The majority are not bulldozed but a trend is developing and pilot programs are being launched primarily in the Midwest to remove REO homes from the market via demolition:
JPMorgan, the second-biggest U.S. bank, has donated or sold at a discount almost 1,900 properties valued at more than $100 million in more than 37 states since late 2008, including 22 in Cleveland, said Jim O’Donnell, manager of community revitalization. The majority aren’t demolished, he said. - Bloomberg 7/27/11
I live in Cleveland and previously in Detroit for over 25 years and follow the housing/mortgage crisis intensely. What I've learned this past week is that banks can write off the full market value of an REO (Real Estate Owned) home if they off load the property to, say, a land bank or non-profit. In those cases they do offer to pay the price of demolition but if they qualify for a federal subsidy that price can be halved:
The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming, according to the statement. Simon declined to say how many foreclosed properties Bank of America holds. ibid
Interesting that the federal government is now using tax payers money to abet the banks in there schemes to use their losses as tax write offs, winnow the supply of available housing, and embark upon a 21st Century version of Urban Renewal.
Danial Indiviglio of the Atlantic has this to add to the report by Bloomberg:
My concern is that banks are using this as an easy out to minimize their loss with little concern about what's best for the U.S. economy. If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.
Unfortunately, if banks are better off bulldozing than attempting to sell these homes, then that's their prerogative. After all, they own the homes and can do as they like with them. It's just pretty incredible that the market has come to this.
This is a complicated wrinkle in the housing meltdown, especially in the urban neighborhoods struggling with long term blight. If the banks can afford to tear down properties that otherwise wouldn't realistically be rescued in that economic context, this should bolster non-profit housing groups ability to stabilize blocks from crime and already stressed market valuations of existing occupied homes. On the other hand, if these isolated projects become the norm at some tipping point for reasons other than stabilization of communities, we could find ourselves with a de facto housing policy that supports new home construction, Fannie and Freddie low rate mortgages for upper middle class purchases ($450,000 Jumbos), and the decimation of affordable housing for the working and non-working class and poor. And all the while the banking industry could write off any need for paying income taxes for decades as a nice little plum for destroying the world economy.