trustee. The beneficial owners of these loans  are investors in MBS, typically large institutions such as pension funds,  mutual funds, and insurance companies. Figure 2 shows how the mortgage  payments of borrowers whose loans have been securitized flow to  mortgage servicers and are passed to the trust for the securitized pool. The  trustee then disburses the payments made to the trust to each of the  investors in the security.
section_title: Types of Mortgage Loans
paragraphs: The mortgage market has four major segments that are defined, in part, by  the credit quality of the borrowers and the types of mortgage institutions  that serve them.
Prime—Serves borrowers with strong credit histories and provides the  most attractive interest rates and mortgage terms. This category includes  borrowers who conform to the prime loan standards of either Fannie Mae  or Freddie Mac and are borrowing an amount above the GSE federally  mandated upper limit, known as “jumbo loans.”
Nonprime—Encompasses two categories of loans:    Alt-A—Generally serves borrowers whose credit histories are close to  prime, but loans have one or more high-risk features such as limited  documentation of income or assets or the option of making monthly  payments that are lower than required for a fully amortizing loan.
Subprime—Generally serves borrowers with blemished credit and  features low down payments and higher interest rates and fees than the  prime market. borrowers who may have difficulty qualifying for prime mortgages but  features interest rates competitive with prime loans in return for payment  of insurance premiums or guarantee fees. The Federal Housing  Administration and Department of Veterans Affairs operate the two main  federal programs that insure or guarantee mortgages.
Across all of these market segments, two types of loans are common:  fixed-rate mortgages, which have interest rates that do not change over the  life of the loan; and adjustable-rate mortgages (ARM), which have interest  rates that can change periodically based on changes in a specified index.  The nonprime market segment recently featured a number of  nontraditional products. For example, the interest rate on Hybrid ARM  loans is fixed during an initial period then “resets” to an adjustable rate for  the remaining term of the loan. Another type of loan, payment-option ARM  loans, allowed borrowers to choose from multiple payment options each  month, which may include minimum payments lower than what would be  needed to cover any of the principal or all of the accrued interest. This  feature is known as “negative amortization” because the outstanding loan  balance may increase over time as any interest not paid is added to the  loan’s unpaid principal balance.
section_title: The Foreclosure Process
paragraphs: If a borrower defaults on a mortgage loan secured by the home, the  mortgage owner is entitled to pursue foreclosure to obtain title to the  property in order to sell it to repay the loan. The mortgage owner or  servicer generally initiates foreclosure once the loan becomes 90 days or  more delinquent. Once the borrower is in default, the servicer must decide  whether to pursue a home retention workout or other foreclosure  alternative or to initiate foreclosure.
State foreclosure laws establish certain procedures that mortgage  servicers must follow in conducting foreclosures and establish minimum  time periods for various aspects of the foreclosure process. These laws  and their associated timelines may vary widely by state. As shown in figure  3, states generally follow one of two methods for their foreclosure  process: judicial, with a judge presiding over the process in a court  proceeding, or statutory, with the process proceeding outside the  courtroom in accordance with state law. Because of the additional legal  work, foreclosure generally takes longer and is more costly to complete in  the states that primarily follow a judicial foreclosure process.
section_title: Federal Regulation of Institutions That Originate and Service Loans
paragraphs: Several federal agencies share responsibility for regulating the banking  industry and securities markets in relation to the origination and servicing  of mortgage loans. Chartering agencies oversee federally and state- chartered banks and their mortgage lending subsidiaries. At the federal  level, OCC oversees federally chartered banks. OTS oversees savings  associations (including mortgage operating subsidiaries). The Federal  Reserve oversees insured state-chartered member banks, while FDIC  oversees insured state-chartered banks that are not members of the  Federal Reserve System. Both the Federal Reserve and FDIC share  oversight with the state regulatory authority that chartered the bank. The  Federal Reserve also has general authority over lenders that may be  owned by federally regulated holding companies but are not federally  insured depository institutions. Many federally regulated bank holding  companies that have insured depository subsidiaries, such as national or  state-chartered banks, also may have nonbank subsidiaries, such as  mortgage finance companies. Under the Bank Holding Company Act of  1956, as amended, the Federal Reserve has jurisdiction over such bank  holding companies and their nonbank subsidiaries that are not regulated  by another functional regulator. Other regulators are also involved in U.S.  mortgage markets. For example, Fannie Mae’s and Freddie Mac’s activities  are overseen by the Federal Housing Finance Agency. Staff from the  Securities and Exchange Commission also review the filings made by  private issuers of MBS.
Federal banking regulators have responsibility for ensuring the safety and  soundness of the institutions they oversee and for promoting stability in  the financial markets and enforcing compliance with applicable consumer  protection laws. To achieve these goals, regulators establish capital  requirements for banks, conduct on-site examinations and off-site  monitoring to assess their financial condition, and monitor their  compliance with applicable banking laws, regulations, and agency  guidance. Among the laws that apply to residential mortgage lending and  servicing are the Fair Housing and Equal Credit Opportunity Acts, which  address credit granting and ensuring non-discrimination in lending; the  Truth in Lending Act (TILA), which addresses disclosure requirements for  consumer credit transactions; and the Real Estate Settlement Procedures  Act of 1974 (RESPA), which requires transparency in mortgage closing  documents.
Entities that service mortgage loans that are not depository institutions are  called nonbank servicers. In some cases these nonbank servicers are  subsidiaries of banks or other financial institutions, but some are also not  affiliated with financial institutions at all. Nonbank servicers have  historically been subject to little or no direct oversight by federal  regulators. We have previously reported that state banking regulators  oversee independent lenders and mortgage servicers by generally  requiring business licenses that mandate meeting net worth, funding, and  liquidity thresholds. The Federal Trade Commission is responsible for  enforcing certain federal consumer protection laws for brokers and  lenders that are not depository institutions, including state-chartered  independent mortgage lenders. However, the Federal Trade Commission is  not a supervisory agency; instead, it enforces various federal consumer  protection laws through enforcement actions when complaints by others  are made to it.
section_title: Abandoned Foreclosures Are Uncommon, but Are Concentrated in Certain Areas and Usually Involve Nonprime Loans and Low-Value Properties
paragraphs: Using data from large and subprime servicers and government-sponsored  mortgage entities representing nearly 80 percent of mortgages, we  estimated that abandoned foreclosures are rare—the total from January  2008 to March 2010 represents less than 1 percent of vacant homes. When  servicers’ efforts to work out repayment plans or loan modifications with  borrowers who are delinquent on their loans are exhausted, staff from the  six servicers we interviewed said they analyze certain loans to determine  whether foreclosure will be financially beneficial. Based on our analysis of  loan data provided by these six servicers covering the period of January  2008 through March 2010, servicers most often made this decision before  initiating foreclosure, but in many cases did not discover that foreclosure  would not be financially beneficial until after initiating the process. While  we estimated that instances in which servicers initiate but then abandon a  foreclosure without selling or taking ownership of a property had not  occurred frequently across the United States, certain communities  experienced larger numbers of such abandoned foreclosures. Specifically,  we found abandoned foreclosures tended to be for properties in  economically distressed communities and low-value properties and  nonprime and securitized loans.
subsections: section_title: After Efforts to Keep Borrowers in Their Homes Fail, Servicers Analyze the Financial Benefits of Proceeding to Foreclosure on Certain Loans
paragraphs: When borrowers default on their loans, home mortgage loan servicers take  a variety of actions in an effort to keep them in their homes, by, for  example, working out repayment plans and loan modifications. The  stakeholders that we interviewed—including servicers, regulators, and  government and community officials—agreed that pursuing efforts to keep  borrowers in their homes were preferable to foreclosure. According to  servicers’ representatives, servicers engage in various efforts to reach  borrowers during the delinquency period through letters, phone calls, and  personal visits. For example, representatives of one servicer noted that on  a typical foreclosure company representatives make over 120 phone calls  and send 10 to 12 inquiries to borrowers in an effort to bring payments up  to date or modify the loan. As borrower outreach continues, servicers also  send “breach” letters after borrowers have missed a certain number of  payments warning borrowers of the possibility of foreclosure.
However, if these initial efforts to bring the borrower back to a paying  status are not successful, staff from the six servicers we contacted— representing about 57 percent of U.S. first-lien mortgages—told us they  typically determine whether to initiate foreclosure as a routine part of  their collections and loss mitigation process after a loan has been  delinquent for at least 90 days. Representatives of servicers told us that  they might decide to initiate foreclosure even though they were still  pursuing loan workout options with a borrower. One noted that the  initiation of foreclosure, in certain instances, might serve as an incentive  for the borrower to begin making mortgage payments again.
According to the staff of the six servicers we interviewed, they usually  conduct an analysis of certain loans in their servicing portfolio before  initiating foreclosure to determine if foreclosure will be financially  beneficial. These analyses—often called an equity analysis—compare the  projected value the property might realize in a subsequent sale against the  sum of all projected costs associated with completing the foreclosure and  holding the property until it can be sold. Servicers use the results of these  equity analyses to decide whether to foreclose on a loan or conduct a  charge-off in lieu of a foreclosure. In general, if the equity analysis  indicates that the projected proceeds from the eventual sale of the  property exceeds that of the projected costs of reaching that sale by a  certain amount, the servicer will proceed with the foreclosure. However,  when the costs of foreclosure exceed the expected proceeds from selling  the property, servicers typically decide that foreclosure is not financially  beneficial. In these cases servicers will usually cease further foreclosure- related actions, operationally charging off the loan from its servicing roles,  and advising the mortgage owner—GSEs or other private securitized  trusts—that the loan should be acknowledged as a loss by the loan’s  owner. In determining which loans to charge off in lieu of foreclosure,  some servicers maintain thresholds for property values or potential  income from pursuing foreclosure. For example, some of the servicers we  interviewed told us that they usually, but not always, considered charge- offs in lieu of foreclosure on properties with values roughly below $10,000  to $30,000. Freddie Mac servicing guidance requires a review for charge off  in lieu of foreclosure when the unpaid principal balance of a loan is below  $5,000 on conventional mortgages or less than $2,000 on government  insured or guaranteed loans, such as Federal Housing Administration or  Department of Veterans Affairs mortgages.
Based on our reviews of bank regulatory guidance and discussions with  federal and state officials, no laws or regulations exist that require  servicers to complete foreclosure once the process has been initiated.  Therefore, servicers can abandon the foreclosure process at any point.  Furthermore, according to staff from the servicers we interviewed,  initiating foreclosure can cost as little as $1,000, and these costs may be  recovered from the proceeds of any subsequent sale of the property.
section_title: Majority of Loan Charge- offs in Lieu of Foreclosure Occurred Prior to Foreclosure Initiation, Although Many Occurred Afterwards Increasing the Likelihood of an Abandoned Foreclosure
paragraphs: Based on our analysis of servicer data, servicers most often charged off  loans in lieu of foreclosure without initiating foreclosure proceedings.  However, in many cases the decisions to charge off loans in lieu of  foreclosure were made after foreclosure initiation, and a significant  portion of these represented abandoned foreclosures. We obtained data  from six servicers including four of the largest servicers and two servicers  that specialized in nonprime loans. These six servicers collectively  serviced about 30 million loans, representing 57 percent of outstanding  first-lien home mortgage loans as of the end of 2009. According to our  analysis of the servicer-reported data, these six servicers decided to  conduct charge-offs in lieu of foreclosure for approximately 46,000 loans  between January 2008 and March 2010, as shown in table 1. For over  27,600 loans, or about 60 percent, the servicers made the decision to  charge off in lieu of foreclosure without initiating foreclosure proceedings.  Of these loans, over 19,400, or 70 percent of the properties, were occupied  by the borrower or a tenant. As will be discussed later in this report, when  properties remain occupied they are less likely to contribute to problems  in their neighborhoods generally associated with foreclosed and vacant  properties.
