Thursday, July 14, 2011

The unseen costs of foreclosure

While I continue to try to avoid talking about the debt ceiling talks and the developing Rupert Murdoch sh*tshow--neither of which I can discuss rationally without getting physically upset--I came across some interesting notes on our nation's foreclosure situation (which I've discussed briefly before here, here, and here) courtesy of NPR.
When you are the nation's largest owner of foreclosed homes, even little things can get expensive fast. Such is the case for mortgage giant Fannie Mae, which as of March 31 had a mind-boggling 153,000 foreclosed homes on its books.
One example — mowing the lawn. Two men swoop in on a foreclosed town house in Lanham, Md., quickly mowing and edging the small front yard. Fannie Mae owns this home, so it's paying for the lawn crew to come every two weeks or so to keep up the curb appeal.
But it's not just this lawn. There are tens of thousands more. Fannie Mae officials won't say how many lawns it's paying to maintain, so we've done some back-of-the-envelope calculations of our own:
Say only half of the homes have lawns, a conservative estimate, that's still more than 75,000 lawns.
153,000/2 [number of lawns]
x 6 (a six-month grass-clipping season)
x 2 (mowing twice a month)
x $40 (a reasonable guess at how much it costs to mow a lawn)
= $36.7 million
Again, this is very rough estimate, but that's a whole lot of money to spend on lawn care.
Yes, it is. And then there's the costs that aren't necessarily "out-of-pocket" costs like basic curb-appeal maintenance, but will certainly cost Fannie Mae (and other owners of foreclosed properties) money in the long run.
As huge numbers of foreclosed homes continue to work their way through the real estate pipeline, another problem is blossoming — mold.
In most homes, as residents go in and out and the seasons change, natural ventilation sucks moisture up to the attic and out through the roof. It's called the "stack effect." And in many parts of the country, it's driven by air conditioning in the summer and heat in the winter.
But no one is going in or out of most foreclosed homes — regardless of climate — and the effects can be devastating.
In some states, it's estimated that more than half of foreclosed homes have mold and mildew issues. Realtors across the country say they're seeing the problem in everything from bungalows to mansions.
Yikes. Even in a small home, remediation of mold and mildew problems can cost thousands of dollars, if not making the home completely un-sellable.

Many banks and bank-like institutions (like Fannie Mae) are making what they think is a "prudent" investment decision, holding onto foreclosed properties at their distressed prices in hopes of a real estate turnaround that will enable them to avoid realizing major losses. But the longer that turnaround takes to happen (and frankly, it may never happen), the more of these sorts of costs those institutions will start to incur. And that, perversely, can turn a modest loss into a somewhat devastating loss.

It always costs money to hold property, and it doesn't seem like the holders of foreclosed properties are fully prepared to take on those costs. That could be a big problem for them in the long run, and could end up costing them much more than just simple investment depreciation.


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