Why Are Banks Bulldozing Foreclosures?

It saves them money and helps to eliminate excess housing inventory, but is it really good for the economy?

600 bulldozer house piddix flickr.jpg

If you can't sell 'em, demolish 'em. This appears to be a new strategy adopted by some big banks struggling with a glut of foreclosed homes on their books. A new report indicates that some houses are being leveled by bulldozers, rather than revitalized and sold. Is this really a smart strategy?

Lindsey Rupp from Bloomberg reports on the phenomenon. The idea is that a bank donates a foreclosed home and possibly even pays for its demolition. One recent example is Bank of America donating 100 foreclosed homes to a Cleveland-area agency that will revitalize the property for other uses. From the article:

"There is way too much supply," said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corp., which works with lenders, government officials and homeowners to salvage vacant homes. "The best thing we can do to stabilize the market is to get the garbage off."

Bank of America had 40,000 foreclosures in the first quarter, saddling the Charlotte, North Carolina-based lender with taxes and maintenance costs. The bank announced the Cleveland program last month, has committed as many as 100 properties in Detroit and 150 in Chicago, and may add as many as nine cities by the end of the year, said Rick Simon, a company spokesman.

The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming, according to the statement. Simon declined to say how many foreclosed properties Bank of America holds.

Other servicers involved in such initiatives include other big names like Wells Fargo, JPMorgan, Citigroup, and even Fannie Mae. That's right: the government is indirectly bulldozing foreclosures.

The motivation here is pretty straightforward. They get out of ongoing maintenance costs and taxes that they would have to pay as long as the property remains on the market. But the even better news is that the banks can often write-off these properties as a result. An accounting analyst the article refers to says that in some cases, banks can deduct as much as the homes' fair market value from their income taxes.

From the real estate market's standpoint this strategy is also positive. With less supply, prices will stabilize more quickly. Disposing of these foreclosures will make the market clear sooner.

And yet, the idea of bulldozing homes does seem rather unsavory, does it not? Perhaps some of these homes are condemned and/or beyond repair. In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over. But does this really describe all of the cases? This is reportedly happening to thousands of homes across the U.S.

My concern is that banks are using this as an easy out to minimize their loss with little concern about what's best for the U.S. economy. If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.

Unfortunately, if banks are better off bulldozing than attempting to sell these homes, then that's their prerogative. After all, they own the homes and can do as they like with them. It's just pretty incredible that the market has come to this.

h/t: J.G.

Image Credit: piddix/flickr

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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