However, in other cases, servicers initiated foreclosure but later decided  to conduct a charge-off in lieu of foreclosure. Charge-offs in lieu of  foreclosure that occurred after a foreclosure was initiated were more  likely to result in a vacant property than charge-offs that occurred without  a foreclosure initiation. As shown in table 1 earlier, these six servicers  initiated foreclosure on over 18,300 loans between January 2008 and  March 2010 that they later decided to charge off in lieu of foreclosure. For  over 8,700, or 48 percent of these loans, this decision was associated with  a vacancy and, therefore, an abandoned foreclosure–that is, a property for  which foreclosure was initiated but not completed and is vacant. We  found a statistically significant association between foreclosure initiation  and vacancy for the charge-offs in lieu of foreclosure in our sample. That  is, we found that initiating and then suspending foreclosure was  associated with a higher probability that a property will be vacant. A  potential reason that vacancies occur more frequently when servicers  decide to pursue a charge-off in lieu of foreclosure after initiating  foreclosure than before is confusion among borrowers about the impact of  the foreclosure initiation. Specifically, local and state officials, community  groups, and academics told us that borrowers may be confused about their  rights to remain in their homes during foreclosure and vacate the home  before the process is completed. Alternatively, servicers could be more  likely to pursue a charge-off in lieu of foreclosure if a property becomes  vacant before foreclosure initiation since the value of the property may  deteriorate rapidly. Nevertheless, as the data show even when servicers  opt to conduct a charge-off in lieu of foreclosure before initiating  foreclosure, some borrowers may still vacate the home. Anecdotally, we  heard from a variety of stakeholders that this decision could be due to  financial hardship or pressure exerted by the lender in collecting  delinquent mortgage payments, among other reasons.
section_title: In the Absence of Overall Data on Instances of Abandoned Foreclosures, Our Estimates Indicated That It Occurs Infrequently
paragraphs: Data indicating the overall number of abandoned foreclosures in the  United States did not exist nor was such information being collected by  the federal government agencies we contacted or by organizations in the  states or local communities that we reviewed. Local governments, bank  regulators, and private organizations collect information on foreclosures,  vacancies, and housing market conditions, but for various reasons the  phenomenon of abandoned foreclosures goes largely unrecorded. Local  officials we spoke with in Baltimore, Chicago, Cleveland, Detroit, and  Lowell, Massachusetts, identified similar difficulties in tracking abandoned  foreclosures. For example:    Accurately identifying the lender and borrower on a given property is  often difficult due to outdated or incorrect mortgage information.
Ascertaining which properties are abandoned foreclosures is often  difficult because formal data on the foreclosure status of properties often  do not exist.
Determining whether properties are actually vacant is often difficult if a  house has been used seasonally or as a rental.
Nonetheless, researchers in some cities we visited are attempting to  compile data. In Cleveland, academic researchers have used court  documents in an attempt to ascertain the reason a sample of foreclosure  cases have stalled. In a number of cities, such as Chula Vista, California,  the city governments have enacted ordinances that require lenders to  register homes that become vacant. In Buffalo, a nonprofit organization  has collected information on the status of foreclosure cases in Erie county,  where Buffalo is located.
Although subject to uncertainty, we estimated that the number of  abandoned foreclosures that occurred in the United States between  January 2008 and March 2010 was between approximately 14,500 and  34,600. As will be discussed, although the potential number of abandoned  foreclosures creates significant problems for certain communities, they  represent less than 1 percent of vacant properties and an even smaller  percentage of the total housing stock. Table 2 shows abandoned  foreclosures as a percent of various housing market metrics.
To determine the prevalence of abandoned foreclosures in the entire U.S.  market, we estimated the number of properties (1) were charged off in lieu  of foreclosure after a foreclosure was initiated and (2) that are vacant. In  developing our estimate, we used the data from the six mortgage servicers  and data from Fannie Mae and Freddie Mac—which together represent  roughly 80 percent of outstanding U.S. mortgages—and augmented this  information with vacancy data from USPS. Using this information, we  estimated the total number of abandoned foreclosures nationwide under  varying assumptions about the remaining 20 percent of the mortgages  outstanding.
section_title: Abandoned Foreclosures Exist Throughout the Country, but Are Likely to Be Clustered in a Few Communities
paragraphs: According to the data reported to us, abandoned foreclosures represent a  small portion of overall vacancies in the United States, but are highly  concentrated in a small number of communities. Based on our analysis of  servicer data from January 2008 to March 2010, we found abandoned  foreclosures in 2,452 of the approximately 43,000 postal zip codes  throughout the country, but only 167 of those zip codes have 10 or more of  these properties. From January 2008 through March 2010, several zip  codes in Chicago, Cleveland, Detroit, Indianapolis, and other large cities  had 35 or more abandoned foreclosures. We found several zip codes in  Detroit that had over 100 abandoned foreclosures. In addition, several  smaller areas contain zip codes with high concentrations of the properties,  such as those including Toledo, Akron, and Youngstown, Ohio; Flint,  Michigan; Fort Myers, Florida; and Gary and Fort Wayne, Indiana.
Analyzing abandoned foreclosures at the U.S. Census-designated  Metropolitan Statistical Area (MSA) level also suggests that such cases are  likely to be concentrated in a limited number of communities. According  to our analysis, 80 percent of the total abandoned foreclosures that we  identified in our servicer data were in 50 of the roughly 400 MSAs; 20  MSAs account for 61 percent of the properties; and 30 MSAs account for  72 percent. Table 3 shows the MSAs with the most abandoned  foreclosures. Because the data we used to produce these estimates may  not be generalizeable, the location of the remaining abandoned  foreclosures could differ from that suggested in table 3. For example, the  Flint, Michigan; Orlando-Kissimmee, Florida; South Bend-Mishawaka,  Indiana; and Canton-Massillon, Ohio, MSAs are notable examples just  outside the top 20. Although not having a large number of abandoned  foreclosures, some small MSAs throughout the Midwest are likely to be  similarly challenged by the existence of such properties given their size.
As shown above in table 3, these 20 MSAs had roughly 5,090 properties  that were charged off in lieu of foreclosure by the servicer without  initiating foreclosure but were also vacant in our sample. Because these  also are properties on which the servicer will no longer be conducting any  maintenance or attempting to sell to a new owner, the properties can  create similar problems for their communities as those resulting from  abandoned foreclosures.
section_title: Concentrations of Abandoned Foreclosures Are Associated with Various Community, Property, and Loan Characteristics
paragraphs: Certain community, property, and loan characteristics may help to explain  some of the concentrations of abandoned foreclosures. In particular,  based on our sample, abandoned foreclosures occured most frequently in  economically struggling areas and distressed urban areas of particular  cities We also found these properties in areas that experienced significant  recent booms and declines in housing. In general abandoned foreclosures  are also more likely to involve low-value properties and nonprime and  securitized loans.
Economically struggling cities appear to experience the greatest  number of charge-offs in lieu of foreclosure and therefore,  abandoned foreclosures. As shown in figure 4, most of the abandoned  foreclosures have occurred in Midwestern industrial MSAs. In particular,  our analysis of servicer data indicates that over 50 percent of all the  abandoned foreclosures we identified were in Michigan, Indiana, and  Ohio. Seven of the 20 MSAs with the most abandoned foreclosures are  located in Ohio. Recent research also supports that this type of  phenomenon is occurring largely in industrial Midwestern states.  Although the deterioration of economic conditions in 2008 and 2009 has  impacted the entire nation, these Midwestern areas have been especially  hard hit with population declines, high unemployment, and decreases in  housing values. For example, Detroit lost about 28 percent of its  population from 1980 to 2006 and the unemployment rate in Michigan was  13.0 percent versus 9.6 percent nationally as of September 2010. According  to a recent report, although Michigan did not seem to experience a  dramatic appreciation in housing prices before the surge in mortgage  foreclosures that began in late 2006, it did witness a significant decline in  housing prices after 2006, largely because the automobile manufacturing  industry was severely hit by the current crisis. Like many areas in the  United States, several of the MSAs in table 3 experienced significant  increases in unemployment rates. For example, the unemployment rate in  the Detroit-Warren-Livonia MSA increased from 4.2 percent in December  2000 to 16.1 percent in December 2009. Similarly, in the Flint, Michigan,  MSA, the unemployment rate increased by more than 10 percentage points  between 2000 and 2009. High unemployment may have exacerbated the  negative consequences of nonprime lending activity. For example,  community development officials in Detroit explained that many people  who did not have mortgages on their homes were enticed to obtain a home  equity loan to make repairs, then lost their homes to foreclosure because  they lost their jobs or the payments were not sustainable. However, many  of the economic problems facing areas such as Cleveland, Detroit, and  other Midwest cities where we identified large numbers of abandoned  foreclosures predate the economic turmoil that started around 2008. For  example, in 2007, the poverty rate in Flint, Michigan, was 16.8 percent, the  poverty rate in Memphis, Tennessee, was 18.8 percent, and the poverty  rates in both Toledo and Youngstown, Ohio, were 14.8 percent.  Consequences of these challenges include weak real estate markets and  other characteristics that are associated with abandoned foreclosures.
Abandoned foreclosures are also likely concentrated in distressed  urban areas. Our analysis shows that distressed urban areas within MSAs  had significant numbers of abandoned foreclosures. In cities with high  property values like Chicago, we found that abandoned foreclosures were  largely driven by activity in a few zip codes. Our analysis also shows that,  on average, the zip codes with the most abandoned foreclosures had larger  declines in home prices (37 percent) compared to the national average of  32 percent following peak levels in 2005. Some distressed zip codes in  Detroit, Michigan, had an over 60 percent drop in home prices from the  peak levels between 2004 and 2006. Stakeholders also told us that  abandoned foreclosures were most often associated with urban areas with  largely minority populations, high foreclosure rates, blight, crime, and  vandalism. For example, one academic speculated that there may be  pockets of distressed housing in the inner parts of cities whose housing  markets as a whole may not be so bad; these areas likely have low value  houses that may end up as abandoned foreclosures. In addition, one  servicer representative said that abandoned foreclosures could be found in  the urban core of any large city.
Concentrations of abandoned foreclosures have also occurred in  areas that experienced significant house price increases followed  by declines. States such as California, Florida, Nevada, and Arizona  experienced the largest increase in property values prior to 2006 also have  experienced the largest decreases in property values in the last few years.  For example, according to a recent report, property values in these states  spanned 47 percent from peak to trough. As a result, these states have  many underwater borrowers—that is, borrowers who owe more on their  mortgages than their properties are worth (negative equity). Significant  overdevelopment and overspeculation prior to the economic crisis also  may have caused investors to abandon their properties after housing  prices declined. For example, representatives of a community group in  Atlanta told us that starting in 2000 in a neighborhood close to downtown  Atlanta investors increasingly constructed new housing on speculation.  Representatives said that some of this new construction was never  occupied, and after house prices began to decline in early 2007, much of it  was vandalized. Without a market for these properties servicers may have  subsequently abandoned foreclosures on many of these properties  because they would not earn enough at foreclosure sale to cover losses  associated with foreclosure and disposition of these properties. Among  the 20 MSAs in table 3, Jacksonville, Cape Coral-Fort Myers, Tampa-St.
Petersburg-Clearwater, Miami-Fort Lauderdale-Pompano Beach, and, to a  lesser extent, Atlanta, appear to fit into the category of housing boom- related abandoned foreclosures. For example, according to Global Insight  estimates, average home prices in the Miami-Fort Lauderdale-Pompano  Beach increased 144 percent from the end of 2000 to the second quarter of  2007 before declining by 40 percent from 2007 to the third quarter of 2010.
Regardless of the city or neighborhood, most abandoned  foreclosures occur on low-value properties. Data from servicers,  Fannie Mae, and Freddie Mac indicate that foreclosures are most often not  completed on properties with low values. Evidence from the econometric  model that we applied to GSE loan-level data also suggests that lower  property values increased the likelihood that a loan would be charged off  in lieu of foreclosure rather than being subject to alternative foreclosure  actions such as a deed-in-lieu of foreclosure or short sale. For example,  the median value of the properties Freddie Mac decided to charge of in  lieu of foreclosure was $10,000 compared to $130,000 for deeds in lieu of  foreclosure, $158,000 for modifications and $160,000 for short sales.  Similarly, the median value of loans for which the six servicers decided to  charge off in lieu of foreclosure in Michigan and Ohio was $25,000. In  addition, servicer representatives told us properties with low values—such  as those valued under $30,000—were the most likely candidates for  decisions to not pursue foreclosure. Some properties may even have  negative values because of the liabilities attached to them. For example, a  property in Cleveland valued at $5,000 may have an $8,000 demolition lien  levied against it; therefore, it may actually cost more to pay off the  demolition lien than the property is worth.
Abandoned foreclosures also occurred most frequently on  nonprime loans. Our analysis shows that about 67 percent of all  abandoned foreclosures that we identified were associated with nonprime  loans. Adjustable rates were also a prominent feature of these loans.  Anecdotally, stakeholders also told us that abandoned foreclosures most  likely occurred on properties where borrowers had nonprime loans and  unstable financing. For instance an official for a community development  corporation in greater Cleveland told us he had seen about 12 instances of  abandoned foreclosures in the past year, and many of the borrowers in  these cases had two mortgages or subprime loans originated in 2003 or  later.
