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Why Sub-prime Lenders Didn’t Cause the Housing Crash

The housing crisis has left quite a mark on economy. Eight years after the real estate bubble began to burst, the economy as a whole has still not fully healed from the crash that followed.

At the time — and ever since — most people have blamed that bubble, and its bursting, largely on the sub-prime mortgage market: lenders that offered loans too freely to borrowers who often weren’t financially secure enough to warrant them. But research by Wharton real estate professors Fernando Ferreira and Joe Gyourko disagrees with that theory. Their paper is titled, “A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012.”

In this interview with Knowledge@Wharton, Ferreira, who is also research associate for the National Bureau of Economic Research, discusses why the prime market was at least as responsible for the crisis as the sub-prime market, the nature of housing cycles, and the possibility of another bubble down the road.

An edited transcript appears below.

Knowledge@Wharton: Let’s look at the research and explain exactly what you really found out here. Why was the housing crisis not just the problem of the sub-prime market?

Fernando Ferreira: That’s a good question. Let’s start with why people focused so much on sub-prime lending. It was a new type of lending focusing on riskier borrowers who didn’t have money for the standard 20% down payment, who didn’t have a history of stable employment, or who didn’t have a high enough credit score to apply for conventional standard loans, so-called “prime” loans. Lenders became quite creative in terms of finding ways to provide loans to those individuals, to those families. And to be honest, those families are riskier, but they are almost middle class. That’s why that market got so much attention, because suddenly, a lot of people — especially minorities, who were out of the mortgage market for such a long time — were able to participate in the housing boom. And at that time — 2004, 2005 and 2006 — that was viewed as a very good thing. We knew we were improving. We were allowing those families to reach the American dream of ownership.

Knowledge@Wharton: So instead of just keeping it pared down to the people that had good credit scores and could put 20% down, banks were lending to a wider clientele. Not seeing those borrowers as that risky was a shift for the industry at that point.

Ferreira: Conditions in 2004 and 2005 were quite similar to today. Markets were rebounding. Prices were increasing. The number of transactions was up. Unemployment was down. Life was good. Everything felt pretty good. Nobody was predicting a Great Recession.

In those circumstances, what the lenders do is they lend. So that’s part of my research. Lenders — sub-prime lenders or prime lenders — usually never drive the cycle. They react to a lot of economic circumstances. So right now, in 2015, the markets are good — very few foreclosures, and we haven’t had a major hiccup in the past six, seven years. They look at that scenario and say, “Why not expand credit?” In 2004, 2005, it was exactly the same situation.

“We have almost no loans being issued by the so-called sub-prime lenders. What we have right now is prime lenders trying to make that loan process, the whole underwriting, a little bit more flexible.”

Knowledge@Wharton: So the assumption is that what happened with the housing crisis was really the fault of the sub-prime market, but your data suggests that, while that was a part of it, the prime market was really as big, if not a bigger, issue?

Ferreira: Yes. Let’s split the housing market into four major components. There’s the prime sector. That’s always around 60% of the market. That’s the bulk of the mortgage market. There are the governmental loans — HUD, FHA and VA — which are about 10% to 15% of the market. Then there’s sub-prime. Sub-prime started in the mid-1990s with about 5% to 10% of the market. And that increased to 20% — big, but a third the size of the prime sector. And then you have all-cash transactions: investors or wealthy people. And that’s about 10% of the market. So during the whole time period, even at the height of the housing boom, sub-prime was never more than 20% of the market. And the prime sector was 60% or more and increasing. My research from the mid-1990s to the late 2000s shows that even the prime sector increased a lot during the 1990s and 2000s, at the expense of the governmental loans.

Knowledge@Wharton: Because of the way the economy was going back then, people were feeling much better, there was more money, jobs were better, salaries were better. So people had that money to basically throw around.

Ferreira: It’s like today. If you ask me today who is getting more loans, riskier borrowers or the middle class, [it’s] the middle class that sees a market that’s stable, that had jobs for the past five, six years, people that were able to save for their down payment — they are the ones getting earlier into this market.

Knowledge@Wharton: As your data shows, there were a lot more foreclosures out of the prime market than the sub-prime market. With market share going up to 20% for sub-prime, is that number going to basically stay where it is? Or are we going to see that shrink down because of how much tougher it is now for people to be able to get a loan?

Ferreira: Yes.

Knowledge@Wharton: Zero down on a home is just not a feasible option these days.

Ferreira: Well, the sub-prime market collapsed after the Great Recession. We have almost no loans being issued by the so-called sub-prime lenders. What we have right now is prime lenders trying to make that loan process, the whole underwriting, a little bit more flexible. And you have the government with a lot more market share, because with the FHA, you can still get 97.5% LTV (loan-to-value ratio) loans. But that will change. And it should change, because that’s what people want. You see more and more, you read the articles in the newspapers and on TV, about middle-class families complaining that they can’t get a mortgage.

