Newest Line of Business for Big Banks: Slumlording


The nation's biggest bailed-out banks have unintentionally entered a new line of work: slumlording. In some cases, major banks have created whole neighborhoods of abandoned and deteriorating foreclosure properties -- and a blight on local municipalities.

Now, Los Angeles has decided to do something about it, by naming the German banking giant Deutsche Bank (DB) the city's biggest slumlord.

L.A. is suing the lender, claiming that it has illegally evicted tenants and allowed foreclosed homes to deteriorate. The city's also considering suing US Bancorp (USB), BNY Mellon (BK), and HSBC (HBC) for not keeping up their own foreclosed properties.

There Goes the Macro-Neighborhood

Foreclosure squalor is not just a local problem. Already lower-than-low housing prices around the country will remain depressed as long as these semi-abandoned houses can't sell. The squatters and drug dealers who take over the empty properties only make this problem worse, as attendant crime makes the neighborhoods even less attractive to prospective buyers.

In the meantime, banks are blaming loan servicers, who they claim should be maintaining the properties. However, many of the largest loan-servicing companies are owned by the big banks themselves.

Last month, the Treasury Department announced that it will withhold payments to Bank of America (BAC), J. P. Morgan Chase (JPM), and Wells Fargo (WFC) for failing to properly service home loans under the Making Home Affordable program. Ocwen Financial Services (OCN) is also failing to meet that program's requirements.

"That's Not My Mess"

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Deutsche and other banks argue that having their names on these properties' titles doesn't make them the true owners. The banks say they merely distribute proceeds to the actual owners: investors in the mortgage-backed securities that represent those abandoned homes.

If that's the case, then I'd better get out my lawn mower and weed whacker, because I'm one of the investors receiving such distributions.

Just about the only thing clear here is that the securitization of home loans -- the bundling of thousands of mortgages into investment instruments -- has created one heck of a mess. If the banks don't start taking responsibility, Los Angeles' legal feud with Deutsche Bank will not be the last suit filed against our newest class of slumlords.

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Fool contributor Dan Radovsky has no financial interest in any of the above-mentioned companies. The Motley Fool owns shares of JPMorgan Chase.