The foreclosure crisis for some cities like Cleveland is a tsunami of 16,000 homes. Some communities have a foreclosed house or two on every block. There a lot of links to other cities as well if you google.
What I see that has not been discussed is what happens when the problem becomes large enough to tip some sort of balance in an area, and what happens to normal procedures and ownership rules in such situations. No one here has mentioned what other costs get pushed onto the public sector that private markets will probably avoid as best they can.
1.Such costs are the extra costs of police and fire protections for the property.
2.Upkeep of the property is abandoned by the borrower, and then if the house either becomes unprofitable due to damage/repair considerations or simple loss of value, the bank abandons the property as a write-off. (In some areas the plumbing is stripped out for copper, along with windows etc and resold in extraordinary times)
3. Taxes cannot be collected either way…liens are less effective for such a house for anyone, bank or city.
4. The act of forclosure is stalled because actual owners of the mortgage can be hard to determine. (12 months in some places)
5. The impact of having an abandoned house on the block that is not protected or kept up lowers the value of all the other houses nearby as well and lowers the tax rate collections eventually.
6. Demolition is paid by the city.
When such issues hit a city, who bails them out. City pockets often are less deep than some of the big guys.
Hence, Cleveland has some credibility when it questions what ownership actually is for a house. The borrower has the title, but the mortgage holder has power to evict. This is also a ‘controlling interest’ and as a ‘right of control’ that defines ownership for a borrower may be applied to the mortgage holder given enough pain. While unlikely to win, when does it become big enough to need a change in law?
You do not own the house until the mortgage is paid. You have ‘rights of use’. Under extraordinary circumstances, who does own the house?
Update 2: Calculated Risk’s Tanta writes a defining post on the ins and outs of ‘walking away’ from a loan.