Why Foreclosure Buybacks Are Wrong

In Detroit they’ve found a “solution” to the foreclosure crisis: Don’t pay your mortgage, don’t pay your taxes, allow the property to be foreclosed, and then buy it back at the tax sale.

The Detroit News reports that in the past year “about 200 of nearly 3,700 Detroit properties sold at auction last year that appeared to be bought back by owners, some under the names of relatives or different companies and many for $500. The total in taxes and other debts wiped away was about $1.8 million.”

“At the September auction,” says the paper, “the properties’ prices are the debt that’s owed. But in October, the county treasurer sells off whatever is left at a $500 opening bid. That’s where most of the sales happen, including owners buying back their properties.”

What these buyback sales represent is not a “solution” to the foreclosure crisis but evidence of just how distorted our system has become.

Imagine that such buybacks are allowed in your community. Imagine also that your neighbor does not pay the mortgage. Along with the mortgage local taxes are not paid. The home is foreclosed a year later, the property is bought back at auction, and your neighbor starts with a fresh slate after returning from a two-month vacation overseas.

But you’ve been paying your mortgage, taxes and insurance. It’s not easy. Maybe you pay $2,000 a month to live in the same neighborhood as the buyback artist. Now, suddenly, the value of your home is entirely in question. Here’s why:

  • When your neighbor does not pay property taxes your community can no longer afford traditional services. The life-style value of living in your area declines as schools face cut-backs and other public services are reduced.
  • When the neighboring home is sold at discount the value of your home declines.

  • Lenders make it tougher to get loans because their risk increases with each buyback. This also means homes are harder to sell and refinance.

Lenders try to prevent buybacks with short sales, one of the reasons the process takes so long. And the states should prevent buybacks at tax sales because such purchases are flatly abusive.

There’s an effort in Michigan to outlaw buybacks. In the same way that lenders should not cheat borrowers with unfair and deceptive practices and loan products, borrowers should not be allowed to misuse the system — and screw the rest of us.

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