They can’t qualify for a mortgage. So slowly but surely, we’ll have more pressure on lenders to expand that market, to allow, again, the same story, to allow families to consume housing. Because ultimately, that’s what people want.

Knowledge@Wharton: So then it really shouldn’t be a surprise that the greater share of foreclosures after the bubble burst were from the prime market, because, as you alluded to, the prime market was three times as big as the sub-prime market, even at its height.

Ferreira: Well, what happened is, it was pretty easy when the crisis started to blame it on those lenders. And some of the lenders, some of the sub-prime lenders, really had bad practices. They were pushing exotic loans to people that couldn’t afford even a month of the mortgage payment. But they were a very small fraction of the sub-prime market, as well.

But those are the people that defaulted and had delinquencies and were foreclosed on first…. So in a way, [the press and researchers were] too quick to get that early data from 2007 and early 2008, where you saw a majority of foreclosures being sub-prime. And then you had all the news that Countrywide was doing so many bad things.

“Under those circumstances, there’s just one solution. And the solution is mail the keys to the bank.”

Suddenly, there was a focus on all the problems of sub-prime, all the problems with low-income borrowers — they shouldn’t have taken those loans, and that’s why everything has collapsed. But it turns out that, just a few months later, when the full effects of the recession were being realized by everybody, and that’s what our data is picking up, it shows that the phenomenon was widespread. It was not concentrated solely on the sub-prime sector.

Knowledge@Wharton: So it wouldn’t have mattered one way or another whether you were in the prime market or the sub-prime market. If you were getting a zero down or 10% down loan on your house, or if you were actually able to do 20% or 30%, this was going to happen?

Ferreira: More equity helps. Having a higher down payment helps. It’s always a good idea to put some money down. But it would not have prevented foreclosures, and let me explain why. In many markets in the Great Recession and the housing bust, prices fell by about 40% to 50%.

In places like Las Vegas, prices were about $500,000 for a house, and in a matter of months, they dropped to about $200,000. So prime and sub-prime borrowers bought homes for $500,000 and now, one year later, they see themselves in a situation where they’re unemployed, they can’t make the mortgage payments, and they have no job prospects, because the economy was just awful in 2008-2009. And they say, “We can’t make the payment; let me sell the house.” And when they go on the market, good luck finding a buyer for that house.

Under those circumstances, there’s just one solution. And the solution is mail the keys to the bank, mail the keys to the lender. And that’s when you have a foreclosure.

Knowledge@Wharton: Obviously, we are still feeling the effects of this even today, because, if you go look on a variety of the different real estate websites, you will still find a good many houses that are listed as foreclosures. Maybe not as many as were listed a couple of years ago, but you still have a lot of properties that fall under that foreclosure realm.

Ferreira: The crisis was major. It was the event of our lifetimes, and a bad event. So around 2008 and 2009, in certain markets, you had about 10% to 20% of the stock of homes being foreclosed. Those markets were the weaker markets, such as inland California, areas like Fresno and Modesto, or smaller markets in Florida, for example. And it took a very long time to resolve the situations. And part of the reason is there are no buyers. Only now, with the markets more normalized, it’s just easier to resolve those situations. And there is another detail. During that time period, lots of lenders and banks decided it was a good idea to postpone the resolution of those problems as much as they could, just to avoid realizing those early losses.

“I predict that, very soon, that same group of people will feel like they want to be part of this American dream of ownership. And they will be able to buy homes.”

Knowledge@Wharton: You mentioned that perhaps the research from back several years ago may be playing into this, as well. I guess, in some respects, then, we still don’t have a full, true understanding about housing cycles and how they affect the markets, or the potential of the U.S. having another bubble down the road.

Ferreira: That’s correct. We know some basic facts about how cycles work in the housing sector. And it starts with construction. It always takes a long time to build houses, to build apartments, to build any type of real estate.

Specifically in the example of houses, it’s a lot because of regulation. There are a lot of bureaucratic steps that developers need to take in order to even start the construction of a housing unit. Once the construction starts, it could go fast — as fast as four, five, six months. But the whole process usually takes one or two years. So developers start to plan construction when times are good, when they think there will be demand for that type of product. But it takes two years for that to happen, for the product to come live, and people can actually buy and move into those homes. The lag is just gigantic.

In times of boom, when thousands and thousands of developers are planning all that construction, and they’re providing all that extra supply of homes, they cannot forecast — or it’s nearly impossible to forecast — any type of recession, any type of negative shock that will happen in the labor market, in international markets. We have this recent Chinese problem. It’s just impossible to forecast that. And when you have this negative shock, it’s very hard for them to stop the construction. And if the house is already built, it’s important to get rid of that stock of houses. Because once you build it, it’s there. It’s pretty expensive to get rid of that construction.

