Facing foreclosure? Don’t pack just yet (© Tony Metaxas/Getty Images)

Across the country, banks are starting to foreclose on homeowners and then, often with no word or explanation, failing to take possession of the home. From Ohio to Indiana, from New York to Florida and Missouri, these abandoned foreclosures have become common enough that real-estate professionals have coined a name: "bank walkaways."

For homeowners, this can sound like great news: The bank goes away, you get your house back without a mortgage and life goes happily on, you might think. But of course nothing is that simple.

"I know several people who are thrilled by their situation," says Judith Fox, a consumer law expert at the Notre Dame Law School. "But I don't think they should be that thrilled. I think they have inherited a legal nightmare."

But Fox says her advice on when to move out has changed in recent years: "I used to tell people when they got the notice for the sheriff's sale, 'Move!' But I am not telling people to do this now."

She has several clients who moved out after getting foreclosure notices. Their banks, however, failed to finish the foreclosures. The homeowners, who thought they'd lost their homes, were sued by their cities for failing to maintain the abandoned properties, which were still in their names.

If you leave before your bank really owns your home, you face problems like these:

  • The foreclosure can be resurrected. The owner of your mortgage can return later and restart the foreclosure — if property values rise in a few years, for example.
  • Your mortgage can be sold. Just as credit-card companies sell deadbeat accounts to aggressive debt collectors for pennies on the dollar owed, some experts believe that mortgage investors might eventually sell their unproductive debts to a collector.
  • The city can throw you out. You may get to live in the house for free for a while, but if you don't keep up with the property taxes, the city will eventually start a tax foreclosure to take the house.
  • You can't sell. You may have the title (or deed) to the house, but the mortgage company keeps the unpaid mortgage and it's a lien against the title, meaning that you can't put the home on the market until you pay off the lien and clear the title.
  • You're on the hook. State laws vary in the particulars, but if you abandon a house while your name is still on the deed, you're still responsible, as Fox's clients were, for taxes, fines, upkeep, code violations, repairs or demolition costs.

Lois and Danuel Stanley, retirees in Goshen, Ind., were shocked in June to get a notice from their mortgage company saying that it was giving up its efforts to foreclose on their home. They say they didn't even know the bank was foreclosing, although they'd missed payments. The stress of not knowing what will happen next is awful, Lois Stanley says.

"I've never heard of them closing a foreclosure," she says. "Am I supposed to move out? Am I supposed to sell the house? Are the police going to come to the door and say, 'Go'? How many days will I have to go? Will I be able to get my things?" Fox and student lawyers at the Notre Dame Law School clinic are trying to help the Stanleys.

Lawyers like Fox are trying to unravel the complicated legal tangles created by bank walkaways. "Who's got the mortgage? How do you get the lien cleared off your title? These are questions many lawyers have been asking each other back and forth. We don't know," Fox says. "This has never happened before."

Reasons to rejoice and to stay put
There's one definite advantage if your mortgage company abandons your foreclosure: You get to live in your home for free. "I have clients who have been living in their house free for a year and nobody is asking for any money," Fox says.

Once foreclosure has begun — whether the bank continues it or stops — you not only have the right to stay, you should stay until the home is sold and legally belongs to someone else. You'll know it's truly time to move when you receive eviction papers from the sheriff or a court. That could take months -- or longer. These days, overwhelmed mortgage companies can take up to nine months just to start a foreclosure.

Meanwhile, if the bank pulls a disappearing act, don't go crazy and party, Fox says. If you can, put an amount equal to your mortgage payment in a bank account each month, and leave it there. (An escrow account is best. Ask your bank how to set one up.) If you suddenly need to leave your home, there's your deposit and first and last months' rent on a new apartment or rental house. Or, if your mortgage company reappears and wants to restart the foreclosure, the account shows your good faith and can help you in negotiations to modify the mortgage.

The bank's logic
It's impossible to predict if or when a lender will abandon a foreclosure, says Kermit J. Lind, a law professor at Cleveland State University's Cleveland-Marshall College of Law and an expert in legal issues affecting communities. He says he's seen it happen in the early stages, at the last minute before the house was to have been sold at auction, and at points in between.

Fox says she sees walkaways where there are concentrations of foreclosures, particularly in Cleveland, St. Louis and South Bend, Ind. The New York Times reports banks walking away in South Bend; Buffalo, N.Y.; Kansas City, Mo.; and Jacksonville, Fla.

But since no one collects statistics, it's hard to know the number of cases. With about 844,000 foreclosures in progress in just the first half of this year — 22% of the 34 million loans outstanding — there could be a great many. Banks appear to abandon foreclosures when the homes are worth less than the cost of foreclosing. These days, good neighborhoods and bad are dotted (or filled) with empty, worthless homes stripped of fixtures, appliances, pipes and wiring, from which owners fled after foreclosure began.

The banks' thinking makes sense. "It gets to the bottom line for the investor," says Jeannine Bruin, spokeswoman for GMAC Mortgage. When a borrower defaults, the investor who owns the mortgage still must pay attorneys and loan servicers and keep up taxes, insurance and property maintenance. Bank representatives figure, "If I proceed through foreclosure sale, how likely am I going to be to be able to sell this house at value and make any kind of return on my investment?"

In Florida, with condominiums plummeting in price, banks have stopped foreclosures to avoid inheriting liability from a unit's unpaid homeowners association dues, Lind says. He blames banks for pushing owners out of their homes early in foreclosure and then neglecting the properties rather than modifying mortgages.

"The decision-making takes place three states away from the collateral," Lind says, "and they don't have a clue about the condition of the property." The result, he says, is "toxic homes and toxic titles."

To illustrate, Lind describes a home next-door to friends of his in an upscale Cleveland suburb: It's been vacant for a couple of years, and the basement has been underwater since a pipe burst. The house is so dangerous — the interior is black with mold and the supporting timbers are rotten — that "not even police officers will go inside," Lind says. The potential liability is huge for those who, often unwittingly, own such homes. In Cleveland and other cities, fires in abandoned, foreclosed houses have spread, destroying both vacant properties and neighboring inhabited homes.

"Owners who stay in the house are really doing a public service for their neighbors," Lind says. (Read "The run-down foreclosure next door: What you can do.")