The United States has entered a new phase of residential foreclosure. The basic narrative is shocking: House-flippers are being allowed to push troubled homeowners out of their houses. As a neighbor of mine said, succinctly, “It’s cheaper for them.”
In an ugly way, house flipping is a sweet deal in any area where the house market has rebounded, as in metropolitan Washington, DC, where I live, with eager buyers and reduced home inventory.
Instead of waiting for a house to come on the market and negotiating with a voluntary seller who could make decent terms for the sale, the house flippers enter the foreclosure pipeline. Once the homeowner is pushed out, the flipper gets the house for a song. The price tends to be even lower than the price of a house already foreclosed, and vacant, where the seller would be the bank. The flipping company is already in touch with the lender (see below), so the process is fairly red-tape-free, especially when the company makes hundreds of these foreclosures. Then the flippers can sell the house quickly, because they sell below market price. They still make a handsome profit. And the houses — having been lived in — tend to be in better shape than vacant properties; often there is good equity to boot, since reluctant sellers may have been living in their home for some time. Selling the houses at a below-market price then depresses local house values.
How does all this happen? In a hideous irony, house flippers are allowed into the foreclosure process as “substitute trustees.” The bank or lender holding the mortgage is often based out of state. When a homeowner falls into financial difficulties — such as job loss or medical bills — the lender may, in effect, turn the delinquent account over to an in-state firm. Whether advertising as law firms, real estate investment facilitators, “creditors’ rights” companies or foreclosure attorneys, the firms are in effect debt collectors — agencies that buy up delinquent credit-card accounts on the cheap, and then try to recoup from the small debtors.
They are also, in effect, house flippers. The national passion for “house-flipping” has been fueled by television, where it is entertainment as well as finance. (Disclosure — while I myself have not done any flipping, I support home renovation and/or home improvement, preferably keeping as much debris as possible out of landfill.) But this is a different process than going into a vacant, derelict house and fixing it up to sell.
The practice is national, with some variation by local real estate market. For me, it is also personal and local, direct from a sixtyish neighbor of mine, weeping in my living room. From a hard-working immigrant family, she has lived in her home since 1998. She has been trying to stave off foreclosure since 2014. I know her; I have seen and copied some of the legal documents; I’ve been in her house. She is the rightful owner; she has a relative who can make terms on the payments. But a house flipper wants the house, and once the bank turns over the mortgage to a “substitute trustee” there is little legal obligation for him to make terms. My neighbor is not even upside-down on her mortgage, so this flipper — if he wins in court — will get substantial equity as well as a house in a good neighborhood.
The process is toxic. 1.) The homeowner gets into trouble and falls behind on payments — like my neighbor, who paid many thousands in medical bills for her late parents instead of just defaulting on the bills. 2.) The bank turns the mortgage over to a real estate-flipping company as “substitute trustees.” 3.) The house flippers work first with the lender and then with some too-friendly judges to push out the homeowner via court action.
It goes without saying that the substitute trustees have better access to lawyers and courts than do the troubled homeowners. Legal aid for the indigent may not be available for someone who still owns her house — ironically. Help from friends and relatives, and the occasional pro bono legal work, may well be the only options. The option offered by advocacy groups or other realtors is too often only an unwanted “short sale,” i.e. loss of the house she is trying to keep.
Yet more ironically, the trustees are supposed to be assisting the courts and thus the public; hence the term “trustee.” Instead, as said, they have a direct pecuniary interest in getting persons out of their home instead of helping them stay in it. This process can involve illegal tactics as well as borderline legalities. But when the homeowner is already troubled, there is far too little redress even for open and apparent, documented illegality.
For the record, reducing the “foreclosure backlog” is not the same as reducing foreclosures. Cutting the Gordian knot is not always the best idea or in the public interest.
Tactics that this writer has seen and heard include posting a fake abandoned-property notice on the door of a house the owner is living in; filing fraudulent claims of ownership in courts which lack jurisdiction in foreclosure cases; getting court orders from courts which lack jurisdiction to grant foreclosure motions; and appearing in court claiming to be a third-party “intervenor” while actually a party (the house flipper) in the foreclosure.
Some foreclosure firms have become notorious, and on some there is information online. One source is attorney Neil Garfield’s website titled Living Lies (Livinglies.wordpress.com), which includes a list of known “foreclosure mills” (though somewhat outdated) by state. The non-profit Pro Publica (ProPublica.org) has also published information on foreclosure mills, as have the magazine American Prospect and the website Above the Law (AboveTheLaw.com). Some material has gone out of date, now that the immediate consequences of the 2008 mortgage-derivatives debacle are less feverish.
But the long-term consequences are still with us. One foreclosure group in Maryland is involved in hundreds of foreclosures, largely in Prince George’s County (DC suburbs). The county’s diverse population is officially “majority-minority” and the real estate market includes many immigrant families, first-time home buyers and members of historically excluded groups. And, as mentioned, this is a region where the real estate market is picking up and house hunters are eager to buy. All in all, it’s the perfect storm — houses easy to pick up, from a population easy to pick on, by judges who largely did not get picked by the public.