How Louisville’s Foreclosure Process Contributes to the Problem of Vacant Properties

Here's a quick breakdown of how the foreclosure crisis exacerbates the River City's growing problem with vacant properties and how banks avoid responsibility for maintaining their vacant property stock.

Homeowners and Tenants Leave Properties Threatened by Foreclosure, Often Months Earlier than Necessary

• Knowing they cannot pay, homeowners seek to avoid the embarrassment and uncertainty of a Sheriff’s “eviction” by moving out. Because the foreclosure process takes months, vacating during the foreclosure process creates a vacant, unmaintained property for at least a few months, if not much longer.

Bank Walkaways Create Long-Term Vacancies and Few Barriers Exist to Discourage this Practice

• Banks can decide to “walk away” from properties at three points: during foreclosure, following a foreclosure auction (but before the deed is transferred), and following the transfer of the deed.

• A bank will decide to “walk away” from a property when the cost of foreclosing and/or owning the property outweighs the benefit to the bank. Louisville’s enforcement mechanisms make the costs of walking away relatively minor.

The Bank’s Avoid Financial Responsibility for their Property in at least Two Ways 

1. Banks Avoid Accountability Through Lax Record-Keeping Requirements

• After the deed is in the bank’s name, the bank can avoid responsibility for maintenance and code violation on a property it owns through the widespread practice of not recording the deed at the County Clerk’s office.

• Many banks will not record their deed until they have found a third-party purchaser for the property.  This creates difficulty for Inspections, Permits, and Licensing to cite the right party for code violations because the bank has not recorded the transfer of ownership.

2. Banks Avoid Accountability Because Building Liens are Virtually Meaningless

• Even if IPL is able to levy fines against the proper party, the bank has no incentive to pay the fines. Should the city attempt to foreclose to collect its money, the bank that owes the money will be paid before the city in from the proceeds of the foreclosure action.

The Mandated Sale of Tax Liens Undermines Louisville’s Ability to Control Housing Stock

• Kentucky passed one of the first land banking statutes in the nation. This statute was intended to give cities the ability to foreclose on tax-delinquent property, scrub the taxes hindering its marketability, and return the property to productive use.

• Since the creation of the Louisville Land Bank Authority, the state has begun mandating the sale of delinquent taxes (“Certificates of Delinquency”) to private, third-party purchasers. The sale of these Certificates is also the sale of the right to foreclose on those properties. Now, out-of-state investors are in control of vacant properties rather than the city.