Tuesday, August 02, 2011

Bulldoze: The New Way to Foreclose

From: TIME

Banks have a new remedy for America's ailing housing market: bulldozers.

There are nearly 1.7 million homes in the U.S. in some state of foreclosure. Banks already own some of these homes and will soon repossess many more. Many housing economists worry that a near constant stream of home sales by banks could keep housing prices down for years to come. But what if some of those homes never hit the market?

Increasingly, it appears that banks are turning to demolition teams instead of realtors to rid themselves of their least-valuable repossessed homes. Last month, Bank of America announced plans to demolish 100 foreclosed homes in the Cleveland area. The land will then be donated to local government authorities. BofA says the donations in Cleveland are part of a larger plan to rid itself of its least-salable properties, many of which, according to a company spokesperson, are worth less than $10,000. BofA has already donated 100 homes in Detroit and 150 in Chicago, and may add as many as nine more cities by the end of the year.

And BofA is not alone. A number of banks are ramping up their efforts to not just rid themselves of their unwanted homes but also fully dispose of them. Fannie Mae has a program to sell houses to local municipalities for a few hundred dollars. Wells Fargo has donated 800 homes since 2009. While some of those homes have been demolished, a spokesperson for the bank says many of the homes have been given to not-for-profits with plans to renovate the homes, not tear them down. JPMorgan Chase says it was one of the first banks to donate houses it couldn't sell or didn't think were repairable. Since 2008, JPMorgan has donated or sold at a discount 1,900 houses to city or county officials.

The banks do the deals because once the properties are donated, they no longer have to pay taxes or for upkeep. Tax experts say the banks may also be able to get a write-off for the donations. That appears to be a better strategy than trying to repair some of the homes, which according to a BofA spokesperson are more economical to demolish than fix up. Local governments like these deals because they get free land to develop or use for open space. Cleveland-based Cuyahoga County Land Reutilization Corp., which inked a contract with BofA, has been one of the most aggressive local-government organizations in striking these deals. And housing economists like these deals because they remove homes from the market that would otherwise sell for a low price or not at all, dragging down home prices in general. An oversupply of homes on the market has been one of the big problems plaguing real estate. According to the most recent data, it would take 9½ months for the current number of homes on the market to sell. The housing market is generally considered healthy when supply equals six months of sales. So taking some of these homes off the market for good could remove some of the inventory drag.

The question is whether the banks will ever put up enough housing for demolition to make a difference. The Obama Administration says it is working on a plan to revamp its loan-modification program in order to help keep more people facing foreclosure in their homes, which would reduce the number of properties that banks have to unload on the market. Some areas of the country are looking at how to speed up foreclosures in an effort to return some normality to the market. It's not clear that any of this will work. Certainly, the idea that we are at the point where banks would be better off knocking down houses than reselling them shows there is still something very wrong with the housing market. But what is clear is that banks and others are at a point where they are ready to try something new to boost the housing market. And that is a good sign for the future.

Correction: An earlier version of this article said that Wells Fargo had donated 800 homes to be demolished. In fact, many of those homes have been or in the process of being renovated.

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