What happens when foreclosures pile up in your neighborhood?

Bloomberg reports from Georgia. “Only the possums are enjoying the backyard of 2035 Lilac Lane in Decatur, Georgia, where Wall Street titan Bear Stearns Cos. is just another homeowner by default.”

“It’s a mess,’ said Kiwanna Ford, who grew up next door to the vacant brick ranch-style house four miles south of the DeKalb County Courthouse. Bear Stearns seized the property three months ago after Ford’s neighbor stopped making payments on his mortgage. ‘If we wanted to sell our house right now with that next door, it would hurt,’ she said.”

“After selling the property last week, Bear Stearns said it still owns 18 houses in the Decatur area acquired since November. Citigroup Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. are listed in public records as the owners of at least 35 homes in the suburb.”

“The value of U.S. homes held by commercial banks swelled 53 percent nationwide to $2.3 billion at the end of March, the highest since 1992, from $1.5 billion a year earlier, according to the Federal Deposit Insurance Corp.”

“The dilemma facing banks is whether to pay maintenance costs or dump the properties at fire-sale prices, said Keith Gumbinger, vice president at a mortgage research firm. Both options can reduce real estate values. ‘No lender wants to own real estate, but at the same time you can’t just unload these properties because you would send home prices into a freefall,’ Gumbinger said.”

“Bear Stearns took possession of the three-bedroom Lilac Lane house for $76,500 on March 6, according to the foreclosure deed. The owner who defaulted had purchased the house in April 2005 for $160,000 using a subprime loan that required no money down. He had been renting it out, according to the neighbor, Ford.”

“The lender was Meritage Mortgage Corp., one of more than 60 subprime home loan companies that have halted operations, gone bankrupt or sought buyers since the start of 2006, according to data compiled by Bloomberg. Bear Stearns had bought the mortgage from Meritage at a discount.”

“The firm sold the Lilac Lane house on June 28 for $84,000, said Elisa Marks, a Bear Stearns spokeswoman. That’s about half the price paid two years ago.”

“Whether selling at auction or using a real estate broker, lenders usually get ‘cents on the dollar,’ which undermines the confidence of mortgage bond investors by showing property values are nowhere near the loans they collateralize, said Keith Shaughnessy, president of Foundation Mortgage Corp.”

“‘It will have a decimating effect on the mortgage-backed securities market when lenders start facing the music and letting property go at whatever price people will pay,’ Shaughnessy said.”
“‘I hope they’d continue to hold them, because selling them at a price that’s too low would have an adverse effect on the neighborhood,’ DeKalb County Commissioner Connie Stokes, who is also a real estate broker, said of Decatur-area foreclosures.”

“In Decatur, JPMorgan owns a brick ranch-style house on Kelley Lake Road, according to the tax assessor’s office. Bear Stearns holds a second mortgage on the property, said spokeswoman Renu Aldrich. The vacant house sits across the street from an elementary school.”

“The former owners bought the three-bedroom property in September 2005 for $155,000 with no down payment, using a so- called piggyback loan, or a second mortgage taken out at the time of sale, according to the deed. Both loans (are) now defaulted.”

“‘It’s sad to see the empty houses,’ said Janette Brown, who has lived two doors away for 25 years. ‘I’m worried about what it might do to the values.’”