The vast majority of abandoned foreclosures were loans that  involved third-party investors including those that were securitized  into private label MBS. GSE-purchased loans account for a very small  portion of our estimated number of abandoned foreclosures. Although the  GSE loans made up roughly 63 percent of the data we collected from  servicers, they accounted for less than 8 percent of the total abandoned  foreclosures during 2008 through the first quarter of 2010. Similarly, we  found that only about 0.3 percent of abandoned foreclosures were  associated with FHA, VA, and Ginnie Mae insured loans. The potential for  abandoned foreclosures to occur on loans associated with Fannie Mae  also appears to have been reduced as Fannie Mae representatives told us  that as of April 2010 they have instructed servicers to complete all  foreclosures pending Fannie Mae’s revision of its charge-off in lieu of  foreclosure procedures to make sound economic decisions as well as  stabilize neighborhoods. About 66 percent of the total abandoned  foreclosures were associated with non-GSE third-party investors. We  estimate that a significant portion of these loans were securitized into  residential MBS, although data issues precluded us from distinguishing  between private label MBS and whole loans held by third parties in some  cases.
section_title: Like Other Vacant Properties, Abandoned Foreclosures Contribute to Various Negative Effects on Neighborhoods, Local Governments, and Homeowners
paragraphs: Abandoned foreclosures, similar to other vacant properties, further  contribute to various negative impacts for the neighborhoods in which  they occur, for the local governments, and for the homeowners. In  addition, because local governments are not aware of servicers’ decisions  to no longer pursue foreclosure on these properties, they cannot take  expedited actions to return the properties to productive use.
subsections: section_title: Without Notification of Servicers’ Decisions to Abandon Foreclosures, Local Governments Cannot Act Quickly to Address the Negative Effects of These Properties
paragraphs: Properties for which the mortgage servicers have abandoned the  foreclosure proceedings are often left without any party conducting  routine care and maintenance, which often results in properties with poor  appearance and sometimes unsafe conditions. As a result, abandoned  foreclosures can create unsightly and dangerous properties that contribute  to neighborhood decline. Academics, housing and community groups  representatives, local government officials, and others in the 12 locations  we collected information from generally told us that, like other vacant and  abandoned properties, abandoned foreclosures often deteriorated quickly.  They explained what types of damage can result, including structural  damage, mold, broken windows, and trash, among other things.  Representatives of a national community reinvestment organization  described the impact of vacant homes nationwide, from swimming pools  filled with dirty, discolored water in Florida to homes in the Midwest that  have sustained damage from falling trees that no one removes. A  Cleveland official said that, in a 2-year period, about 20 vacant homes in  one ward had caught fire and that people used vacant properties to dump  trash and asphalt.
While touring abandoned foreclosures in some of the neighborhoods in the  communities we visited, we observed several vacant and abandoned  properties that showed various signs of property deterioration, including  overgrown grass, accumulated trash or other debris, and broken windows.  Because abandoned foreclosures, by definition, are vacant properties, they  create similar problems as other vacant properties do for communities.  Figure 5 presents pictures of abandoned foreclosures and other vacant  properties in several of the communities we visited.
Abandoned foreclosures also create problems in communities because  homes in foreclosure proceedings that become vacant in certain  neighborhoods are often quickly stripped of valuable materials, furthe depressing their value. Housing and community group representatives, a local government officials, told us that looters strip vacant houses of  copper piping, wiring, appliances, cabinets, aluminum siding, and o ther  valuables, usually within a few weeks of the time at which the property  became vacant, but sometimes within 24 hours. An official from a  foreclosure response organization in one Midwestern city told us that a  thriving industry of home salvage thieves exists in the city and an official  from a non-profit housing organization in another Midwestern city told u that junkyards in the area accept things they should not, such as aluminum siding and refrigerators—and this provides an incentive for criminals to  strip houses of any materials of potential salvage value. Representatives  from a national property maintenance company that operates across  the  country told us a house can be secured, including having its windows and  doors boarded up and entrances locked, only to be broken into and  stripped of any valuable parts. Similarly, a local official told us that many  houses in Chicago are secured with steel grates, but vandals will bypass  these and cut a hole in the roof or brick to gain access—and, once inside,  they will rip the house apart by sawing into the walls and cutting out  the  wiring and piping. A local official in another city reported that several ga explosions have occurred at vacant properties there recently due to  vandals stealing pipes while the gas was still flowing to the home. Staff from a national property maintenance company told us that mortgage  servicers contract with them to inspect the properties of homeowners  whose loans become delinquent and that in certain locations, they often  have to re-secure properties at every monthly inspection because such properties are constantly being broken into and damaged. In addition, a  code enforcement official told us that vandalism had become such an  issue for the city that a sign left on a property’s door indicating that it had  a code violation would serve as a flag to thieves to strip the house. F representatives from two national co told us that, as a result of vandalism, exposure, and neglect, vacant  properties can become worthless.
Similar to other vacant and uncared for properties, abandoned  foreclosures also can create public safety concerns. Staff from an entity  that advises local governments on community development explained abandoned foreclosures that remain vacant for extended periods pose  significant public health, safety, and welfare issues at the local level.  Although unable to identify which properties were abandoned  foreclosures, local government officials in Detroit said that safety issues   that  associated with vacant properties were the primary reason they had  identified 3,000 vacant properties that were to be demolished in 2010. Of  these, they said that 2,100 had been deemed dangerous and that 400 were  considered so hazardous that they were considered emergency situation noting that a firefighter had recently been killed when he entered a  property and a floor caved in. Likewise in Fort Myers, Florida, officials  told us that 1,200 to 1,300 of the city’s 1,600 vacant and abandoned  properties were considered unsafe. A Cleveland official told us that, wh housing inspectors discovered a vacant property with a code violation, th city was compelled to act to address the potential danger, or it may be  liable for any subsequent injuries. Officials from this same office further  noted that the public money that is used to fund the land bank—which  may take in unsafe and abandoned properties—may have otherwise been  used for civic uses, such as teacher salaries.
Like other vacant properties, abandoned foreclosures also contribute to  neighborhood decline by providing venues for a wide variety of crimes.  Local government and other officials told us that vacant and abandoned  properties were subject to break-ins, drug activity, prostitution, arson, and  squatting, among other things. A study of the City of Chicago noted that  some vacant building fires were the result of arson by owners seeking to  make insurance claims and that others were started by squatters making  fires to keep warm. Other empirical studies have found relationships  between vacant or foreclosed properties and crime. For example, a  national organization representing municipal governments reports that  crime is moderately correlated with vacant and abandoned properties,  deteriorating housing and high divestments in the neighborhood. Another  study of central city Chicago found that a 2.87 percentage point increase in  the foreclosure rate would yield a 6.68 percent increase in the rate of  violent crimes such as assault, robbery, rape, and murder. The author of  this study explains the weaker positive relationship between foreclosure  and property crimes, such as theft and vandalism, may be due to an under- reporting of such crimes in lower-income areas.
Another impact of abandoned foreclosures is that, like other vacant and uncared for properties, they negatively affect the value of surrounding  properties. Although property values have fallen sharply in many region around the country as part of the recent economic recession, man those we interviewed said that vacant properties and abandoned  foreclosures compounded this problem. One local official explained th once a few properties in a neighborhood became vacant, the negative  effects tended to spiral and lead to further foreclosures and vacancies,  particularly in low-income neighborhoods. In addition, empirical s have found that vacant and abandoned properties, together with  foreclosures, can cause neighboring property values to decline. For  example, using data from 2006 in Columbus, Ohio, a recent study found  that each vacant property within 250 feet of a nearby home could d h  its sales price by about 3.5 percent, whereas the impact from eac foreclosure was less severe, but had a wider impact out into the  neighborhood. In addition, an author for a federal research organization  reviewed several research papers on foreclosure’s price-depressing impact  on sales of nearby properties and reported that, according to the lite rature,  this impac percent.  t can range from as little as 0.9 percent to as much as 8.7  Because local government officials are not aware that foreclosure are no longer being pursued, these properties remain vacant and  contribute to neighborhood decline for longer periods of time. Instead of   actions  learning that servicers are charging off loans in lieu of foreclosure a not assume responsibility for maintenance, local government staff  responsible for enforcing housing codes told us they typically find out  about vacant and abandoned properties through citizen complaints, vaca property registration ordinances, or on their own initiative. They noted  that, by the time they become aware of a property for which a servicer is  no longer taking responsibility, the property may have been vacant and  deteriorating for months or years, which exacerbates the overall  neighborhood decline. Several stakeholders noted that, if local  governments were made aware of properties for which servicers were  charging off the loans in lieu of foreclosure, they may be able to take mor timely action. For example, they could take expedited actions to acquire  the vacant property—such as through the use of a land bank—and return  it to productive use.
section_title: Abandoned Foreclosure also Increase Costs for Local Governments
paragraphs: Abandoned foreclosures also increase costs for local governments  because they must expend resources to inspect properties and mitigate  their unsafe conditions. Within local communities, code enforcemen t  departments are largely responsible for ensuring that homeowners  maintain their properties in accordance with local ordinances regarding  acceptable appearance and safety. In cases in which such ordinances are  not being complied with, code enforcement departments can typically f violating property owners or take actions themselves, such as making  repairs or boarding up doors or windows and billing the property owner  for these expended costs. However, code enforcement and other o told us that it is often difficult to locate the owners of abandoned  foreclosures because they have left their homes; they also told us that it is difficult to locate current mortgage lien holders—who generally have interest in maintaining the properties. Officials said that one reason  identifying lien holders is difficult is because they often fail to record  changes in ownership with local jurisdictions. To address the challenge,  the code enforcement manager of one of the cities we visited told us that  he had made one of his field staff a full-time “foreclosure specialist” who job it was to research owners and lien holders of foreclosed properties  with identified code violations. The new foreclosure specialist told us that  he uses several different avenues to find property owners and lien h including county court records, local realtors, property manager property maintenance companies, and the Mortgage Electronic  s,  Registration Systems (MERS®).  In addition, another code enforcement  manager told us that he had developed a team of investigators train ed in  skip tracing violators.   to increase the division’s ability to identify and locate  Local governments are often burdened by having to pay for the  maintenance or demolition of abandoned foreclosures. In the interest of  public safety, code enforcement departments will often take action when  they cannot identify or contact another responsible party. Researchers  tallied total costs of over $13 million for code enforcement activities to  address and maintain all vacant and abandoned properties for eight Ohio  cities in 2006. In addition, the City of Cleveland, Ohio, has budgeted over  $8 million of federal grant money for demolition and has already expend nearly $5 million. Recent literature, as well as our interviews with local  officials, further revealed the burden some local governments are  experiencing due to an increase in the amount of vacant and abandoned  properties:    A 2005 report estimated the direct municipal costs of an abandoned  foreclosure to be $19,227 in the City of Chicago with a fire, the cost can be as high as $34,199. —and if it is a severe case    The same study reported that the cost of boarding up a single-family hom one time was $900, but noted that, because multiple times, the true cost was $1,445.
In a 2008 study, the City of Baltimore report police and fire services showed an annual increase of $1,472 for each  vacant and unsafe property on that block.
Code enforcement officials for a city in Fl orida reported that they spent  ver $120,000 to mow lawns of vacant properties in 2008; this was up from  o less than $30,000 in 2006 and prior years.  for another city in Florida told us they have  850,000 in outstanding code invoices for boarding up or mowing lawns  $ for abandoned properties.
Code enforcement officials for a county in Florida reported that prior to  2007, the number of code enforcement cases against properties in  foreclosure was not significant enough to warrant tracking; however, in  2008, after the department began to identify and track these properties  because of the noticeable increase in citizen complaints, statistics reveal  at 25 percent of all their cases involved properties in foreclosure—and  th as of May 2010, they had 443 active cases against properties in foreclosure.
A Cleveland official reported an approximately $80,000 increase in  rior year. She said these  osts were related to hiring additional staff to support existing staff with  personnel costs for code enforcement over the p c research, documentation, and court testimony.
