Normative Narratives

Economic Outlook: Making Banks Responsible for “Zombie Houses”

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Original article:

New York Attorney General Eric Schneiderman has launched a statewide effort to combat so-called zombie properties by encouraging the state legislature to pass the Abandoned Property Neighborhood Relief Act (APNRA) he proposed earlier this year.

Schneiderman announced that the city councils of Albany, Poughkeepsie, Elmira, Beacon, Jamestown and Hornell are scheduled to approve resolutions on Monday urging passage of the bill. The city councils of Newburgh, Binghamton and Schenectady have passed similar resolutions.

The Attorney General’s Abandoned Property Neighborhood Relief Act would provide support to neighborhoods plagued by vacant houses. Among other things, the legislation would make banks responsible for the abandoned properties.

See the full text of the legislation here

Some U.S. cities spent public funds on securing, cleaning and stabilizing the houses that generate no tax revenue. Others let the houses rot.

New York is among the states seeking to make banks take responsibility.

I (not surprisingly) like the idea of holding banks responsible for the maintenance of “zombie houses”. Municipal budgets should be spend on public goods and welfare programs, not on cleaning up messes left by irresponsible borrowers (homeowners who could not afford the homes they bought) and / or lenders (banks giving mortgages they never should have).

Not only does the Abandoned Property Neighborhood Relief Act free up municipal funds, there also seems to be a preventative benefit of holding banks responsible for maintaining abandoned homes. In Matt Taibbi’s best selling book “Griftopia”, he tells the story of bankers who sold people the biggest house at the highest interest rate (often pushing qualified buyers into “subprime” loans), in order to secure the biggest fee / commission for the sale. The banker received their fee immediately, regardless of the long term performance of the loan–the emphasis was on the quantity of mortgages sold, not the quality. The banks then bundled these mortgages into “mortgage backed securities”, had them rated at inflated values (by ratings agencies such as S & Ps), and sold them off to investment banks (which, when the time came, were “too big to fail” and got bailed out by the taxpayers).

When people inevitably defaulted on predatory loans, the bankers kept their fees and the municipality was left to pay to maintain the vacant home, lest it attract crime / erode real estate values; a classic example of excessive risk taking due to “moral hazard“. While there is no way to ensure that a mortgage will not go bad–there are too many variables to account for–holding banks responsible for the upkeep of abandoned homes will almost certainly lead to stricter due-diligence and a more long-term perspective on mortgages.

Taibbi does a much more comprehensive job of explaining the link between poor underwriting / predatory lending and the greater housing crisis in Griftopia. With less “bad” mortgages (ones people are likely to default on, including but not limited to “sub-prime”), the destructive potential of mortgage backed securities is limited.

Furthermore, people more people will be able to stay in their homes (even if they are slightly smaller), realizing all the associated socioeconomic benefits.

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