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Treading Water in Foreclosureville: What happens when your neighbor walks away and no one returns 

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We don't talk about it - the dilapidated two-two story eyesore with a collapsing fence and a yard full of knee-high weeds that have dried to a brown, come-hither-wildfire crisp through the late summer. The home, if you can call it that, has been neglected for so long that it's become invisible to most of us who live here. We'd rather not think about what the unclaimed phonebooks, flyers and foreclosure notices that pile up on the front porch mean for our property values. Most of us bought during the boom and are already underwater on our mortgages, treading water in a town where the tide of foreclosures has washed away dreams and savings.

Though the home is only three doors down from my own in a tidy little pre-boom subdivision in northeast Bend, I never met the owner or the occupants. Folks mostly keep to themselves on my street where rental properties are interspersed liberally with families, working folks and a few retirees. Like thousands of other properties in Central Oregon, the home has been sitting vacant for some time. It's owned by the bank. Which bank it is doesn't really matter. If the condition of the house is any indication, the institution barely knows that it exists. To them, it's not a home; it's a toxic asset, a piece of paper to shuffle back and forth as the paint fades on the real property.


According to court records, it was one of a half-dozen properties that the owner, Jeudi P. Divaband, purchased between 1999 and 2006 in Deschutes County. I never met Ms. Dibavand, but I tracked her down recently in the Tri Cities where she's an instructor at a for-profit college. Dibavand agreed to talk about her experience in Bend where she lived for more than 20 years and raised a family before she lost it all in the housing bubble.

I wondered if Dibavand ever came back to Bend and if she was aware of the condition of her former property where, as it turned out, she lived for more than a year while she and her husband divorced. Dibavand does come back to Bend. When she does, she told me, she makes it a point to drive by the properties she lost in the bust, all six of them. Technically, she sold the house on my street to her ex-husband before it went into foreclosure. Still it's painful for her to see the condition of the property that she bought after she sold the Palmer's Motel on Greenwood, a business that she and her then husband had operated for more than a decade, along with the small breakfast café of the same name that they built.

Like many others with commercial property to sell during the boom, Dibavand took advantage of a tax loophole known as a 1031 exchange, which allowed her to reinvest the profits from the sale of her motel in real estate without paying capital gains tax. In turns out that such exchanges not only helped fuel the real estate boom, they were rife with fraud. Local investors lost millions when unscrupulous managers illegally diverted the money into investment schemes. Dibavand was lucky; she got her money out before the house of cards came tumbling down. She bought six rental properties around Central Oregon, including the house on my block in 2006.

But the air was beginning to leak out of the bubble. The notice of foreclosures started rolling into the recorder's office in downtown Bend within a matter of months. The S.S. Bend was taking on water and the Dibavands, like so many other owners, were scrambling for the lifeboats. For many investors, that meant walking away from hundreds of thousands, or in some cases millions, of dollars worth of investments.

Dibavand's investments started slipping away when the economy soured and renters packed up. When they left there was no one to take their place. One by one she stopped paying on her homes.

In July 2007, ReconTrust, a California-based subsidiary of Bank of America filed a notice of foreclosure on the home at the end of my block. Dibavand's husband left around that time and the home began to languish. Over the ensuing years the bank, through Recontrust, moved several times to sell the property, but balked. Nothing was selling in Bend, so there was no hurry, apparently. It wasn't until last month that the bank put the home up for auction on the Deschutes County courthouse steps. The asking price: $90,000. It didn't sell.

Dibavand's other properties weren't far behind. After selling the home on my block, she defaulted on the five other mortgages including a property in Bend where her mother was living in a mobile home. On the verge of bankruptcy, Dibanvand didn't have enough money to move the mobile home. The bank wasn't interested either. In a gesture that borders on cruelty, the bank, rather than move her mother's home, brought out a piece of heavy equipment, smashed it and hauled the debris away.

They weren't much more accommodating when it came to negotiating the delinquent mortgage payments.

"The banks, unfortunately, wouldn't work with any of the houses. They wouldn't even talk to us," Dibavand said.

In the end, she had no choice but to file for bankruptcy. The value of her toxic assets, according to the court: $2.2 million.

The Waiting Game

It's not clear exactly what the next step will be for the home on my block. In the roughly four years that the house has sat vacant, it has steadily deteriorated. The blue paint has faded to a sun-bleached gray. The fence has mostly collapsed into the weed-infested yard. Even the front steps are falling apart. Unfortunately for me, and my neighbors, the home sits at the end of the block, immediately across the street from the monument that serves as the entrance to my neighborhood. As such, the home serves as "Welcome to Foreclosure-ville" greeting to visitors and a poke in the eye to residents.

Bend's code enforcement officer James Goff tells me that things are likely to get better for me. Goff has seen plenty of properties like my own eyesore around town. Goff said that typically when a bank takes possession of a house through a default, the property is maintained in order to bring it back to something like sale condition. At the very least, many of the banks now have local property managers who can respond to complaints.