When local governments maintain or demolish properties, they typically  may place liens against the properties for the associated costs. I jurisdictions, these liens may have the same first-priority status as tax liens  and may, therefore, be relatively easily recovered, but in other  jurisdictions these liens may have lower priority. In one jurisdiction, were told that code enforcement liens were wiped out when the  foreclosure was completed. A case study of Chicago estimated that  between 2003 and 2004 the city recovered only about 40 cents on each  dollar it spent for demolition.   we  Abandoned foreclosures also burden local governments with reduced  property tax revenues. Local jurisdictions directly lose tax revenue from  vacant and abandoned properties in two ways: (1) property taxes owed the property owner sometimes go unpaid and are not recouped, (2) a loss  of tax value of a property when a structure is demolished. In addition,  abandoned foreclosures contribute to falling housing values, wh erode the property tax base. For example, researchers calculated tha 2006, the City of Cleveland lost over $6.5 million due to the tax  delinquency on vacant and abandoned structures, and over $409,000   demolished. Moreover, one local official told us  because structures were that every 1 percent decline in home values costs the City of Cleveland $1  million in tax revenue.
Abandoned foreclosures also contribute to an increased demand for cit services. As discussed, abandoned foreclosures result in an increased  demand for code enforcement related services—including demolition,  boarding of windows, removing trash, mowing the lawn, and a range of  other activities intended to keep the unit from becoming an eyesore.  Abandoned foreclosures also result in a variety of other muni including increased policing and firefighting, building inspections, legal  fees, and increased demand for city social service programs.
Abandoned foreclosures also increase the difficulty of transferring the  property to another owner, which can increase the potential for the  property to contribute to problems within a community. If a borrower  remains in the home or in contact with the servicer, title to the property  u of  can be transferred to a new owner through short sales or deed-in-lie foreclosure actions. If homeowners vacate their properties and cann reached, these alternative means of transferring title cannot occur.  However, in these cases, the servicer can complete the foreclosure  process where title is transferred to a new owner—either a third par buyer or the lien holder where the property is then held in its or the  servicer’s real estate-owned inventory. However, when the servicer  abandons the foreclosures, this transfer of title does not occur. Without this transfer, abandoned foreclosures may remain vacant for extended  periods of time, with recent media and academic reports labeling such  properties as being in “legal limbo” or having a “toxic title.” One academic  we interviewed said abandoned foreclosures result in property titles that  lack transparency and cannot be easily transferred; another academic told ty  us that uncertainty about a property’s ownership and status may make it  hard for neighborhood groups or cities to determine what actions can be  taken to dispose or sell such property. According to a recent report by a  national rating agency, most properties associated with charged-off loans  will ultimately be claimed by municipalities for back taxes, which  according to stakeholders may not be an efficient process.
section_title: Lack of Transparency of Foreclosure Decisions May Cause Confusion among nd Increase Homeowners a the Number of Abandoned Foreclosures
paragraphs: Abandoned foreclosures can also create confusion among the bor over the status of their properties and their responsibilities for such properties. According to representatives of counseling agencies,  community groups, and some of the homeowners we interviewed,  borrowers are often surprised to learn that the servicer did not complete  the foreclosure and take title to the house—and that they still own the  property and are responsible for such things as maintenance, taxes, an d  code violations. A nonprofit law firm representative said that borrowers  who thought that they had lost their homes through foreclosure were  sometimes brought to housing court for code violations. For example,  a  court record from Buffalo City indicates that one individual appeared in  court to address code violations 3 years after receiving a judgment of  foreclosure. According to the record, after the judgment o there was no sale of the property. While in court, this individual claimed  that she did not believe that she still owned the property.
section_title: Abandoned Foreclosures Have Not Significantly Affected Federal and State Foreclosure-Related Programs
paragraphs: Although creating various negative impacts on neighborhoods and  communities, abandoned foreclosures have not significantly affected state  s  and federal foreclosure-related programs because most of these programtry to prevent foreclosure and some only apply to properties still occupied by homeowners. In response to the surge in mortgage foreclosures t began in late 2006 and continues today, several states created task forces to address the crisis. According to a 2008 report by a national trade  association, the main objectives of almost every task force created as of March 2008 was to get practical help directly to “at risk” homeown for example, creating consumer hotlines, and developing outreach and  educational programs designed to encourage homeowners to get  counseling. In addition, we spoke with a legislative analyst for a nation organization who told us that over the past 3 years state legislatures have  enacted many laws focusing on such topics as payment assistance and  loan programs, regulating foreclosure scam artists, ensuring homeow and tenants receive proper foreclosure notice, shortening or lengt the foreclosure process, and implementing mediation or counseling programs. The federal government has also implemented several  foreclosure-related programs, most of which focus on foreclosure  prevention and require that borrowers live in their homes. For example,  the federal Home Affordable Modification Program (HAMP) is a program  designed to help borrowers avoid foreclosure and stay in their homes by providin g incentives for servicers to perform loan modifications; however,  HAMP requires as a pre-condition that borrowers currently live in thei homes.
The term “abandoned” was originally defined as a property that had been foreclosed upon  and was vacant for at least 90 days. HUD expanded the definition to include properties  where (a) mortgage, tribal leasehold, or tax payments are at least 90 days delinquent, or (b)  a code enforcement inspection has determined that the property is not habitable and the  owner has taken no corrective actions within 90 days of notification of the deficiencies, or  (c) the property is subject to a court-ordered receivership or nuisance abatement related to  abandonment pursuant to state, local, or tribal law or otherwise meets a state definition of  an abandoned home or residential property.
Therefore, there is no longer a programmatic barrier preventing NSP  grantees from acquiring abandoned foreclosures.
On behalf of GAO, a national nonprofit organization e-mailed structured questions to 25  NSP grantees, including NSP 1 and NSP 2 grantees, and their subrecipients.
section_title: Some Servicer Practices Increase Likelihood of Abandoned Foreclosures and Regulatory Oversight Has Been Limited
paragraphs: Various servicer practices may be contributing to the number of  abandoned foreclosures. These practices include initiating foreclosure  without obtaining updated property valuations and obtaining valuations  that did not always accurately reflect property or neighborhood conditions  or other costs, such as delinquent taxes or code violation fines.
subsections: section_title: Without Updated Property Valuations That Consider Property and Neighborhood Conditions, Servicers May Abandon Foreclosures on Certain Properties
paragraphs: By not always obtaining updated property valuations at foreclosure  initiation, servicers appeared to increase the potential for abandoned  foreclosures to occur. As described earlier, after a certain period of loan  delinquency—usually around 90 days—has passed, officials from the six  servicers that we interviewed representing about 60 percent of the nation’s  home mortgages told us that they make a determination about whether to  initiate foreclosure. Representatives of servicers told us they take into  account various information about the property when deciding whether to  initiate foreclosure and some servicers conduct an equity analysis on  certain loans to determine if the expected proceeds from a sale will cover  foreclosure costs. However, the valuations used in these analyses might be  outdated at the time of foreclosure initiation and staff from four of the six  servicers told us that they did not always obtain updated information on  the value of the property at the time they conducted this analysis and  initiated foreclosure. The representatives from one servicer told us that  the company performs an equity analysis on loans in its own portfolio  before foreclosure initiation. However, for loans serviced for Fannie Mae,  Freddie Mac, or third-party investors, this servicer follows the applicable  servicing agreement or guidance, which may not require such analyses or  updated property valuations. Instead, the company initiates foreclosure  automatically when one of these loans reaches a certain delinquency  status. Only two of the six servicers we interviewed reported updating  property valuations on all loans before initiating foreclosure.
Even when servicers obtain updated property valuations, this information  does not always reflect actual property or neighborhood conditions, which  can also increase the likelihood of servicers commencing foreclosure but  then abandoning it. Representatives of the six servicers we interviewed  said that property inspections begin in the early stages of delinquency and  continue on a regular basis, but that information collected during  inspections—information relevant to the resale value of a property, such  as vacancy status and property damage—is not used in developing  property valuations. Most of the servicers we interviewed reported using  automated valuation models (AVM) to estimate property values, not  necessarily taking into consideration property-specific conditions.  Furthermore, servicers we interviewed said they do not incorporate  information on property and neighborhood conditions obtained from  property inspections in their valuations. Simply using a BPO or AVM  without consideration of up-to-date property or neighborhood conditions  may result in abandoned foreclosures because the actual resale value and  accurate expected proceeds from foreclosure sale may not be reflected in  the valuation.
Another servicer practice that appeared to increase the potential for an  abandoned foreclosure was that servicers generally were not considering  local conditions that can affect property values prior to initiating  foreclosure. Our interviews with the six servicers indicated that they did  not always adjust property valuations to take into consideration potential  steep declines in value due to factors specific to neighborhoods or city  blocks. Staff from most of the servicers we interviewed reported that in  some areas a property that was occupied and well-maintained when  foreclosure was initiated could become vacant and be vandalized and  decline in value. Similarly, local government officials said that homes with  resale value could be stripped of raw building materials during the  foreclosure process, leaving them practically worthless. As previously  discussed, representatives of community groups and local governments  told us that properties are sometimes vandalized within 24 hours of  becoming vacant. In Detroit, for example, according to officials, property  values can be seriously impacted by vacancy due to vandalism and rapid  decay of vacant properties. Data from one property maintenance company  contracted to inspect and secure homes undergoing foreclosure indicated  that 29 percent of the properties it oversaw nationwide had some property  damage in the 6 months from January to June 2010. In Detroit, about 54  percent of its properties had incurred damage.
In addition, not considering other costs, such as local taxes and potential  for code violation fines, associated with a property before initiating  foreclosure can increase the likelihood that a foreclosure would be  abandoned. For example, local taxes owed or code violations and fines  can add significant costs to the foreclosure process. Servicers told us that  they may abandon foreclosures because of the amount of tax owed on the  property. Tax liens are commonly placed on delinquent properties when  borrowers are unable to pay property taxes. Unattended properties or  those with damage can often accumulate local municipality code violation  fines that can also decrease the net proceeds that the servicer will gain  from completing a foreclosure. These fines vary widely, but in some cities  fines may accrue while a property is in delinquency and foreclosure, and  over time the assessed fines can exceed a property’s value. The unpaid  taxes and code violation fees that may accumulate during foreclosure can  encourage servicers to abandon the foreclosure because they serve to  reduce the net proceeds that the servicer would realize in completing the  foreclosure.
In some cases, the circumstances that lead to servicers initiating but then  abandoning a foreclosure appeared to be those that could not have been  anticipated at the time the decision to initiate foreclosure was being made.  For example, property inspections and valuations usually include only  information about external conditions of properties, potentially leaving  internal damage or conditions such as lead paint or contaminated drywall  undetected. Addressing these internal problems could be costly.  Unexpected fires or other natural disasters can also leave properties with  very low values. If such damages are discovered or occur after foreclosure  was initiated, servicers may decide that completing the foreclosure is not  warranted.
When servicers do not have updated or complete information about  property and neighborhood values and conditions before initiating  foreclosure, the likelihood that they will commence then abandon  foreclosures increases. Representatives of servicers said that they did not  always obtain updated valuations before initiating foreclosure because  they did not think it was necessary or because they were not required to  do so. Instead, they generally obtained more current information only after  foreclosure initiation, such as when preparing for the foreclosure sale. In  cases where this valuation indicates that the value of the property was  insufficient to justify completing the foreclosure process, the servicers  generally stop the foreclosure and charge off the loan in lieu of  foreclosure. However, by that time the property may already be vacant and  negatively impacting the neighborhood. As previously discussed, our  servicer data indicates that charge-offs in lieu of foreclosure that occurred  after foreclosure was initiated were associated with a higher rate of  vacancy than when the charge-off occurred prior to foreclosure initiation.
section_title: Views on Whether Servicers Have Financial Incentives to Initiate but then Abandon Foreclosures Were Mixed
paragraphs: Academics, local government officials, community groups, servicers, and  others expressed mixed views on whether mortgage servicers have  financial incentives to initiate foreclosure even in cases in which they  were unlikely to complete the process. For example, accounting  requirements for mortgage loans do not appear to provide incentives for  servicers to initiate foreclosures but then not complete them. First, most  mortgage loans that servicers are managing are being serviced on behalf of  other owners. As a result, any accounting requirements applying to such  loans do not financially affect the servicer’s financial statements because  these loans are not their assets. However, servicers that service loans for  other owners do carry the expected value of the servicing income they  earn on such loans on their own financial statements as an asset. The  reported value of this servicing rights asset would be reduced if a serviced  loan is charged off and no more servicing income is expected from it.  However, this reduction would occur regardless of whether foreclosure  has been initiated or not.
