Banks Benefit from 'Foreclosure Amnesty'

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Even as legions of homeowners default on their mortgages and await eviction, many still remain in their homes — even 18 months after getting an eviction notice? How is this possible? Banks and lenders are reluctant to pull the trigger — and here is why.

To begin, there is little doubt that U.S. foreclosure activity remains high. According to RealtyTrac, about 308,000 U.S. homes were in foreclosure in February. That’s a 2% downtick from January, but a 6% rise on foreclosures from a year ago. About 2.8 million U.S. homes have already been foreclosed upon in 2009, the company says.

RealtyTrac also reported that the 15% of U.S homeowners are either delinquent on their mortgages or already are in foreclosure.

But banks are also taking their sweet time in evicting foreclosed homeowners. In California, the average time to officially foreclose on a home and evict the homeowner is 229 days in early 2010, according to real estate analyst Foreclosure Radar. But back in August 2008, it only took 146 days to show a homeowner the door.

Why the decline? With foreclosure activity remaining high, and the average value of a U.S. home still stagnant, banks and lenders are increasingly OK with allowing homeowners who have defaulted on their loans to remain in their homes.

Banks and homeowners each get something positive out of the deal. Lenders get some stability in the home itself, as well as some much-needed good public relations — and they don’t have to dump a property into a lousy housing market. With the U.S. housing market in tatters, it’s not easy selling a foreclosed home — most are in troubled, even abandoned neighborhoods, and banks can't get much bang for the buck in selling right away. So they’re content to wait out the economic crisis, and sell the foreclosed house once the housing market is humming again.

For foreclosed homeowners, they get to remain in their homes rent-free for months at a time, until the bank decides to put the house back on the market.

Part of the trend is simple common sense. Rather than trigger a “forced eviction” that would result in a delinquent homeowner being tossed out on the street, banks are electing to keep homeowners in their homes, even after foreclosure papers have been signed, stamped and delivered. With someone in the home, banks surmise, there is less of a chance for the home — which the bank now owns — to deteriorate in value.

“If the person’s in the property, there’s less chance for vandalism, and they’re probably maintaining the house,” Gary Kirshner, a spokesman for Chase Bank (Stock Quote: JPM) said in a recent interview with the Los Angeles Times. The newspaper reports that about 100,000 L.A. homeowners are living rent-free in their foreclosed homes so far in 2010.

Another reason for bankss flexibility with struggling homeowners to remain in their homes, especially for those who are in foreclosure proceedings, is that lenders hope that homeowners will get their financial act together and start making regular mortgage payments again.

Call it “housing amnesty” or call it good business on the part of mortgage lenders. What matters to crisis-stricken homeowners is a lifeline that allows them to remain in their foreclosed homes, save some money, and give them a shot to wind up back in a decent home tomorrow — and not out on the street today.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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