OCC communication to Banks regarding Foreclosed Residential Properties

The following information was received from Kermit J. Lind and draws attention to an important communication released yesterday from the Federal Office of the Comptroller of the Currency.  

Here is the link to the full OCC communications released on 12/14/2011:

OCC 2011-49

Below Kermit's message is an excerpted version of the communications drawing specific attention to issues important to the way banks and financial institutions comply with local and state government laws as well as consideration for releasing mortgage liens as opposed to pursuing foreclosures in cases where the "costs to foreclose, rehabilitate, and sell a property exceed its current fair-market value."

Dear Public Officials and Code Enforcement Advocates,

The attached statement just released by the OCC to Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, and All Examining Personnel should be of special interest to those agencies who are spending millions in public funds to deal with the harmful condition of residential properties in foreclosure. 

In the case of Cuyahoga County and Cleveland, published reports have illuminated the loss of tax-base value measured in billions of dollars and demolition costs for dwellings no longer safe for any lawful use measured in the hundreds of thousands of dollars. 

If those to whom this guidance is directed would follow it, the public effort and costs to protect payers of taxes and mortgages next to or near foreclosed properties would be significantly mitigated. 

 If those who exercise public authority would consider the standards outlined by one of the primary regulators of financial institutions to be expected of the institutions who come before them in the course of business, it would encourage those financial institutions to voluntarily adhere to those standards.

Kermit J. Lind
Clinical Professor Emeritus 
Cleveland-Marshall College of Law
Cleveland State University

OCC 2011-49

Subject: Foreclosed Properties
Date: December 14, 2011

To: Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, and All Examining Personnel

Description: Guidance on Potential Issues With Foreclosed Residential Properties

Background

"...The Office of the Comptroller of the Currency (OCC) is providing guidance to banks on obligations and risks related to foreclosed property. This guidance highlights legal, safety and soundness, and community impact considerations.¹

...Bank as Owner of Foreclosed PropertyObligations and Actions

• In acquiring title to foreclosed properties, banks assume the primary responsibilities of an owner, including providing maintenance and security, paying taxes and insurance, and serving as landlord for rental properties...
• Following foreclosure, the bank must record its ownership interest in local land records.
• Banks must comply with the other real estate owned (OREO) appraisal and accounting requirements.
• Banks should maintain appropriate insurance on the property...
• The Protecting Tenants at Foreclosure Act of 2009 provides tenants with protections from eviction as a result of foreclosure on the properties they are renting.
  • When a bank takes title to a house after foreclosure, it must honor any existing rental agreement with a bona fide tenant and must provide 90 days’ notice to the tenant prior to eviction whether or not the tenant has a rental agreement...

Additional Issues as Owner

• Banks should have sufficient staffing to manage their foreclosed properties portfolios and policies, procedures, and risk management systems in place to properly oversee and manage third-party relationships.
  • Use of third parties does not diminish the responsibility of the bank board of directors and management to ensure that foreclosed properties are administered in a safe and sound manner and in compliance with applicable law...
• When disposing of foreclosed residential properties, banks should consider:
  • ...opportunities to participate and coordinate with state and local land bank programs, neighborhood stabilization programs, redevelopment programs, and other anti-blight programs, or opportunities to enhance owner occupancy.

Bank as Servicer of Foreclosed Property

Additional Issues as Servicer

• Banks acting as servicers should have sufficient staffing and appropriate third-party vendor oversight to manage the foreclosed properties portfolios.
• Rehabilitation or improvement of foreclosed properties should comply with local building codes, licensing requirements, and any requirements in servicing agreements...
  

Releasing a Lien Rather Than Foreclosing

At times, lenders may release a lien securing a defaulted loan rather than foreclose on the residential property. This decision is often based on financial considerations when the bank or servicer/investor determines that the costs to foreclose, rehabilitate, and sell a property exceed its current fair-market value. When this decision is made after a bank or servicer has initiated foreclosure, the borrower may have already abandoned the property or discontinued the care and maintenance of the property, increasing the chance of a blighted property in the community. Because the decision to release a lien is typically a financial decision, banks and servicers should ensure that their valuation of the property provides the best information practicable, while complying with investor requirements, before initiating foreclosure and subsequently deciding to release the lien. While the financial risk must be considered, banks and servicers should also consider the potential for reputation and litigation risk arising from their position as a prior mortgagee or servicer of a now-abandoned property. [emphasis added]

If the decision is made to forego foreclosure and release the lien, the bank or servicer should notify, or attempt to notify, the borrower of the decision. Borrowers should be notified that (1) the mortgage holder is not pursuing foreclosure and has released the mortgage lien, (2) the borrower may continue to occupy the property, and (3) the borrower is obligated to maintain the property consistent with all local codes and ordinances and to pay property taxes and the debt owed. The bank or servicer should also make appropriate notifications to the local jurisdiction when it makes the decision to release a lien in lieu of foreclosure.

Additional Information

For additional information, please contact Steven V. Key, Assistant Director, Bank Activities and Structure Division, (202) 874–5300; or Kevin R. Russell, Director, Retail Credit Risk Division, (202) 874–5170.

Darrin Benhart
Deputy Comptroller for Credit and Market Risk

 ¹ Office of Thrift Supervision CEO Letter 319, “Tenant Protection During Foreclosure: ‘Helping Families Save Their Homes Act of 2009,’” dated September 2, 2009, is hereby rescinded, as this bulletin also references these protections.

 ² For regulations and guidance applicable to banks’ authority to make additional expenditures on OREO properties, see www.occ.gov.

 ³ For regulations and guidance addressing the OREO holding period, see www.occ.gov.http://www.occ.treas.gov/news-issuances/bulletins/2011/bulletin-2011-49.html#ftn1