Lenders Begin Bypassing Foreclosure On Large Projects, Using Receiverships To Unload Collateral Securing Bad Loans While Avoiding Builder Liability

The Wall Street Journal reports:

• Some banks are starting to bypass foreclosure on large, troubled real-estate developments and instead are throwing the properties into receivership, a move intended to reduce some of the headaches associated with taking over problem assets. When banks foreclose on delinquent borrowers, they often plan to sell the property to new owners. But while holding the properties, banks are required to maintain them and pay all fees and taxes associated with the real estate. In some towns, banks that hold foreclosed residential property may be fined as much as $1,000 a day for code violations or even be subject to arrest.

• To avoid those hassles, some banks are asking courts to appoint receivers for large projects, especially residential developments in California, Arizona, Colorado and other Western states. The aim is to have the receiver, not the bank, eventually sell the property. By keeping the bank's name off the title of the property, the bank hopes to stay out of trouble with the law. "The fact is we are seeing a number of banks that don't want to get in the chain of title," says Douglas Wilson, a receiver in San Diego. [... B]y taking the title on the building, [a lender] could be liable for any construction defects for a decade in California or for any injuries on unsecured construction sites.

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• Some [of a receiver's] tasks are mundane, like making sure fire alarms and security systems have power connected. Otherwise, [says one receiver], "on Friday they strip the copper, and Monday it's a meth lab."

For more, see Receivers' Catch: Foreclosures (Banks Pass Wind-Down Work to Court-Appointed Pros) (requires subscription; if no subscription, try here, then click link for the story).