If the servicer of a mortgage loan is also the holder (owner) of the loan,  accounting requirements also do not appear to provide incentive to initiate  foreclosure. For the six servicers from whom we obtained data, 7 percent  of the loans were owned by the servicing institution, meaning accounting  decisions made by the servicer directly affect the institution financially.  For these loans, bank regulatory rules require servicers to mark the value  of delinquent loans down to their collateral value (or charge off the loan)  after the loan is 180 days past due, regardless of whether foreclosure has  been initiated or not. As a result, servicers then cannot avoid recognizing  the loss by, for example, abandoning the foreclosure, because the loan’s  loss of value is already reflected in their accounting statements.  Furthermore, financial institutions holding loans in their own portfolio  must develop reserve accounts for expected losses on their books. Thus,  they have to anticipate any declines in property values for loans in their  portfolio and start setting aside funds to cover any losses at specific points  in the delinquency cycle. Whether the property is carried to foreclosure  sale or charged off, the loss has already been reflected in their loan value  accounts.
For private label securitized loans that are being sold to private investors  and serviced in pools, servicers do not appear to have incentives to delay  or abandon foreclosure due to investors’ potential motivation to postpone  accounting for losses on those securities. According to OCC officials, a  single charge-off for a loan held in a pool would not necessarily lead to a  devaluation or write-down of the value of the overall pool of loans. In  addition, they said that whether the value of a security is written down  depends on several factors, including overall losses to the pool, liquidity,  and interest rate changes. Thus, investors have some discretion under  accounting guidance in deciding when to write down securitized assets.  Further, public accounting standards require investors holding mortgage- backed securities to either set aside loss reserves and write down the  value of impaired assets. Therefore, abandoning or postponing foreclosure  completion would be unlikely to have an advantage to the security.
Some academics or local government officials we interviewed were  concerned that servicers may have an incentive to initiate foreclosures  even though they might later abandon the process in order to continue  profiting from servicing mortgages. However, in servicers’ and experts’  descriptions of servicing practices, such incentives were called into  question. Servicers can derive part of their revenue from imposing fees to  borrowers who are past due with payments, and do not need to forward  this revenue on to investors. Therefore, some stakeholders suggested  servicers might initiate foreclosure in an effort to accrue late fees and  other charges associated with servicing the loan during the foreclosure  process. In addition, some stakeholders suggested that servicers might  continue earning income from other financial interests they might own on  the property, such as a second lien mortgage. However, five of the six  servicers we interviewed reported that they stopped charging fees once a  loan enters foreclosure as assessed fees are unlikely to be fully collected  on loans in foreclosure. In addition, servicers might not continue yielding  profits on second-lien mortgages because second-lien mortgages were  much less prevalent on subprime first lien mortgages, which were often  found in areas with very low housing values, such as Detroit and  Cleveland, compared to high-price areas, such as California, according to a  2005 study. 59, 60 Finally, servicers and other experts told us that servicers  do not have to initiate foreclosure in order to stop advancing payments on  loans.
Sean Dobson, Laurie Goodman, Mortgage Modifications: Where Do We Go From Here,  Amherst Securities Group LP (July 2010).
Charles A. Calhoun, The Hidden Risks of Piggyback Lending (Annandale, Va.: June  2005). government and private mortgage insurance and guarantees require that  foreclosure be completed before claims are paid. For example, FHA  mortgage insurance and VA guarantees, which cover a portion of potential  losses from loan defaults, require a claimable event, such as a foreclosure  sale, short sale, or deed-in-lieu of foreclosure before servicers can collect  on a claim. Representatives of mortgage insurers also said that they could  not pay an insurance claim on an abandoned foreclosure because the bank  did not hold the title. Similarly, the GSEs may provide servicers  incentives to complete foreclosures in order to receive reimbursements.  Fannie Mae requires servicers to submit final requests for reimbursement  of advances after the foreclosure sale and after any claims have been filed  with other insurers or guarantors.
section_title: Past Oversight of Servicer Foreclosure Practices Had Generally Been Limited, Although Bank Regulatory Agencies Have Recently Conducted Additional Reviews Addressing Practices
paragraphs: Mortgage servicers’ foreclosure activities were not always a major focus of  bank regulatory oversight, although federal banking regulators have  recently increased their attention to this area, including the extent to  which servicers were abandoning foreclosures. Various organizations have  regulatory responsibility for most of the institutions that conduct  mortgage servicing, but some of these institutions do not have a primary  federal or state regulator. According to industry data, OCC—which  oversees national banks—is the primary regulator for banks that service  almost two-thirds of loans serviced by the top 50 servicers. The Federal  Reserve oversees entities that were affiliated with bank holding companies  or other state member banks that represented about 7 percent of these  loans. Entities that are not chartered as or owned by a bank or bank  holding company accounted for about 4 percent of the top 50 servicers’  volume. Some states require mortgage servicers (including state-chartered  banks) to register with the state banking department, according to state  banking supervisors we interviewed. These supervisors also told us that  most banks that were chartered in their states did not service mortgage  loans. According to our analysis, only a few of the top 50 servicers were  state-chartered banks that were not members of the Federal Reserve  System.
According to our interviews with federal banking regulators, mortgage  servicers’ practices, including whether they were abandoning foreclosures,  have not been a major focus covered in their supervisory guidance in the  past. The primary focus in these regulators’ guidance is on activities  undertaken by the institutions they oversee that create the significant risk  of financial loss for the institutions. Because a mortgage servicer is  generally managing loans that are actually owned or held by other entities,  the servicer is not exposed to losses if the loans become delinquent or if  no foreclosure is completed. As a result, the extent to which servicers’  management of the foreclosure process is addressed in regulatory  guidance and consumer protection laws has been limited and uneven. For  example, guidance in the mortgage banking examination handbook that  OCC examiners follow when conducting examinations of banks’ servicing  activities notes that examiners should review the banks’ handling of  investor-owned loans in foreclosure, including whether servicers have a  sound rationale for not completing foreclosures in time or meeting  investor guidelines. In contrast, the guidance included in the manual  Federal Reserve examiners use to oversee bank holding companies only  contained a few pages related to mortgage servicing activities, including  directing examiners to review the income earned from the servicing fee for  such operations, but did not otherwise address in detail foreclosure  practices.
In addition, until recently, the extent to which these regulators included  mortgage servicing activities in their examinations of institutions was also  limited. According to OCC and Federal Reserve staff, they conduct risk- based examinations that focus on areas of greatest risk to their  institutions’ financial positions as well as some other areas of potential  concern, such as consumer complaints. Because the risks from mortgage  servicing generally did not indicate the need to conduct more detailed  reviews of these operations, federal banking regulators had not regularly  examined servicers’ foreclosure practices on a loan-level basis, including  whether foreclosures are completed. For example, OCC officials told us  their examinations of servicing activities were generally limited to reviews  of income that banks earn from servicing loans for others and did not  generally include reviewing foreclosure practices. Staff from the federal  banking regulators noted that no federal or state laws or regulations  require that banks complete the foreclosure process; therefore, banks are  not prohibited from abandoning foreclosures. In addition, many of the  federal laws related to mortgage banking, such as the TILA, are focused on  protecting borrowers at mortgage origination, and Federal Reserve  officials reported that none of the federal consumer protection laws  specifically addressed the process for foreclosure. As a result, the  Federal Reserve staff who conduct consumer compliance exams also have  not focused on how servicers interact with borrowers during the default  and foreclosure process. Further, OCC officials said that, even if  examiners observed banks they supervised abandoning the foreclosure  process, the practice would not negatively impact the bank’s overall rating  for safety and soundness. These officials said that a bank’s need to protect  its financial interest might override concerns about walking away from a  home in foreclosure.
However, in recognition of the ongoing mortgage crisis in the United  States, staff from OCC and the Federal Reserve told us that their  examiners have been focusing on reviewing servicers’ loan modification  programs, including those servicers participating in the federal mortgage  modification program, HAMP. As potential problems with foreclosure- related processes and documentation at major servicers emerged, these  two regulators have also increased examination of servicer foreclosure  practices. OCC staff responsible for examinations at one of the large  national banks that conducts significant mortgage servicing activities told  us that they had obtained data on loans that were charged-off and  foreclosure was not pursued and found that the practice was very rare and  typically involved loans on low-value properties. OCC examiners  acknowledged that abandoned foreclosures—due to their association with  neighborhood crime and blight—could pose a reputation and litigation risk  to the bank. For example, we found that some servicers and lenders have  been sued by various municipalities over their servicing or lending  activities.
The Federal Reserve has also recently increased its attention to mortgage  servicing among the institutions over which it has oversight responsibility.  In the past, the Federal Reserve has not generally included nonbank  subsidiaries of bank holding companies that conduct mortgage servicing in  their examination activity because the activities of these entities were not  considered material risks to the bank holding company. However, in 2007,  the Federal Reserve announced a targeted review of consumer compliance  supervision at selected nonbank subsidiaries that service loans.  Additionally, in October 2009, the Federal Reserve began a loan  modification initiative, including on-site reviews, to assess whether certain  servicers under its supervisory authority—including state member banks  and nonbank subsidiaries of bank holding companies—were executing  loan modification programs in compliance with relevant federal consumer  protection laws and regulations, individual institution policies, and  government program requirements. In addition, as part of its ongoing  consumer compliance examination program, the Federal Reserve  incorporated loan modification reviews into regularly scheduled  examinations of state member banks, as appropriate. Federal Reserve  officials noted that as of October 2010 these reviews and examinations  were still in progress; however, initial work identified two institutions that  were engaging in abandoned foreclosure practices. Federal Reserve  officials reported that, in general, no federal regulation or law explicitly  requires that servicers notify borrowers when they decide to stop pursuing  a foreclosure after the foreclosure process had been initiated.
Nevertheless, Federal Reserve staff instructed the servicers to do so as a  prudent banking practice. According to Federal Reserve officials, the  institutions agreed to do so. Because abandoned foreclosures do not  necessarily violate any federal banking laws, supervisors did not take any  actions against the institutions.
section_title: Other Regulators and Entities That Review Servicers’ Activities also Do Not Oversee Servicers’ Foreclosure Practices
paragraphs: Other federal and state regulators that review servicers’ activities also  reported having little insight into servicers’ foreclosure practices and  decisions to abandon foreclosures, particularly those with non-GSE loans,  which account for the greatest numbers of abandoned foreclosures.  Officials from the Securities and Exchange Commission, which receives  reports on publicly traded residential mortgage-backed securities, told us  that they did not examine servicers’ policies or activities for these  securitized assets. Furthermore, SEC’s accounting review of publicly  traded companies engaged in mortgage servicing included aggregate  trends in foreclosure activity but not incomplete foreclosures on  individual loans. While the Federal Housing Finance Agency Federal  Property Manager’s Report includes data on charge-offs in lieu of  foreclosure, FHFA also does not routinely examine whether Fannie Mae  and Freddie Mac are abandoning foreclosures. Like the banking  regulators, they also said they had focused most of their oversight on the  institutions’ loan modification and pre-foreclosure efforts. In addition, the  Federal Trade Commission (FTC) may also pursue enforcement actions  against nonbank institutions that violate the FTC Act or consumer  protection laws. However, FTC staff told us they did not think that either  the unfair and deceptive acts and practices provision of the FTC Act or the  Fair Debt Collections Practices Act would apply to an institution that  walked away from a home in foreclosure, as a general matter. State  banking regulators that we interviewed said that they conduct little  oversight of servicers’ foreclosure practices given the limited number of  state-chartered banks that conduct mortgage servicing activities. However,  several examiners and industry association officials we interviewed  acknowledged the need to obtain further information about the  foreclosure process and improve their examination process for nonbank  mortgage servicers.
