How Deadbeat Banks Pushed Detroit To The Brink
This week, Michigan will attempt to finalize the assignment of an emergency financial manager for the troubled city of Detroit, essentially taking fiscal control from the duly elected city government. The new manager will have authority over a wide array of policies to balance the city budget, including unilaterally reworking wages and benefits in municipal labor contracts, firing entire staffs of city agencies, and selling off public assets. It’s not hard to see this plan as union busting sanctioned by the state. Amid a sea of public protests, the Detroit City Council will appeal the emergency manager’s installation at a hearing on Tuesday, but Mayor Dave Bing has resigned himself to the prospect.
Detroit faced major challenges even before the Great Recession, with the loss of manufacturing jobs in the auto industry and the hollowing out of the urban core (“white flight” into the ring suburbs robbed Detroit of its tax base going back several decades). The financial crisis and subsequent economic crash sent these problems into overdrive. But lately a new meme has arisen from supporters of the emergency manager ruling: Scapegoating the citizens of Detroit by characterizing them as a bunch of tax cheats. A report in the Detroit Newsasserted that only half of city property owners pay their property taxes, leaving $246.5 million uncollected annually. This figure represents the highest rate of unpaid property tax among major U.S. cities.
Rather than demonizing “deadbeat” homeowners, however, we should examine who actually evades responsibility for paying taxes on those properties. Detroit has been ravaged by an unending foreclosure crisis. Predatory loans trapped borrowers into monthly mortgage rates they couldn’t pay, with lenders particularly targeting lower-income minority areas like Detroit. Many of those homeowners are gone now, evicted from their properties. It is a pattern that has sunk property values, making the high property tax rates in Detroit even more unsustainable. But it also has turned banks into the real deadbeats, depriving the city of revenue.
In a foreclosure, the property reverts back to the bank, which then becomes responsible for all maintenance and upkeep, as well as any fees. Some banks simply ignore these responsibilities and refuse to pay taxes or keep the vacant property in good order. The more clever banks stick evicted homeowners with the bill.
Across the country and particularly in Detroit, banks have engaged in “walkaways,” where they start foreclosure proceedings but then find them too costly to complete. They choose not to finish the legal steps to foreclosure, leaving the properties vacant. Banks that walk away from homes do not have to notify the city, or even the borrower, that they have abandoned the foreclosure process. Borrowers kicked out of their homes then find themselves still responsible for property tax payments.
We know this kind of behavior has occurred all over the country, leaving foreclosure victims stuck with the “zombie title” to an old property for years. And Detroit is ground zero for the phenomenon. A 2010 report of the Government Accountability Office found 500 bank walkaways in just four Detroit zip codes.
It’s impossible to know the real number of bank walkaways in Detroit without a house-to-house study. Nevertheless, we know of the staggering number of vacant homes in Detroit, particularly in the neighborhoods ringing downtown. Someone is responsible for those properties, and it’s probably the bank. And we know that banks have a financial incentive to cut and run from cities like Detroit, starving their budgets and creating a cascade of blighted properties in their wake.
So while it’s easy to blame Detroit’s financial troubles on deadbeat homeowners, the more appropriate parties to blame may well be the deadbeat banks.