So that’s the basic nature of the cycle. In boom times, you have an oversupply of homes. Shocks happen when the recession hits. You have a drop in demand, a dramatic drop in demand. And that oversupply is hanging there for a long time. Prices drop. And when prices drop, you have all sorts of actors — borrowers and lenders and banks — all running for the hills because it becomes a very complicated situation.

Knowledge@Wharton: So then where are we headed in the next few years? Because you see the various reports that the housing numbers are kind of going up and down; there are some months that are good for both new homes and existing homes. We see a variety of stories that more people are renting now than ever before, especially the millennial generation waiting a little bit longer to buy. The housing sector is better than what it was a few years ago, but it’s certainly not where we hope it would be. And realistically, I don’t think we can expect it to be in that area for several years.

Ferreira: I think there are two things. There is a temporary, transitory component, which is that the Great Recession happened recently; especially younger families had a hard time with the job and employment situation. Only recently they were able to feel more secure in their jobs and maybe get some raises and feel more confident that they could actually save and be ready to buy a home, or improve their credit scores, and so on. That’s part of the reason why more people are renting now, and they want to rent, especially the below-35 age group. That will change quite soon. Provided that we don’t have another major economic crisis, that will change. I predict that, very soon, that same group of people will feel like they want to be part of this American dream of ownership. And they will be able to buy homes. So in that sense, I think the scenario of the mid-2000s will get back pretty quickly, actually. It could be here already, or this year or next year.

Now, there are certain longer run trends that go against that. And the longer run trends are many. We are getting the first jobs much later. We’re staying longer in school. We are getting married much later. We’re having kids later or having fewer kids, period. And we are moving from city to city and from job to job much more frequently. All those long-term trends make homeownership a much tougher proposition, a much riskier investment.

“As soon as lenders start to react to the good business conditions, they’ll provide more lending. And if, one day, a crash happens, they’ll be blamed again.”

Knowledge@Wharton: So we’re talking about a change that maybe is going to stay for quite some time. Maybe we shouldn’t expect to start to see the age of first-time homebuyers dip significantly in the next few years just because of how our society is evolving right now.

Ferreira: Yes. I teach a real estate class here at Wharton, and I tell my own students, “If you know for sure that you’re going to be living in the same city, in the same neighborhood, at least for the next five or six years, then start thinking about buying a house, start doing the math. It doesn’t mean that you should buy a home.” But that should be the starting point.

Now, it turns out that, for most people under 40, it’s highly unlikely that they will stay in the same job and they will be living in the same city over the next five or six years, because that’s just the nature of current labor markets. On top of that, you need all those other issues. You know, do you have enough savings? Could you put 20% down? Is this the right option for you? Do you have kids already and are you thinking of enrolling them in a certain public school, and that’s why you need to buy a home close by? There are many things that one should consider in that decision, which means that, under those circumstances, renting is just a much safer and better proposition.

Now, the problem is there is a stigma. People don’t want to be renters. And it’s true that there are lots of landlords out there, especially small landlords, who are not extremely professional. And sometimes it’s hard to find high-quality housing for rent.

Knowledge@Wharton: Now that your research is out, will there be more of a fresh look, especially from the media and going forward, about how that period is going to be viewed historically, reexamining the blame that sub-prime took in this? Are we going to take this historical example as a lesson, so that we can watch this play out and understand what occurred, so we don’t fall into the same type of bubble again?

Ferreira: Unfortunately, I don’t think so. Let me give you an example about lenders. Lenders got all the blame, especially sub-prime lenders, for the crisis. So what’s happening right now in this recovery? Are we giving thank-yous to the lenders because perhaps they’re helping with the recovery? Absolutely not.

What we are actually reading in the news is that people, and sometimes even politicians, are criticizing lenders because they are being tough — too tight with their underwriting standards. So as soon as lenders start to react to the good business conditions and to the pressures from the people, they’ll provide more lending. And if, one day, a crash happens, they’ll be blamed again.

Knowledge@Wharton: So if that trend comes back, it really does fall even more so on the consumers themselves to really be aware and to know their situations so that they don’t potentially fall into a foreclosure situation down the road.

Ferreira: Yes. And that’s where part of the research is going — trying to understand not just the financial components of the decision making of buying versus renting, but the more psychological factors. What are the raw expectations? Are those expectations about future price appreciation, for example? Are they realistic or unrealistic? Bob Schiller, who won the Nobel Prize in economics, is the most famous person doing research in this area. And his work shows that, even to this date, on average, and especially in certain markets, people still have unrealistic expectations about future price appreciation. They still expect that prices will go up by 5%, 8%, sometimes even 10%, in every year over the next 10 years. That’s not going to happen.