Other entities that review servicers’ activities also do not review servicers’  foreclosure practices or decisions to abandon foreclosures.  Representatives from private rating agencies that evaluate mortgage  servicers’ told us that although they review servicers’ handling of loans in  default and the overall average length of time servicers take to complete  foreclosure, they do not track specific loans to see if foreclosure was  completed because it would not be a specific trigger for downgrading that  security’s rating. In addition, representatives of institutions that serve as  trustees for large numbers of pooled assets in an MBS pool told us that  they sought to ensure that servicers forwarded payments to investors and  noted that trustees did not provide management oversight of servicers’  decisions on how to handle loans.
section_title: Various Actions Are Being Taken by Some Communities to Prevent or Mitigate the Effects of Abandoned Foreclosures, but Each Presents Tradeoffs
paragraphs: We identified various actions that some communities are taking to reduce  the likelihood of abandoned foreclosures occurring or reduce the burden  such properties create for local governments and communities.  Communities dealing with abandoned foreclosures may benefit from  implementing similar actions, but they may need to weigh the  appropriateness of the various actions for their local circumstances as  these actions can require additional funding, have unintended  consequences, and may not be appropriate for all communities. In  addition, these actions generally were designed to address vacant  properties overall; therefore, they may not fully address the unique  impacts of abandoned foreclosures.
subsections: section_title: Some Communities Are Taking Steps to Increase Borrowers’ Awareness of Available Counseling
paragraphs: Officials from local governments, community groups, and academics told  us that borrowers often leave their homes before the foreclosure sale even  though they are entitled to stay in their homes at least until the sale.  Although borrowers may leave for a variety of reasons, we consistently  heard that many borrowers leave because they believe that servicers’  initial notices of delinquency and foreclosure initiation mean that they  must immediately leave the property. For example, a representative of a  counseling group in Chicago told us that many people, especially the  elderly and non-native English speakers, do not understand notices that  they receive from servicers and think that they are being told to leave their  homes.
Some jurisdictions are taking steps to increase borrowers’ awareness of  their rights during foreclosure through counseling. A variety of counseling  and mediation resources are already available to borrowers. For example,  HUD sponsors housing counseling agencies throughout the country to  provide free foreclosure prevention assistance and provides references to  foreclosure avoidance counselors. In addition, according to a national  research group, at least 25 foreclosure mediation programs were in  operation in 14 states across the country as of mid-2009 to encourage  borrowers and servicers to work together to keep people in their homes  and avoid foreclosure. Officials from local governments and community  groups, servicers, and an academic noted that increasing the use, visibility,  and resources of counseling efforts could provide avenues to educate  borrowers about their rights to remain in their homes during the  foreclosure process and prevent vacancies. To increase the visibility and  use of counseling resources, the state of Ohio implemented a hotline  phone number to help refer borrowers to counselors and a Web site to  provide information about foreclosure. In addition, local officials have  credited a recent law in Michigan with helping to educate borrowers about  their rights during the foreclosure process. The Michigan law allows  borrowers a 90-day delay in the initiation of foreclosure proceedings if  they request a meeting with a housing counselor and a servicer  representative to try to arrange for a loan modification.
Representatives of community groups, local governments, and servicers  were generally supportive of efforts to educate borrowers about their  rights during foreclosure, and a recent study has demonstrated the  effectiveness of such counseling on keeping people in their homes. In our  interviews, representatives of a servicer and local government and a  researcher noted that counseling could be more effective at educating  borrowers about their rights than servicers’ efforts because borrowers  might be more willing to talk to a counselor than to a bank representative.
Representatives of a law firm also noted that local staff might reach more  borrowers and achieve better results than bank representatives because  the local individuals have a better understanding of local conditions and  homeowners could work with the same individual rather than with bank  representatives who change with each contact. Community group and  servicer representatives also noted that counseling is most effective at  keeping people in their homes if it is offered soon after a borrower first  becomes delinquent because they are more likely to leave their homes  later in the foreclosure process. In addition, a November 2009 study found  that homeowners who received counseling were about 1.6 times more  likely to get out of foreclosure and avoid a foreclosure sale—possibly  allowing them to remain in their homes—with counseling than without.
Local community representatives noted that increased counseling may not  completely prevent abandoned foreclosures for several reasons. First,  counselors cannot reach every borrower needing assistance. For example,  officials from a community group and counseling agencies said that some  borrowers might not be aware that counseling is available or might be too  embarrassed about their situation to seek assistance. Second, the quality  of counseling may limit its effectiveness. Researchers noted that the  quality of counseling can be uneven and organizations that are not HUD- approved or foreclosure rescue scams could mislead borrowers about  their rights. Third, representatives of research and advocacy groups we  interviewed also noted that increased funding for counseling efforts would  allow counseling agencies to expand and help more homeowners.
section_title: Many Jurisdictions Have Implemented Vacant Property Registration Systems
paragraphs: Another action that some local governments are taking to address the  problems of vacant properties, including abandoned foreclosures, is to  require servicers to register vacant properties. As previously discussed,  one of the major challenges confronting code enforcement officials is  identifying those responsible for maintaining vacant properties. Vacant  property registration systems can attempt to address this problem by  requiring servicers to provide the city with specific contact information for  each vacant property they service. According to a national firm that  contracts with servicers to maintain properties, nearly 288 jurisdictions  have enacted vacant property registration ordinances as of February 2010.  Although the structures of these ordinances vary, researchers generally  classify them into two types. The first type of systems tracks all vacant and  abandoned properties and their owners. For example, among the cities we  studied, Baltimore, Maryland has implemented this type of registration  system. The second type of systems attempts to hold the lender and  servicer responsible for maintenance of vacant properties during the  foreclosure process. According to the Fannie Mae and Freddie Mac  uniform mortgage documents, although these mortgage contracts typically  give servicers the right to secure abandoned properties and make repairs  to protect property values, they do not necessarily obligate them to do so.  The cities of Chula Vista, California, Cape Coral and Fort Myers, Florida,  and Chicago, Illinois, for example, have implemented this second type of  ordinance. New York state also enacted a similar law statewide.
According to some local officials and researchers, the contact information  in vacant property registration systems makes it easier for local code  enforcement officials to identify the parties responsible for abandoned  foreclosures and that holding mortgage owners accountable for vacant  properties can reduce the negative impact of these properties on the  community. For example, local officials we interviewed in some cities with  vacant property registries said that most owners complied with their city’s  registry requirements and noted that the registries had been effective at  providing contacts for officials to call to resolve code violations on vacant  properties. Several stakeholders, including local officials, researchers, and  representatives of a community group also recommended the type of  vacant property ordinance that holds servicers accountable for  maintaining vacant properties during foreclosure. They noted that these  types of ordinances could provide servicers with needed incentives to  keep up vacant properties to avoid incurring additional costs and help  them in determining whether to initiate foreclosure.
Local officials and industry representatives told us that, while vacant  property registration systems can help local governments identify some  owners, they might not capture all owners, and some servicers found  certain requirements overly onerous and outside of their legal authority to  perform. Local officials in a couple of cities and one servicer  representative told us that these systems might not capture all owners  because those who did not want the responsibility of maintaining certain  properties would choose not to register. Further, systems that do not  require that properties be registered until after the foreclosure sale would  not help officials identify those responsible for maintaining abandoned  foreclosures. In addition, servicers’ representatives told us that complying  with these ordinances can be burdensome. For example, servicers  consider ordinances that require them to secure doors and windows with  steel, install security systems, and perform capital improvements to vacant  properties as onerous, according to an industry association. Servicers also  reported having difficulty tracking and complying with multiple systems  and said that they would prefer a uniform system with consistent  requirements. Further, servicers and other industry representatives we  spoke to believe servicers’ authority to perform work on properties they  did not yet own as limited. Holding a mortgage on a property does not give  the servicer right of possession or control over the property. Therefore,  servicers argue that they cannot be held liable for conducting work on  properties because they are not the titleholders until after a foreclosure  sale. For example, representatives of one servicer told us that the  company would take steps to prevent a property from deteriorating but  was cautious about going onto a property it did not own. In addition,  community groups, researchers, and other industry analysts have  expressed concerns that such laws could have the unintended  consequence of encouraging servicers to walk away from properties  before initiating foreclosure to avoid the potential maintenance and  related costs, which could have the same negative effects on  neighborhoods and communities as abandoned foreclosures do now.
section_title: Some Areas Are Reducing the Time Required for Foreclosing on Vacant Properties or Requiring Foreclosures to Be Completed Once Initiated
paragraphs: State or local actions to streamline the foreclosure process for vacant  properties could also reduce the number of abandoned foreclosures by  decreasing servicers’ foreclosure costs and preserving the value of vacant  properties. As we have seen, the length of the foreclosure process affects  servicers’ foreclosure costs as well as the condition and value of a  property. Some areas are implementing streamlining efforts. For  example, a law was recently enacted in Colorado allowing servicers to  choose a shortened statutory foreclosure process for vacant properties  that provides for a foreclosure sale to be scheduled in half the time of the  typical process, according to a state press release on the new law. In  addition, some courts in Florida have created expedited foreclosure court  dockets for uncontested cases in order to move a higher number of cases  forward in the process. Shortening the time it takes to complete  foreclosure could result in less decrepit properties that servicers could  resell more easily and at a higher price than they might have been able to  otherwise—thereby encouraging servicers to abandon fewer foreclosures.
However, some stakeholders raised concerns about streamlined actions.  First, servicers and other industry analysts note that determining whether  properties were actually vacant could be difficult. Second, shortening  foreclosure times is contrary to the trend among state and local  governments across the country to enact laws such as foreclosure  moratoriums that extend foreclosure timelines. Therefore, some raised  concerns about ensuring that homeowners had appropriate opportunities  to work out a solution within a shortened time frame. Third, another  potential unintended consequence is that in judicial states, shortening the  time frame for foreclosing on vacant properties by moving these cases to  the head of the queue could lengthen the time frames for other cases,  increasing servicers’ carrying costs on those properties.
Other jurisdictions have attempted to require servicers to complete  foreclosures once they have initiated them. For example, staff in one court  we visited told us the judge requires a foreclosure sale to be scheduled  within 30 days after the court enters a foreclosure judgment. If servicers  do not comply, they can be held in contempt of court, fined, and perhaps  serve jail time. Many local officials and researchers we interviewed  suggested that foreclosure cases should be dismissed, that servicers  should face fines, or that servicers should lose their right to foreclose or  take other actions on a property if they do not take action on foreclosure  proceedings or schedule a sale within a certain amount of time. These  actions could reduce abandoned foreclosures because servicers would  more thoroughly consider the benefits and costs of foreclosure before  initiating the process, and once initiated, foreclosures would be completed  in a timely manner. Others also said that these actions would quickly move  properties out of the foreclosure process and into the custody of a servicer  that local officials could then hold responsible for the property’s upkeep.
However, others noted that such a requirement could result in missed  opportunities to work out solutions with the borrower and that it could be  difficult to enforce. For example, representatives of servicers and others  told us that borrowers often sought such alternatives at the last minute  before a foreclosure sale and that requiring servicers to complete all  foreclosures would limit their ability to explore alternatives late in the  foreclosure process. An academic and regulatory officials expressed  concerns that servicers would incur additional expenses if they had to  complete sales and take ownership of properties when doing so was not in  their best interest and they would not be able to recover their costs. In  addition, regulatory staff cautioned that such a requirement could cause  servicers to walk away from properties before initiating foreclosure. This  type of action also would be difficult to implement in a state with a  statutory foreclosure process because there is not the same degree of  public records tracking foreclosures in these states.
section_title: Certain Communities Are Establishing Outlets for Servicers to Dispose of Low-Value Properties
paragraphs: Local actions to establish reliable outlets for servicers to easily and  cheaply dispose of low-value properties could reduce the number of  abandoned foreclosures by providing incentives for servicers to complete  the process. As previously discussed, servicers told us that many  properties that were abandoned foreclosures were those that would likely  have been either too costly for servicers to take ownership of or not likely  to have resulted in sufficient sale proceeds. Taking foreclosed properties  into their own real estate ownership inventories can be costly to servicers  as they must continue to pay for taxes and insurance, maintain a  deteriorating property, and hire a broker to market the property for sale.  According to a recent report, if servicers and their investors know that  they will not be further burdened by costs for the property, they may be  more willing to take title and transfer it to a government or nonprofit  entity that will be able to begin moving the property back into productive  use.
