REQUIRED READING: We have all heard just about enough foreclosure statistics – the numbers have been well publicized and speak for themselves. However, there is an important foreclosure-related issue that has not made the national news, and it poses a significant threat to maintaining property values: homeowners' willful destruction of homes in the foreclosure process.
In numerous instances, homeowners in the foreclosure process purposefully poured cement down drains, ripped out fixtures such as air-conditioning units or piping, uprooted and sold trees, or otherwise wreaked havoc. Some ruin the property out of vengeance and some steal fixtures for money. However, understanding the reasons for this behavior does little to deter it.
Although foreclosure and related issues are state-specific, all states are grappling with the problem in one form or another. In Michigan, for example, the state foreclosure statutes (MCL 600.3140 for judicial foreclosures and MCL 600.3240 for foreclosures by advertisement) provide for a post-foreclosure sale redemption period of up to one year, during which the defaulted borrower may – and typically does – continue to occupy the property. While the existence of this grace period may be positive in general, it is during this time that most of the destructive behavior occurs.
Although it may appear at first blush that such actions by borrowers would diminish the value and resale of the foreclosed property, thus harming only the foreclosing mortgagee, the truth is that this behavior also damages neighboring properties – and not just because water from a neighbor's deliberately flooded basement is drowning the geraniums. This destruction after foreclosure makes resale more difficult; a sizable number of real estate owned (REO) properties are too damaged to qualify for a standard home loan. This, combined with the glut of REO properties already on the market, makes the possibility of marketing these homes in their current condition unrealistic.
Failure to sell these properties leaves neighborhoods with devalued homes and, in turn, damages the value of the rest of the community. How many people want to buy homes in neighborhoods filled with eyesores and/or unsafe homes?
So, how does the mortgage industry fight back against this destruction? And how can state legislatures help?
Unfortunately, mortgagors have historically been hampered in their efforts against this destruction. They could – at least, in theory – turn to provisions in the mortgage contract that require the borrower to maintain the home's value, and ask civil courts for assistance.
This, however, is largely an impractical and expensive approach. As can be seen by reviewing In Re Wierenga, 431 B.R. 180 (Bankr.W.D.Mich. June 14, 2010), the cost of this type of complex litigation, coupled with the dubious likelihood of collecting on a judgment, makes this an unlikely avenue either to being made whole or to deterring the destruction.
Some lenders have found relief by utilizing ‘cash for keys’ programs. This process involves making a deal with the homeowner in which he or she is given cash in exchange for vacating the premises (circumventing the eviction process). In these cases, the homeowner is less likely to damage the property not only because he or she is less angry, but also because the titleholder can rest the deal on the condition of the house. While this approach has undoubtedly saved properties from abuse, it is not a practical solution for every lender or every property.
Michigan recently took steps to address the issue by amending MCL 600.3205a, which pertains to a borrower's right to request a loan modification meeting on a homestead property. Under the original version of this section, the foreclosing party must send a notice to the borrower that details the right to request a meeting; lists the names, addresses and telephone numbers of the mortgage holder or servicer; and proivdes a list of housing counselors. Â Â Â
Now, the notice must also state that under MCL 600.3278, the borrower will be held responsible to the person who buys the property at the foreclosure sale or the mortgage holder for certain damage during the redemption period. This technique may prevent some rampages, but lenders need a stronger and more useful alternative to halt this destruction and the resulting downward spiral of property value.
State legislatures are trying to do their part to help protect lenders and, therefore, communities. While some state governments, such as Michigan's, added a warning to foreclosure documents and some advocate for a shortening of redemption periods (some states have little or no redemption period), a growing number of state legislatures have taken an alternative approach to the problem: criminalizing the willful destruction of foreclosed homes.
Arizona, for example, enacted a law that makes it a felony to knowingly harm property subject to an interest of a secured creditor with the intent to hinder or prevent enforcement of that interest (Arizona Revised Statute 13-2204). There have been several instances of prosecution, including at least one guilty plea, under this statute. Officials in Arizona are clearly taking these matters seriously, and the resulting publicity will surely deter others from similar behavior.
Other states are following suit. While the impact of these laws on home values and the market in general is difficult to measure at this point, the few highly publicized cases that have come from these states are sure to make a positive impact.
One bad cop
One notable recent case involved a San Diego police officer and his wife, who were charged with a felony for racking up $200,000 in property damage. Under California Penal Code Section 502.5, anyone who ‘takes, removes or carries away’ from a mortgaged or encumbered property with the intent to commit fraud is guilty of larceny.
In these types of instances, the destruction is easy to prove – in this case, the officer and his wife poured dye on the carpets and even smashed stones off the front of the property. If the lender has enough evidence to prove that the former homeowner caused the destruction, these statutes can become an established and well-publicized method to deter future destructive behavior. Unfortunately for this officer, his wife had sent an email to their credit union demanding $10,000 in exchange for leaving the home in good condition; many of the missing items were later removed from the family's storage units.
Lenders in other states are watching the impact of these laws on home destruction rates, and three states with a high percentage of foreclosures – Arizona, Nevada and California – are understandably leading the charge. Making such behavior a felony should prove a more effective disincentive and help prevent the continued ravaging of neighborhoods.
Many forces, most of which are difficult to control, have affected property values. It makes sense to address this force we can control. A statute criminalizing the removal, damaging and other destruction of foreclosed property would do so and help launch the upward spiral of property values nationally.
Jeff Weisserman serves as general counsel for Trott & Trott PC in Farmington Hills, Mich. He can be reached at email@example.com.