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How Detroit’s Foreclosure Auction Fails Homeowners

September marks something of an anti-holiday in Detroit. It’s the month when the Wayne County Treasurer launches its annual Auction of Tax-Foreclosed Properties. For many Wayne County residents, this is the least-wonderful time of the year.

Each September, Wayne County puts up for auction tens of thousands of properties whose owners are more than three years behind on their property taxes. Thousands of these homes are occupied, either by owners or tenants. This year’s auction—which launched on Friday and runs through September 24—includes more than 8,000 homes occupied by an owner or a tenant, according to the county’s own records.

This year’s auction is hitting Detroit like a hammer. Wayne County sought to foreclose on a record-high 75,000 properties. For last year’s auction, by contrast, the county only initially identified 50,000 tax-delinquent properties. The tax-foreclosure burden falls overwhelmingly on the city of Detroit: Houses and lots in Detroit accounted for 63,000 properties first marked for foreclosure by Wayne County.

But the problem for Detroit goes well beyond the scale of the foreclosure auction. Recent changes to the law mean that it’s harder for occupant-owners to bid to save their homes—and easier for buyers to take or keep scores of properties for investment purposes.

215 Leicester Court in Detroit. (Google Maps)

The house at 215 Leicester Court in Detroit is a property that was nearly put up for foreclosure sale. According to the Wayne County listing, the house, which is occupied, was removed from the auction in August, sparing it from Friday’s auction block. The United Community Housing Coalition intervened on behalf of the owner, as the organization has done for the last 12 years.

“A lot of the reasons why people are in foreclosure deal with not just not paying their taxes, but over-assessment, lack of knowledge of various programs that are available, and lack of communication between the cities and their residents,” says Ted Phillips, executive director of the United Community Housing Coalition.

Typically, the United Community Housing Coalition helps owner-occupants to understand their rights or enter into payment agreements with Wayne County to keep their homes. The organization helps owners to assess their own property assessments—some of which are 5 to 10 times the amount of any real market value for the property.

“There’s something called the poverty exemption in Michigan,” Phillips says. “In Detroit, that means you can get 100 percent exemption of your taxes if your income is at or below a certain level. Many of the people in tax foreclosure are at or below that level, but they knew nothing about it.”

Had it gone on to auction in September, the house at 215 Leicester Court would have been offered at a starting minimum bid of the overdue tax value. Properties that persist into October are listed again—for a starting bid of just $500, plus a small portion of the current year’s property taxes.

The auction itself is nothing new: Wayne County has been selling off tax-foreclosed properties for years. The Detroit Land Bank Authority began auctioning city-owned vacant properties last summer. Maps of blight in Detroit line up reasonably well with properties and lots that are going up for bid. For the past five years, Loveland Technologies has been mapping tax-foreclosed properties in an effort to fight blight.

A map indicating properties in the Wayne County Treasurer’s tax-foreclosure auction. The section outlined in purple is Detroit. (Loveland)

But a significant change to state law means that homeowners who are delinquent on their property taxes are prohibited from participating in the auction. This means that owner-occupants who are behind have no recourse to keep their homes if they fall far behind on their taxes.

“In years past, someone could purchase a property, not pay the taxes for 3 years, it would go through the auction again—and they could pick up the property for $500,” says Emily Thompson, foreclosure programs coordinator for the United Community Housing Coalition.

While this sounds like a loophole designed for tax scofflaws, according to experts, it’s corporate buyers who are taking advantage. (Wayne County authorities could not be reached for comment.) Jerry Paffendorf, the co-founder and CEO of Loveland Technologies—an organization that has mapped all the properties in the Wayne County foreclosure auction for the last 5 years—says that a handful of investors take most of the properties.

According to Loveland’s “leader board” for the 2014 foreclosure auction, for example, a corporation called ASM Services purchased 224 properties for just north of $1 million. Ten investment-class buyers accounted for more than 1,400 foreclosure purchases in last year’s auction. Paffendorf says that most of the buyers never occupy the property and never pay property taxes on them.

“This whole thing is designed for the county to recoup funds and get properties back into the hands of responsible private owners,” Paffendorf says. “But more than 80 percent are not paying taxes for a variety of reasons after the purchase.”

Phillips says that he’s heard renters say that their landlords take advantage of the foreclosure auction every three years in October to wipe their property-tax slate clean at $500 a pop. (Tax scofflaws!) But Michigan’s law does not target corporate landlords—which can reorganize endlessly and re-enter the foreclosure auction after failing out of it.

“It’s perfectly legal to spin up an LLC or use a holding company,” Paffendorf says. “You don’t see any human names on anything. Everything is the address of a property’s LLC.”

Not all foreclosure auctions cause hardship in Detroit. The ongoing Building Detroit auction held by the Detroit Land Bank Authority, for example, has strict occupancy requirements. (The city gets first crack at the county auction; the properties it takes go to the Land Bank.) Wayne County’s foreclosure auction doesn’t require the same tracking for outcomes. Process servers take notes on properties when they deliver foreclosure notices; this is the only way the county tracks which homes are even occupied.