The use of land banks is one alternative that some jurisdictions are  attempting to use to address problems arising from large numbers of  foreclosures and vacant properties. Land banks are typically  governmental or quasi-public entities that can acquire vacant, abandoned,  and tax-delinquent properties and convert them to productive uses, hold  them in reserve for long-term strategic public purposes such as creating  affordable housing, parks, or green spaces, or demolish them. Land banks  can reduce the incidence of abandoned foreclosures by providing  servicers a way to dispose of low-value properties that they might  otherwise abandon. Sales or donations to land banks could help servicers  reduce their foreclosed property inventories. For example, Fannie Mae  and the Cuyahoga County Land Reutilization Corporation have an  agreement whereby on a periodic basis Fannie Mae sells pools of very low- value properties to the land bank for 1 dollar, plus a contribution toward  the cost of demolition. This agreement allows Fannie Mae to reliably  dispose of pools of properties in a recurring transaction at pre-defined  terms. Land bank officials from Cuyahoga County noted that they are in  the process of negotiating similar agreements with several large servicers.  Once it has acquired the properties, a land bank can help stabilize  neighborhoods, such as by reducing excess and blighted properties  through demolition or transferring salvageable properties to local  nonprofits for redevelopment. According recent research, the Genesee  County Land Bank in Flint, Michigan, has been credited with acquiring  thousands of abandoned properties, developing hundreds of units of  affordable housing, and being the catalyst for increasing property values in  the community by more than $100 million between 2002 and 2005 through  its demolition program.
Although land banks can help reduce abandoned foreclosures or their  negative effects, our interviews revealed potential challenges of  implementing these banks. First, many of the local government officials  we interviewed noted that land banks did not have enough resources to  manage a large volume of properties. Land banks may be dependent on  local governments for funding, and without a dedicated funding source it  may be difficult for land banks to engage in long-term strategic planning.  However, recently created land banks, such as those in Genesee and  Cuyahoga counties, have developed innovative funding mechanisms that  do not depend on appropriations from local governments. Second, some  mentioned that contributions from servicers—such as the agreement  between Fannie Mae and the Cuyahoga County Land Reutilization  Corporation—could help defray land banks’ property carrying costs.
Second, land banks may be limited in their authority to acquire or dispose  of properties. For example, by design land banks tend to passively acquire  and convert abandoned properties with tax delinquencies into new  productive use. However, land banks can also be designed to actively and  strategically acquire properties from multiple sources. The Cuyahoga  County Land Reutilization Corporation, for example, has the authority to  strategically acquire properties from banks, GSEs, federal or state  agencies, and tax foreclosures. Third, some municipalities face political  challenges in establishing land banks or local officials question whether  they are needed. For example, according to an advisor to local  governments on establishing land banks and a representative of a  community group, the Maryland state legislature authorized the creation of  a land bank in Baltimore, but its implementation fell through due to  political differences at the city level. Further, some local officials we  interviewed in Florida did not think land banks were needed in their areas  because they expected the housing market to recover so that vacancies  would not be a long-term problem.
Similar to land banks, other methods for cities to acquire properties before  or following foreclosure could also provide incentives to servicers to  complete the foreclosure process for low-value properties rather than  abandoning it. Some cities have negotiated specialized sale transactions  with Fannie Mae and HUD. For example, HUD recently announced a  partnership with the National Community Stabilization Trust (NCST) and  leading financial institutions that account for more than 75 percent of  foreclosed property inventory to provide selected state and local  governments and nonprofit organizations the first opportunity to purchase  vacant properties quickly, at a discount, and before they are offered on the  open market. In addition, some cities have worked with Fannie Mae to  purchase foreclosed and low-value properties. According to Fannie Mae,  the City of St. Paul, Minnesota, has purchased 45 properties from the  entity and has access to review Fannie Mae’s available properties to be  able to submit an offer for a pool of properties before they are marketed.  And, according to a representative of a national community development  organization, with the broadened definitions of abandoned and foreclosed  properties under the NSP program, local governments and other grantees  will be able to work with servicers earlier in the foreclosure process to  acquire such properties through short-sales, for example, which could  discourage abandoned foreclosures. For example, one organization in  Oregon is pursuing purchasing notes prior to foreclosure using some of  the state’s Hardest Hit Fund money, which would save the servicer the  costs of initiating and completing foreclosure. However, the ability of  these types of programs to fully address the issue of abandoned  foreclosures may be limited. For example, local officials and researchers  said cities’ capacity to receive donations or acquire properties was limited  because they did not have enough resources to manage properties.  According to recent research, capacity constraints prevent most  community development organizations from redeveloping enough vacant  homes to reverse the decline of neighborhood home values. In addition,  according to industry observers, and HUD and local government officials,  local governments have not pursued many pre-foreclosure acquisitions,  such as short sales and note sales, because they can be time-consuming  and technically difficult to complete.
section_title: Conclusions
paragraphs: The overall estimated number of abandoned foreclosures nationwide is  very small. However, the communities in which they are concentrated  often experience significant negative impacts, including producing vacant  homes that can be vandalized, reduce surrounding neighborhood property  values, and burden local government with the costs associated with  maintenance, rehabilitation, or demolition. Given the large number of  homeowners experiencing problems in paying their mortgages and the  negative impacts on communities when properties become vacant,  avoiding additional abandoned foreclosures would help reduce any further  potential problems that another vacant and uncared for property can  create for communities already struggling with the impacts of the current  mortgage crisis.
Various servicer practices appear to be contributing to the potential for  additional abandoned foreclosures. First, no requirement currently exists  for mortgage servicers to notify borrowers facing foreclosure of their right  to continue to occupy their properties during this process or of their  responsibilities to pay taxes and maintain their properties until any sale or  other title transfer activity occurs, and regulatory officials told us that they  were not sure they had the authority to require servicers to do so. The lack  of awareness among borrowers about their rights and responsibilities  contributes to the problems associated with abandoned foreclosures. With  such information, more borrowers might not abandon their homes,  reducing the problems that vacancies create for neighborhoods, their  surrounding communities, and the local government of the community in  which the property exists. Second, no requirement exists for servicers to  notify the affected local government if they abandon a foreclosure.  Without such notices, local government officials often are unaware of  properties that are now at greater risk of damage and create potential  problems for the surrounding neighborhood. With such information, local  governments could move more quickly to identify actions that could  ensure that such properties are moved to more productive uses.
Third, servicers are not always obtaining updated property value  information that consider local conditions that can affect property values  when initiating foreclosure. As a result, the likelihood that servicers may  initiate foreclosure only to later abandon it after learning that the likely  proceeds from the sale of the property would not cover their costs is  increased. If servicers had more complete and accurate information on  lower-value properties that were more at risk for such declines in value,  they may determine that foreclosure is not warranted prior to initiating the  process for some properties. Having servicers improve the information  they use before initiating a foreclosure could result in fewer vacant  properties that cause problems for communities.
section_title: Recommendations for Executive Action
paragraphs: To help homeowners, neighborhoods, and communities address the  negative effects of abandoned foreclosures, we recommend that the  Comptroller of the Currency and the Chairman of the Board of Governors  of the Federal Reserve System take the following four actions:  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; 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; and 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.
As part of taking these actions, 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.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the Board of  Governors of the Federal Reserve System, Department of Housing and  Urban Development, Department of the Treasury, Department of Veterans  Affairs, Fannie Mae, Federal Deposit Insurance Corporation, Federal  Housing Finance Agency, Freddie Mac, Federal Trade Commission, Office  of Comptroller of Currency, Office of Thrift Supervision, and Securities  and Exchange Commission. We received technical comments from  Federal Reserve, FDIC, FHFA, FTC, OCC, and OTS, which we  incorporated where appropriate. The Comptroller of the Currency did  not comment on the recommendations addressed to him.
We also received written comments from Treasury and the Federal  Reserve that are presented in appendices II and III. The Acting Assistant  Secretary for Financial Stability at the Department of the Treasury noted  that, although the number is small, abandoned foreclosures are a serious  problem that underscores the importance of holding servicers  accountable. The Director of the Division of Consumer and Community  Affairs at the Board of Governors of the Federal Reserve System agreed  with our findings but neither agreed nor disagreed with our  recommendations. Instead, the Director’s letter described ongoing actions  the Federal Reserve is taking to address these issues and noted that the  agency is concerned about the effects abandoned foreclosures may have  in communities where they are concentrated. In response to our  recommendation that the agency require the servicers the Federal Reserve  oversees to notify borrowers that their loans are being charged off in lieu  of foreclosure, the Director’s letter states they agreed that such  notification represents a responsible and prudent business practice and  will advise institutions they supervise to notify affected borrowers in the  event of abandoned foreclosures. While this would ensure that borrowers  are notified in cases where examiners identify instances of abandoned  foreclosures, we believe that a more affirmative action by the Federal  Reserve to communicate this expectation to all servicers it supervises  would be more effective at reducing the impact of abandoned foreclosures  on homeowners.
Regarding our recommendation that the Federal Reserve require mortgage  servicers to notify local authorities when loans are being charged off in  lieu of foreclosure, the Consumer and Community Affairs Division  Director stated that the Federal Reserve expects servicers to comply with  any local laws requiring registration of vacant properties. While this would  ensure that local authorities are notified in those communities, we  reiterate that the Federal Reserve should take steps to ensure that the  servicers it oversees are notifying local authorities that would likely be in  a position to take action to mitigate the impact of an abandoned property,  such as tax authorities or code enforcement departments, in all areas—not  just those with existing vacant property registration systems—to ensure  that all communities have such information that could help them better  address the potential negative effects of abandoned foreclosures. We also  encourage the Federal Reserve, along with other banking regulators with  responsibilities to oversee mortgage servicers, to work with Congress to  seek any additional authority needed to implement such a requirement.
In response to our recommendation that the Federal Reserve require  servicers to obtain updated property valuations in advance of initiating  foreclosure in certain areas, the Consumer and Community Affairs  Division Director letter notes they agree with the importance of servicers  having the most up-to-date information before taking such actions, but  noted that servicers’ ability to obtain optimal information could be limited.  Even without the ability to conduct interior inspections of properties,  having servicers take additional steps to improve the accuracy of their  valuations prior to initiating foreclosure would still be possible. We  acknowledge that updating property valuations can be challenging, which  is why our recommendation encourages a risk-based approach to  identifying properties where an updated evaluation could assist servicers  in making a more well-informed decision about initiating foreclosure. The  Director’s letter also cites existing Federal Reserve guidance outlining  expectations for obtaining property valuations, which, according to  Federal Reserve staff, applies to actions that institutions should take  before and after they have acquired properties through foreclosure.  According to this guidance, an individual who has appropriate real estate  expertise and market knowledge should determine whether an existing  property valuation is valid or whether a new valuation should be obtained  because of local or property-specific factors including the volatility of the  local market, lack of maintenance on the property, or the passage of time,  among others. Having the Federal Reserve take further steps to ensure  that servicers understand and implement this guidance and evaluate  properties in advance of initiating foreclosure would likely help to reduce  the prevalence of abandoned foreclosures as well.
We are sending copies of this report to interested congressional  committees, the Board of Governors of the Federal Reserve System,  Federal Deposit Insurance Corporation, Federal Housing Finance Agency,  Office of Controller of Currency, Office of Thrift Supervision, Department  of Housing and Urban Development, Department of the Treasury,  Department of Veterans Affairs, and Securities and Exchange Commission,  and other interested parties. The report is also available at no charge on  the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-8678 or clowersa@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report focuses on the prevalence, causes, and effects of abandoned  foreclosures. Specifically, this report addresses (1) the nature and  prevalence of abandoned foreclosures, including how they occur; (2) the  impact of abandoned foreclosures on communities and state and federal  efforts to mitigate the effects of foreclosure; (3) certain practices that may  contribute to why mortgage servicers initiate but not complete  foreclosures and the extent of federal regulatory oversight of mortgage  foreclosure practices; and (4) the various actions some communities are  taking to reduce abandoned foreclosures and their impacts.
To determine the nature and prevalence of abandoned foreclosures— where servicers initiated but decided not to complete foreclosure and the  property is vacant—we analyzed mortgage loan data from January 2008 to  March 2010 reported to us from selected servicers and two government-  sponsored enterprises (GSE). We obtained aggregated and loan-level data  from six servicers—including large servicers and those that specialize in  servicing nonprime loans—Fannie Mae, and Freddie Mac on loans that  were categorized as charge-offs in lieu of foreclosure (loans that were fully  charged off instead of initiating or completing a foreclosure). After  eliminating overlapping loans, the institutions contributing data to our  sample collectively account for nearly 80 percent of all first-lien mortgages  outstanding. The database we have assembled is unique and, therefore,  difficult to cross-check with other known sources to check its reliability.  Because we were able to cross-check the loan level information provided  by the GSEs with official reports submitted by Federal Housing Finance  Agency (FHFA) to Congress we believe that these data are sufficiently  reliable for our reporting purposes. However, because some of the  servicers compiled the information requested differently or were reporting  information that is not a part of their normal data collection and retention  apparatus, our dataset contains various degrees of inconsistency, missing  data and other issues. In reviewing these data we found a number of  concerns with some elements of the database and some sources of the  data. For example, we believe that some servicers (1) submitted data that  included second liens, (2) contained elements that appeared to be  irregular or (3) may not have provided the total charge-offs in lieu of  foreclosure associated with their servicing portfolio. While the number of  potential second liens were not significant especially among those that we  identified as abandoned foreclosures, it is difficult to know with certainty  how the remaining issues impacted our results including the descriptive  statistics report. For this reason, we have characterized our results in a  manner that minimizes the reliability concerns and emphasizes the  uncertainty regarding the total number of abandoned foreclosures in the  United States. Moreover, we conducted a variety of tests on this data. For  example, we were able to use GSE data as a reliability check on some  elements of the servicer database. We also cross-checked some of the  properties in our database against property tax records for a portion of the  data for Baltimore and Chicago. We were able to visually inspect some  properties in a few cities. Given these and other steps we have taken, we  believe the data is sufficiently reliable for the purposes used in this study.
