Thursday, December 24, 2009

The practice of foreclosure stripping

More owners stripping fixtures from a property before foreclosure

‘Stripping House – Before Foreclosure,’ the ad declared, offering potential buyers the cabinets and countertops, the sinks and toilets, the doors, the appliances, the sprinklers. Even the palm and citrus trees in the yard were for sale, with a catch.

‘You dig,’ the author advised.

In Nevada and other states hit hard by the housing crisis, stripping fixtures and appliances from homes in foreclosure has become commonplace. Craigslist, the Web site for classified ads, functions as a bazaar where stripped items are sold openly. Often, the stripping is not done by strangers. It is done by the owner, just before the bank forecloses on the mortgage and takes the property back.

If that seems like a situation tailor-made for the police, it is – at least in Arizona, where the Federal Bureau of Investigation has used Craigslist to arrest a handful of people for stripping homes and trying to sell the goods, charging them with felonies under a state fraud statute.

In other parts of the country, however, the police are stymied. As it turns out, several troubled states, like Nevada, have no specific criminal prohibition against stripping fixtures from a property before foreclosure. Mortgage contracts do prohibit such behaviour, requiring that homes be kept in good order. But violating those provisions is a civil matter, not a criminal offence.

‘If the homeowner sells the components to the house while they still own the house, that’s not a crime,’ said Officer Bill Cassell, a spokesman for the Las Vegas police.

So too in Florida, another state swamped by foreclosures. Several prosecutors and police agencies there said that unless laws were modified, such behaviour would have to be sorted out between borrower and lender in civil court.

Even in Arizona, which has an applicable law and where thousands of homes have been stripped, convictions are rare. There, to make a charge stick, law enforcement basically has to catch people in the act, said Julie Halferty, a special agent with the FBI in Phoenix and head of a mortgage fraud task force.

‘This window of time can be quite short,’ Ms Halferty said in an e-mail message. ‘Once homes are abandoned, arguably any number of people can get access and strip the fixtures.’ Statistics on foreclosure stripping are elusive, and experts disagree on just how widespread the practice is. Yet even those who play down the number acknowledge that the problem is serious, particularly in housing boom-and-bust areas like central Arizona, southwest Florida and the Las Vegas region.

‘Clearly it’s happening, and it’s happening with some frequency,’ said John A Courson, president of the Mortgage Bankers Association.

Banks are largely powerless to stop a homeowner determined to strip a property. Lenders can pursue such homeowners in court, but the expense and difficulty typically outweigh the gain.

Though the efforts are scattered and feeble, law enforcement officials are trying in places to stop the practice.

Last April, Randolph Guzman, 42, of Phoenix, was arrested while trying to strip appliances and fixtures from an investment home he owned, shortly before a bank was to hold an auction.

Mr Guzman posted an ad on Craigslist and found a married couple interested in buying the air-conditioners, kitchen cabinets, ceiling fans and a light fixture for US$2,300. They met at the house, in Surprise, a distant Phoenix suburb, and Mr Guzman accepted a down payment of US$400 in cash.

Then he was handcuffed and read his rights. The couple, he discovered, were police officers working undercover with the FBI.

Guzman pleaded guilty to defrauding a secured creditor, a felony.

If he completes 18 months of probation, the charge will be reduced to a misdemeanour, he will serve no jail time and pay only a few hundred dollars in court fees.

David Michael Cantor, Guzman’s attorney, called his client’s offence minor when compared with the thousands of homes that have been thoroughly stripped by their former owners.

‘I understand why they want to crack down on this stuff, but Randy is small potatoes,’ Mr Cantor said.

After the FBI publicised the arrest of Guzman and a handful of others caught stripping homes, the number of ads for stripped goods on Craigslist in Phoenix dropped sharply.

‘That was our objective – to get the word out that stripping a foreclosed home is illegal,’ Ms Halferty said.

Craigslist does not vet the postings created by its users, and a spokeswoman, Susan MacTavish Best, said the site had not been contacted by law officials about ads for stripped merchandise. ‘One wonders how one would know the provenance of each fixture and appliance,’ she wrote in an e-mail message.) The police in Las Vegas would like to follow the lead of those in Phoenix, but Nevada law hinders them.

‘We don’t have the tools to prosecute,’ said David Roger, district attorney for Clark County, which includes Las Vegas.

‘It’s obviously an issue that the Legislature should address.’ Not all legal experts agree that existing law is insufficient, given that homeowners who strip a house are violating their mortgage contracts. General fraud statutes might be stretched to apply. Yet so far, few prosecutors or the police – dealing with budget cutbacks – are making arrests or bringing cases.

The key to reducing the number of homes being stripped, experts suggest, lies not with the law but with lenders.

‘If banks focused more on prevention, everybody would be better off, particularly them,’ said Kenneth Thomas, a banking consultant in Miami.

Already, some indicators suggest that mortgage servicers are starting to delay the final step in a foreclosure – seizing the home – in part to limit the number of homes being stripped and vandalized.

Yet for some areas, it is too late. In several Phoenix suburbs, the stripping of homes appears to have peaked, but not before taking a heavy toll.

In Maricopa, a distant Phoenix suburb that had rapid growth before the crash, new developments were stripped one after another, often in the order they were built, according to Shawn Schlegel, a real estate broker who publishes a weekly community newspaper.

Some see an upside. Justin Cellini, 29, spent the last year being rejected by lender after lender in his quest for a home loan.

Finally, with cash from relatives, he was able to buy a four-bedroom, two-bath house in Hollywood, Florida, that had been stripped by its former occupants.

He paid US$111,000. ‘I’m actually thankful that they stripped the house,’ Cellini said. ‘It wound up costing me a lot less money in the end.’ He has been refurbishing it on the cheap – by buying fixtures and appliances off Craigslist.

Source: Business Times, 24 Dec 2009

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