“The tax-foreclosure auction was a horrible system, but at least it was for some folks a chance to reset and get their homes back, get into the right mode the next time—get the assessment corrected and get with some folks who could get them some counseling and help—and next time make it work,” Phillips says.

In an abstract world of just causes, it may seem fair, or even reasonable, for authorities to set for auction homes whose owners are late on their taxes. But in Wayne County—in Detroit—leaders need to account for the incredibly unjust and often racially motivated factors that led to such economic despair in the first place. Moreover, it does the county no good to evict Detroit homeowners from their homes—period, full stop.

“This is not going to work. It’s just going to hurt folks,” Phillips says. “If you’re going to pass something like this, you should make an exception for homeowner-occupants, as opposed to owner investors.”

Article source:

Detroit neighborhood plea: ‘We want squatters’

Wanted: One good squatter.

It’s no joke. In a remote pocket of northwest Detroit along the Rouge River, neighbors are so desperate to stop a cycle of abandonment and blight they’re recruiting a squatter to occupy a home whose longtime owners left last weekend.

That’s because neighbors fear the onetime farmhouse on Puritan and Hazelton will be stripped and torched if it remains empty for long. Eight nearby houses burned in the past two years. A few blocks away, there are more weedy lots than homes.

“We want squatters. There’s so much abandonment here, we need them to turn the neighborhood around,” said Jennifer Mergos, 33, co-founder of the Northwest Brightmoor Renaissance neighborhood group.

Squatting is illegal in Michigan, punishable by up to two years in prison for repeat offenders under laws passed last year. But 10 years into a mortgage crisis that has seen 1 in 3 homes foreclosed in Detroit, Mergos and other neighbors view squatting as a solution instead of a scourge.

“Most people around here are perfectly fine with squatters,” said Sky Brown, another neighbor.

She acknowledged that sounds weird. But the situation is unusual and so is the neighborhood. The 95-year-old farmhouse is on a dead-end gravel road and overlooks woods and a creek. Next door is a house with no windows that appears to be heated with a wood stove.

Just blocks away are busy Telegraph and McNichols roads. No one but neighbors are coming to the rescue, said Brown and Mergos.

“The neighborhood is rallying around this house because it’s a tipping point to stop the continued destruction that’s happened around here,” said Mergos, an urban farmer who lives a mile away in Redford Township.

“If I didn’t have three small children, I’d squat in there in a heartbeat with a dog, a gun and some wasp spray.”

She’s motivated in part because she couldn’t save her own home two doors down from the farmhouse. Mergos had planned to rehab it and live there with her boyfriend, Sparrow Rissman. But it burned twice in two years after he bought it from the tax auction in 2013.

Undeterred, Mergos began a community garden, Sunnyside Farms, on the site of her burned home. Someone tried to wreck the garden, so she placed five beehives to keep away troublemakers.

“I’m trying to bring something positive to the neighborhood,” said Mergos, who grew up in Brightmoor. “There’s nothing to do now and nowhere to go, so lighting homes on fire is the entertainment.”

At least 350 other homes in the neighborhood are fire-damaged, while one-third of Brightmoor properties are vacant, according to data from the Detroit Blight Task Force. The population of the four-square-mile neighborhood, which stretches from Interstate 96 to Puritan, has fallen in half to 12,000 since 1990.

Detroit has led the nation in arson rates for years. And while there are no statistics on squatting, city data indicate at least 5,500 publicly owned, abandoned buildings are likely occupied.

Squatting is the next step in a do-it-yourself culture that’s taken root by necessity in Detroit, said neighborhood leader Riet Schumack.

Brightmoor neighbors already mow lawns and board vacant homes, she said. Technically, that’s trespassing and illegal, Schumack added.

“As long as squatters are not becoming a great nuisance to the community, we allow it to happen,” said Schumack, co-founder of Neighbors Building Brightmoor, a group that maintains 200 properties.

“It’s not black and white. You want someone in the house when it’s still functioning. Otherwise, it will be destroyed in 24 hours.”

Only in Detroit

Accepting squatters is one thing. But how does a neighborhood recruit them?

It’s an only-in-Detroit question, Brown acknowledged. And neighbors don’t want just any squatters. They want ones who won’t sell drugs or sex but will maintain the house and ward off arsonists if necessary.

So Brown asked several squatters she knows for referrals and alerted the Detroit Arson Squad, while another neighbor informed The Detroit News about the situation.

Within days, she got four good leads. By Thursday, Brown received word that a couple may be moving into the home.

“The over-arching theme is that the city of Detroit does nothing, so we’re forced to do our own thing,” said Brown, 34, a Wayne County Community College professor.