But neither neighbors nor the city have much leverage in dealing with private property. While some neighborhoods have homeowner's associations that police aesthetics, Bend has no "beautification" ordinances on the books. When complaints started rolling in about vacant properties several years ago, the city was at a loss. Eventually, Goff worked with the fire department to tighten Bend's flammable fuels ordinance. The law, which was adopted in 2009, prohibits property owners from allowing lots to become overgrown with weeds. The idea is to prevent such properties from becoming a fire hazard. There's also an understanding that it would force banks and investors to maintain at least some level of appearance on their properties.

"The purpose of this code is to prevent Bend from looking like Texas," Goff said.

Few Options for Neighbors

However, the city isn't going to tell a property owner to water his or her lawn, Goff said. But for those who refuse to do even basic maintenance, allowing weeds to overtake the property, the city can come down with a heavy fine. Goff can fine a property owner up to $900 per lot, per day for a weed violation. Already this year, Goff has issued some steep fines to property owners. He wrote one ticket for $430,000 to an investor group that ignored warnings. The ticket was reduced to $7,500 during negotiations with the property owners.

While the enforcement process is complaint driven, Goff maintains a database of roughly 1,000 properties that have had past problems. Each spring he generates a form letter reminding them of their obligations under the fuels ordinance. By midsummer the complaints will start rolling in. However, due to staff cutbacks at city hall, Goff has had to layoff his entire staff. He's now a one-man department, trying to do a job that requires two or three more bodies. Last year, Goff had 350 active code enforcement cases. This year that number is down 120. He says a manageable number is closer to 30. That means less time to dedicate to any one case. When it comes to residential fuels, Goff focuses primarily on would-be subdivisions, investment properties that fell victim to the housing bust.

Bend Mayor Jeff Eager is sympathetic to my problem. Surprisingly, though he said he hasn't heard many specific complaints from constituents about the issue. I asked Eager if he thought more strict regulations, similar to the beautification rules that insulate some of Bend's more affluent neighborhoods should be considered. But Eager isn't ready to add more laws if he thinks the city can't enforce them. There is also the question of how to legislate aesthetics - in some cases, one person's xeriscaping is another person's weed bed.

And while Code enforcement is important to maintaining livability, it isn't necessarily the highest priority on the council's agenda, Eager said.

"I think it's important that there be someone, preferably more than one person who is tasked with enforcing the code, otherwise you have no incentive for property owners and other folks to comply with the code - so it's important. When you weigh that against other priorities - making sure that we have cops on the street and firefighters, filling pot holes - I couldn't tell you ranking wise where (code enforcement) fits," Eager said.

A Toxic Asset

It's hard to quantify just how damage much the blighted house on my block has done to my own home value. Part of that will be determined when, or if, the home is listed and sold. If I'm lucky, the house will be refurbished, the yard landscaped and the home sold at a price that approaches what it fetched in 2005. That's probably not realistic, though. So-called distressed homes typically sell for significantly less than homes involved in traditional owner-to-owner sales. Appraiser Donnie Montagner has been tracking the trend in Central Oregon for two years and has found that bank-owned and short-sales typically have averaged between, $130,000 and $180,000 this year with most of the sales falling into the lower end. By way of contrast, most of the traditional sales have exceeded $230,000.

"We're kind of in the inverse of what we looked like during the boom where we had overvalued assets," Montagner said.

In other words, these distressed sales prices are artificially depressed.

While appraisers can take into account when a nearby property is sold in distress when calculating your own home value, they can't always totally discount it, Montagner said.

"If you do have a sale that happens two doors down, to not include it raises the question of why didn't you and what else didn't you see?" Montagner said.

On a macro level the glut of bank-owned homes and short sales can drag down an entire market like Bend, where distressed sales have accounted for almost half of all the transactions over the past two years, according to Montagner.

While investors are beginning to return to market, it's not clear how long it will take to clear out the glut of bank-owned and otherwise distressed properties. Notices of foreclosure dropped in July in Deschutes County. The number of distressed sales as percentage of all transactions also dropped in July to 41 percent, down from 50 percent last July and a high of 66 percent in November. But there are a number of factors that can account for that, including the fact that banks are becoming more strategic about when to list their properties.

The reality though is that like most homeowners in Bend, I'm upside down in my mortgage. We bought on the front side of the boom, but refinanced to get a lower interest rate and dip into our imagined equity. The bank was only too happy to oblige. I don't really want to know how much my home is worth. I know I can't sell it and it's too risky to try renting it. Right now, we're treading water. But it would be nice to lose the dilapidated anchor that's pulling us down, slowly.

Come to think of it, maybe a little urban wildfire isn't such a bad thing. Anybody carrying a match?

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