Bankruptcy

Bank Walk Aways

By Adam Levitin

The phenomenon of jungle mail or "strategic default" has become well known enough over the past few years. There's a lesser known phenomenon, though, known as bank walk aways. With a bank walk away, the lender will fail to pursue a foreclosure on a defaulted loan in order to avoid assuming the liabilities associated with the property. This practice takes various forms, including:

•  homeowner defaults, but lender never pursues foreclosure (typically very low value property in Detroit or Cleveland, and the costs of the foreclosure exceed the property value)

• homeowner defaults, lender commences foreclosure, gets judgement, but doesn't record the deed. Homeowner has moved out, but is still on the hook for the tax bill and possibly any torts associated with the property. 

• Homeowner discharges the debt in a bankruptcy. The lien is still valid, however and enforceable based on the default. The homeowner has moved out, but the lender doesn't foreclose and insists that the homeowner is on the hook for taxes and (force-placed) insurance. (I'm not quite sure how the homeowner could be on the hook to the lender for these expense post-discharge, as there's no contract any more, but tax liability here remains with the record owner of the property. 

I know there've been a few judicial decisions on these cases, a little reporting (here and here and here, e.g.) and the GAO has done a report on the topic. An email from a Credit Slips reader got me wondering if the ex-homeowners have any way of addressing this problem. I'm curious what strategies attorneys have adopted for dealing with these issues.  Is there any way to force the lender to take title? A bankruptcy court order? Filing a quit claim deed? How about initiating a quiet title action? If the lender doesn't claim title, then it's your, no? And if the lender shows up, then ask for an order directing the lender to record the deed. 

Full post as published by Credit Slips on January 20, 2011 (boomark / email).