Brown also made headlines last year. That’s when she and her husband, David, bought a $2,000 house in the neighborhood in hopes of forming a kibbutz, a Jewish communal settlement. City officials seized backyard goats and charged the couple with violating ordinances.

The case ended when she agreed to perform community service. She wasn’t able to save the goats.

As the case dragged on, the couple set their sights on the farmhouse and negotiated for months to acquire it in a short sale, a transaction in which lenders agree to take less money than is owed on the mortgage.

The deal fell through because the lender, Fannie Mae, wanted $65,000 for the 1,400-square-foot home, Brown said.

The owners of the farmhouse did not return phone calls from The Detroit News. The home’s front door is secured by three deadbolt locks.

Neighbors say that’s not enough.

Next door, Keith Stone Sr. lives in a tiny house with no siding and plywood covering all windows and front door.

The property is encircled with a fence made from concrete chunks and protected by at least two dogs. Stone said he covered the windows “to keep people out.”

“Around here, the scrappers will scrap it if they get a chance,” said Stone, a tree trimmer. “I was gone once for six hours and they took my siding.”

‘Takeovers or holdovers’

The issue is percolating as Wayne County is conducting its annual auction of tax-foreclosed homes this month and October. About 8,000 of the 25,000 Detroit properties for sale are occupied, which means occupants could become squatters in homes they used to own.

“Detroit could be the largest phenomenon of squatting in recent history in America,” said Bernadette Atuahene, a law professor at Chicago-Kent College of Law.

She spent the summer interviewing 40 squatters in Detroit and said she has “no trouble finding them.”

Atuahene categorizes squatters as “takeovers or holdovers.” Takeovers break into properties. Holdovers lost their homes to foreclosure or are former renters.

In places like Brightmoor, legal distinctions of ownership aren’t that important, said Ken Jackson, who has lived around the corner from the farmhouse since 1989.

“Squatter, owner, it doesn’t matter who lives there as long as they take care of the property,” said Jackson, a warehouse worker.

Twitter: @cityhallinsider

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Land Trusts Offer Houses People With Lower Incomes Can Afford—And a Stepping …

Editor’s note: Earlier this year, we covered a Boston community land trust that’s stopping gentrification in its tracks. Our readers wanted to know, can that model, which limits the amount homes can be sold for, really help low-income people build family wealth? Here’s what we found.

Five years ago, Joyce Fidalgo bought her first home in the lower-income Boston neighborhood where she was raised. Several years out of college and working at a hospital, she was embarking on a well-worn path to the “American Dream” through home ownership. 

But as Boston real estate prices skyrocket, Fidalgo won’t be able to sell her home for a hefty gain. The land that her home sits on is owned by a community land trust, a nonprofit entity owned by community members who steward land for long-term public benefit. The trust, which is affiliated with the Dudley Street Neighborhood Initiative community group, limits the selling price so that the home can remain affordable for future buyers. First established in the 1960s, there are now more than 200 such community land trusts across the country. A 2011 survey of 96 CLT’s found that they host almost 10,000 units of housing, including 4,000 ownership units.

While this price restriction allowed Fidalgo to afford her home in the first place, she admits, “I may not benefit as much as if I lived in a market-rate home.” For instance, she would not be able to reap the windfall from selling her home at market price, which went up 30 percent for the median home in her neighborhood in the first quarter of 2015. Still, she says, “The other benefits are more valuable to me now than selling years down the line.”

Perhaps until the foreclosure crisis, owning a home was seen as the surest way into the middle class.

Fidalgo’s story represents one of the key debates over the community land trust model. Do they help lower-income residents to build wealth or do they lock these residents into subsidized housing? Some longtime residents of New Orleans Lower 9th Ward, which was devastated by Hurricane Katrina, opposed a community land trust effort because of concerns over whether it would help families build wealth. These residents and others question whether it is fair to offer a “second class” of home ownership that restricts low-income people from building wealth through home appreciation in the same way as conventional homeowners.

There is no doubt over the role of homeownership in building wealth. In 2011, home equity accounted for 25 percent of all individual wealth according to the U.S. census. A 2008 study published by HUD concluded that for low-income households, homeownership is often the only source of wealth and can be a good means of building greater wealth. It allows families to leverage the little equity they do have to reap the benefits of home value appreciation. Perhaps until the foreclosure crisis, owning a home was seen as the surest way into the middle class.

Meanwhile, community land trusts are increasingly touted as a tool for preventing gentrification and securing land for affordable housing and urban farming (see my previous article on this here). And, according to a 2013 study by Federal Reserve Bank of Cleveland, Boston is the city with the most neighborhoods that gentrified between 2000 and 2007, among the largest 55 cities in the United States.

Starter homes 

Proponents of the model say that land trust homeowners actually do build wealth. While they may not build as much equity as they would from owning a market-rate home, they note that lower-income people would not be able to afford market-rate homes in the first place.