We used two methods to code the data as vacant or occupied in our  database. First, the servicers provided data on whether the property was  vacant at the time the loan was charged off in lieu of foreclosure. We  found this data to be reliable based on cross-checks with property tax  records and visual inspection for a small sample of the database. However,  32 percent of the field was either blank or the servicer indicated that  occupancy status was unknown. Moreover, an occupied property may  eventually become vacant weeks or even months after charge-off in lieu of  foreclosure. Therefore, we augmented this information by using a second  method. The second method involved determining occupancy status using  U.S. Postal Service (USPS) administrative data on address vacancies.  These data represent the universe of all vacant addresses in the United  States. We obtained lists of vacant properties from USPS for 6-month  increments from June 30, 2008, through June 30, 2010. The USPS codes a  property as vacant if there has been no mail delivery for 90 days. The data  also included properties the USPS codes as a “no-stat” for urban areas. A  property is considered a “no-stat” if it is under construction, demolished,  blighted and otherwise identified by a carrier as not likely to become  active for some time. We matched these USPS data on address vacancies  to actual addresses in our loan database. Therefore, we considered a  property vacant if it was either coded as vacant at the time of charge-off in  lieu of foreclosure by the servicers or was coded as vacant based on the  vacancy lists obtained from USPS.
Users of the report should note the difficulty in determining vacancy and  that our exercise may have resulted an understatement or overstatement  of the number of vacant properties in our sample. In particular,  determining vacancy by matching to USPS data has limitations including,  (1) long lags before vacancy is determined, (2) mail carrier delays in  reporting vacancies, (3) coding seasonal and recreational properties as  vacant, and (4) matching errors due to differences in address formats or  incomplete addresses in the loan file. Due to privacy concerns we were  not able to leverage USPS expertise to ensure a higher quality match based  on lists that included all known delivery points. As a result, our analysis  will miss any property that was demolished upon the determination of  vacancy or any property deemed a “no-stat” in rural areas. Because of the  90-day lag in determining vacancy and the fact that we are dealing with  properties from 2008 to 2010 largely in major metropolitan areas, this is  not likely to have a significant impact on our estimates of vacant  properties. It should be noted that the data collected by the USPS are  designed to facilitate the delivery of mail rather than make definitive  determinations about occupancy status. For example, USPS residential  vacancy data do not differentiate between homeowner and rental units nor  identify seasonal or recreational units.
Once vacancy is determined and the number of abandoned foreclosures is  estimated, our projections of the prevalence of abandoned foreclosures in  the United States are based on an extrapolation designed to highlight the  uncertainty in the results. While we estimated the total number of  abandoned foreclosures directly for a large portion of the mortgage  market, we simulated the total number based on assumptions about the  remaining mortgage loans not covered in our sample. To form estimates of  prevalence we conducted several analyses. First, we formed base  prevalence estimates using information from the servicer and GSE  databases alone. Second, we combined servicer and GSE databases to  produce some estimates of prevalence based on information contained in  both databases. Third, we made a determination of the possible error rate  in determining vacancy through various runs of our matching analysis to  USPS data and examining the output. Lastly, we conducted a series of  simulations to extrapolate our findings to the 20 percent of the mortgage  market not covered in our database and to capture the uncertainty  inherent in our data. Although the loans reflected in this report represent  servicers that service a large percentage of the overall mortgage industry,  they likely do not represent a statistically random sample of all charge-offs  in lieu of foreclosure. Rather than assume the large sample can be  generalized and produce a point estimate with confidence interval, we  simulated the likely number of abandoned foreclosures for the remaining  loans under a number of different assumptions about the characteristics of  the population. For example, in some runs we assumed a 10 percent error  matching rate and that the remaining servicers resemble some  combination of the subprime specialty lenders and the large servicers in  our sample. In some cases we assumed no error in our matching analysis  but formed our estimates eliminating a servicer that raised some concern  over the reliability of their data. Lastly, we produced estimates combining  elements of both of these sets of assumptions. In extrapolating the  findings from our sample we provided a range of estimates that reflect the  fact that the characteristics of these loans may differ from the remaining  population of mortgages as well as our concerns over data reliability and  potential matching error in determining vacancy. We believe these  simulations properly characterized the sources and nature of uncertainty  in the results. We also acknowledged, throughout the report, cases in  which data issues may have affected the results.
To supplement this data analysis and to determine the impacts of  incomplete foreclosures on communities and homeowners, we conducted  case studies and a literature review. We selected 12 locations to provide a  range of states with judicial and statutory foreclosure processes, from  different regions of the country, and that had variations in local economic  circumstances and responses to abandoned foreclosures. Our case study  locations were Atlanta, Georgia; Baltimore, Maryland; Buffalo, New York;  Chula Vista, California; Chicago, Illinois; Cleveland, Ohio; Detroit,  Michigan; Lowell, Massachusetts; and Cape Coral, Fort Myers, Manatee  County, and Hillsborough County, Florida. We conducted in person site  visits or phone calls with city and county officials, community  development organizations, academic researchers, foreclosure assistance  providers, and state banking supervisors in these locations to gain  perspectives on the impact and prevalence in each location. Although we  selected the case study locations to provide broad representation of  conditions geographically and by type of foreclosure process, these  locations may not necessarily be representative of all localities  nationwide. As a result, we could not generalize the results of our analysis  to all states and localities. In two of the locations we visited, officials  provided us with pictures and examples of abandoned foreclosures and  vacant properties. In Detroit, Baltimore, and Florida, we visited selected  vacant and abandoned properties and took pictures to document property  conditions. After the conclusion of our fieldwork, we analyzed the  information obtained during the interviews to find common themes and  responses. To supplement our case study interviews, we reviewed various  relevant journal articles, reports, law review articles, and other literature  on the impacts of vacant and abandoned properties. We consulted with  internal methodologists to ensure that any literature we used as support  for our findings was methodologically sound.
To determine what impacts abandoned foreclosures were having on state  foreclosure mitigation efforts, we reviewed the findings and  recommendations of several state foreclosure task forces and interviewed  staff from a national policy research organization who tracks state  foreclosure-related legislation. We also contacted the housing finance  agencies in the 10 states that were determined as of March 2010 to have  been hardest hit by the foreclosure crisis. These states received funding  from the Department of the Treasury through its Housing Finance Agency  Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest-Hit  Fund), and included Arizona, California, Florida, Michigan, Nevada, North  Carolina, Ohio, Oregon, Rhode Island, and South Carolina.
To determine what impacts abandoned foreclosures were having on  federal foreclosure mitigation efforts, we reviewed current federal  foreclosure efforts and obtained information from Neighborhood  Stabilization Program (NSP) grantees. The current federal foreclosure  efforts we reviewed include the Home Affordable Modification Program  (HAMP), Federal Housing Administration HAMP, Veterans Affairs HAMP,  Second Lien Modification Program, Home Affordable Refinance Program,  Home Affordable Foreclosure Alternatives Program, Housing Finance  Agency Innovation Fund for the Hardest-Hit Housing Markets, Hope for  Homeowners, Hope Now, Mortgage Forgiveness Debt Relief Act and Debt  Cancellation, and the Neighborhood Stabilization Program. In conjunction  with a separate GAO review of the first phase of the Neighborhood  Stabilization Program (NSP 1), we interviewed officials from 12 of the 309  NSP 1 grantees that were selected based on factors including the  magnitude of the foreclosure problem in their area, geographic location,  and progress made in implementing the program. The grantees were  Orange County, Lee County, and City of Tampa (Florida); State of Nevada,  Clark County, City of Las Vegas, City of North Las Vegas, and City of  Henderson (Nevada); State of Indiana, City of Indianapolis, and City of  Fort Wayne (Indiana); and City of Dayton (Ohio). Additionally, we worked  with a national nonprofit organization to obtain written responses to  structured questions on the extent to which abandoned foreclosures have  impacted their efforts to acquire properties from an additional 25 NSP 1  and NSP 2 grantees and subrecipients from across the country. These  grantees may not necessarily be representative of the all grantees. As a  result, we could not generalize the results of our analysis to all NSP  grantees.
To identify the reasons financial institutions decide to not complete  foreclosures, we interviewed six servicers, including some of the largest  and those that specialize in subprime loans. These servicers represented  56 percent of all mortgages outstanding. We also analyzed Fannie Mae and  Freddie Mac policies and procedures for servicers in handling foreclosures  and compared them to other guidance servicers follow, such as pooling  and servicing agreements (PSA). We did not do a systematic analysis of a  sample of PSAs ourselves, rather we relied on interviews with servicers  and academics who research PSAs, relevant literature, and reports to  better understand how the terms of PSAs might influence servicers’  decisions to pursue or abandon foreclosure under different circumstances,  and how losses associated with delinquency and foreclosure are  accounted for. Thus, descriptions contained in this report are the opinions  of these academics and authors only about those specific PSAs they  provided to us or were discussed in their reports. While there may be  things that are similar across PSAs, they are contracts between two  parties—the trust and the servicer—and the terms apply to just these  parties. We reviewed federal regulatory guidance that covers the  examination process for reviewing institutions’ foreclosure and loss  reserve process. We also reviewed whether abandoned foreclosures may  violate consumer protection laws such as the Fair Debt Collections  Practices Act, and the Federal Trade Commission Act (Unfair or Deceptive  Acts or Practices). In addition, we interviewed representatives of Board of  Governors of the Federal Reserve System, Federal Deposit Insurance  Corporation, Office of Controller of Currency, Office of Thrift Supervision,  Department of Housing and Urban Development, Department of Veterans  Affairs, and Securities and Exchange Commission.
To determine what actions have been taken or proposals offered to  address abandoned foreclosures, we reviewed academic literature and  interviewed academics, representatives of nonprofit organizations, local,  state, and federal officials, and other industry participants. We also  obtained information about the advantages and disadvantages of these  actions through our literature review and interviews. We summarized  these potential actions and conducted a content analysis of interviewee  viewpoints on their advantages and disadvantages.
We conducted this performance audit from December 2009 through  November 2010 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: Comments from Federal Reserve
section_title: Appendix III: Comments from Treasury
section_title: Appendix IV: Selected Federally Funded Foreclosure-Related Programs
paragraphs: As part of our assessment of how abandoned foreclosures (properties on  which a foreclosure has been initiated but not completed and are vacant)  might affect federal foreclosure-related programs, we reviewed several  current programs and their eligibility requirements. Most programs listed  below were designed to help homeowners avoid foreclosure and require  that those who receive assistance be owner-occupants of their homes.
section_title: Appendix V: Text for Figure 4, Areas Where Abandoned Foreclosures Are Concentrated, January 2008 through March 2010
paragraphs: The following information appears as interactive content in the body of  the report when viewed electronically. The content associated with  various states on the map describes housing market conditions that likely  explain the elevated levels of abandoned foreclosures in three different  groups of states. The content appears in print form below. This  categorization is based in part on judgment and trends in the data for the  MSAs with the most abandoned foreclosures in these states. Because  other researchers may posit alternative categorizations that may also fit  the data and other types of abandoned foreclosure exist, this analysis  should not be considered definitive.
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Cody Goebel (Assistant Director);  Emily Chalmers; William R. Chatlos; Kate Bittinger Eikel; Lawrance Evans,  Jr.; Simon Galed; Jeff R. Jensen; Matthew McHale; Courtney LaFountain;  Tim Mooney; Marc Molino; Jill Naamane; Rhiannon Patterson; Linda Rego;  Jeff Tessin; and Jim Vitarello made key contributions to this report.