“When we sold the property, it gave us enough, along with our savings, to buy a market-rate home.”

Christopher Kaufman Ilstrup said that when he purchased a condo on the Champlain Housing Trust in Vermont in 2004, “the land trust felt clearly like the best option for a person without significant savings to afford to make a down payment.” Having worked his entire career in the nonprofit sector, he thought that “saving $30,000 for a down payment was impossible.” Without the land trust home, he “probably would have just stayed a renter and not built any wealth at all.”

Instead, he lived for seven years in the condo, during which time he got married and adopted a child. He says that in 2011 “when we sold the property, it gave us enough, along with our savings, to buy a market-rate home.” He gained about $8,000 from the sale, which represented an almost 29 percent annual rate of return on his initial investment.Most land trust homeowners are improving their financial situation to the point where they can afford to buy at market prices.

Studies confirm that Ilstrup’s experience of land trust homeownership as a stepping stone to market-rate home ownership is shared by many others. The Urban Institute evaluated three land trusts that had large numbers of ownership units—and resales of those units—over two to three decades. These studies found that those who sold their land trust homes gained modest proceeds ranging from about $8,000 to $17,500, representing annual rates of return from 22.1 percent to 38.7 percent.

Community Land Trust equity graph

Each of these land trusts allows owners to keep 25-30 percent of any appreciation of the market value of the property. These returns on initial investments far exceed those that would have been possible if they had invested their down payment in stocks or bonds.

Furthermore, 68-78 percent of the sellers went on to buy market-rate homes. Far from being trapped in subsidized housing, most land trust homeowners are improving their financial situation to the point where they can afford to buy at market prices.

Perhaps the best news is that these land trusts were not only able to support homeowner asset-building, but also retained the affordability of these homes for future generations. Ilstrup says that when he sold his condo, he didn’t “begrudge the grant going to the next owner, who was a single mother with a child.”

Thus, the land trusts effectively preserve and recycle the original public subsidy. One study estimates that if the local and state investments of $2.17 million in the Champlain Housing Trust homes was not preserved, it would have taken more than five times that amount in additional subsidies to keep those homes affordable.

“The land trust is looking out for you”

The foreclosure crisis proved that as much as real estate value can appreciate, it can also fall. For lower-income people, these risks may outweigh the benefits of home ownership. As Miriam Axel-Lute of the National Housing Institute notes, “…pushing low-income families into homeownership often backfires. Without any savings in the bank or cushion in their income, these families are often blindsided by maintenance or repair problems they can’t address, or are only a few weeks of unemployment away from defaulting on their mortgage payment. With lower credit scores, they are often saddled with higher interest rates and unsustainable loan terms.”

Most land trust homeowners are improving their financial situation to the point where they can afford to buy at market prices.

Community land trusts can help buffer homeowners from these downsides of market ownership. For instance, almost all of the homeowners in the three Urban Institute cases secured affordable, 30-year, fixed-rate mortgages. Ilstrup credits the land trust’s homeowner education program for helping him understand what is affordable and sustainable.

Similarly, Fidalgo says that the land trust introduced her to a bank that offered her a second mortgage so that she could put down larger down payment and avoid costly private mortgage insurance (which can run a couple hundred dollars a month). Fidalgo was approved for a mortgage large enough to afford a market-rate home, but she says the payments would have been so high that “I’d be living from paycheck to paycheck and getting help to pay my monthly bills.” 

But more than just homeowner education and financing support, land trusts also help residents steward their properties. Fidalgo notes that if she needs to make repairs, she can look to the land trust for a list of contractors. She and Ilstrup both believe that the quality of their land trust homes is higher than the market-rate homes they could otherwise afford, which helps to keep maintenance costs down.

This partnership between owners and land trusts also helps prevent foreclosures. A 2011 study found that at the end of 2010, only 1.3 percent of the mortgages held by land trust homeowners were seriously delinquent, compared to 8.57 percent of conventional mortgages. The study attributed these lower rates to the stewardship practices of land trusts, such as retaining the right to address late mortgage payments and buy the property back in case it is foreclosed on. As Ilstrup says, it’s “very positive to know that the land trust is looking out for you and has an interest in the property.”

What the neighborhood can provide

The question of whether and how land trusts contribute to building wealth for lower-income families, though, should be examined in terms broader than just real-estate ownership. Community land trusts promote security and stability for residents simply by providing homes that they can afford. Fidalgo says that this stability has allowed her to “save money to pay for my education. I can travel and do other things and not have to worry about having money just to pay my mortgage.” In fact, she just finished her masters in education this spring. 

Ron Stokes, a neighbor of Fidalgo on the Dudley land trust, can attest to what this security and stability means. He has lived in his land trust home for 21 years now. Nearing 70, he is a retired bus driver and raised two daughters with his wife. “We knew what our monthly payments would be,” he says. “As time went along, we were able to put away a few more dollars than we would have. The extra money went towards retirement and education.”

Ultimately, land trust home ownership provides another choice between renting and market ownership. 

He believes his daughters, now both health professionals, “are successful because of what this neighborhood could provide.” Both Stokes and Fidalgo point to the added value of community that the land trust brings. In Stokes’ words, “since we’ve moved in, all the neighbors have been here and we look out for one another.” Fidalgo says that on the land trust “you are part of a community and you can interact with people who you might not otherwise know.”

Community land trusts diversify our concepts of property ownership. Conventional thinking now dictates that you are either an owner or a renter. Owners enjoy all the benefits of any appreciation in value. But land trusts are rooted in the idea that land value is not only created by the labor of the owner. Rather its value depends largely on public infrastructure improvements like transit and parks and other collective efforts to build community and economy. The land trust model separates ownership of the land from the human improvements on it and retains the socially generated value for community benefit.

Ultimately, land trust home ownership provides another choice between renting and market ownership. For some, like Ilstrup, it is an interim step on the way to a market-rate home. For others, like Stokes, it is simply a home that provides the comfort and security to pursue other life needs.

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Longtime Wayne County Treasurer Wojtowicz to retire

After 39 years, long-time Wayne County Treasurer Raymond Wojtowicz is planning to retire.

A woman who identified herself as Wojtowicz’s wife during a call to his Hamtramck home today confirmed the retirement plans, but she declined to provide any details. Wojtowicz could not be reached for comment.

Former Wayne County Chief Deputy Treasurer David Szymanski, who left his position Sept. 1 as part of a wave of county retirements ahead of benefit changes anticipated under the consent agreement with the state, called his former boss a “humble, God-fearing man,” who eschews the limelight.

He said Wojtowicz, a former mayor of Hamtramck who’s voice and face has become recognizable on radio and TV ads for the treasurer’s auctions, has been committed to helping people in his role and made major changes to the treasurer’s office since he became treasurer in August of 1976.

“He took us from written manuscript ledgers to online auctions and a complete IT system,” Szymanski said. “He took us basically from the Stone Age to the new millennium.”

Wojtowicz’s long service was noted by a number of prominent local leaders.

“Ray is one of those that devoted their life to public service. He has dedicated nearly 40 years to serving the people of Wayne County as our treasurer; and for that commitment he deserves our respect and gratitude. I wish him the best in his retirement,” according to a statement from Wayne County Executive Warren Evans.

“Treasurer Wojtowicz has been a friend for years and a true partner in the city’s efforts to keep families facing foreclosure in their homes. Thanks to his personal commitment and the support of the state Legislature, tens of thousands of Detroiters were able to receive the assistance they needed to avoid foreclosure,” Detroit Mayor Mike Duggan said in a statement from his office.

In 2012, a controversial bonus Wojtowicz legally collected as treasurer became a political issue in Lansing. The bonus was awarded to county treasurers for collecting taxes on behalf of municipalities. Over the years, Wojtowicz collected more than $500,000 in bonus pay alone. In December 2012, Gov. Rick Snyder signed a bill eliminating the bonus.

Szymanski noted that the 86-year-old Wojtowicz was on the committee that penned the county charter, which was adopted by the county commission in 1981.

Selecting a new treasurer would appear to add extra uncertainty to an office already dealing with numerous retirements this fall as well as its largest-ever tax-foreclosure auction.

However, Szymanski would likely be a candidate to replace to Wojtowicz.

Szymanski said that he would “love” to be the next treasurer, a decision that would be made by a committee made up of Chief Probate Judge Freddie Burton Jr., Clerk Cathy Garrett and Prosecutor Kym Worthy.

“Absolutely, I love the staff there so much and what we’ve been able to accomplish there over the last four years,” Szymanski said of his time as the deputy, noting that he would hope to carry on that legacy.

Contact Eric D. Lawrence: Follow him on Twitter: @_ericdlawrence. Staff writer John Wisely contributed to this report.

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Foreclosures down 40 percent from 2014 – Sarasota Herald

The region’s foreclosure activity plunged nearly 40 percent in August over the year, tracking a statewide trend that saw foreclosures dip to their lowest rate in more than eight years, real estate researcher RealtyTrac reported Wednesday.

For the first time since June 2012, Florida’s foreclosure rate did not rank among the top three in the nation, with actions on distressed homes down by 33 percent over the year.

A total of 618 foreclosure filings — default notices, scheduled auctions and bank repossessions — were recorded in Sarasota, Manatee and Charlotte counties in August, or 400 fewer than last year, when lenders were still adjusting to new state regulations about foreclosing on homeowners.

Bank repossessions, known as REOs, increased by 6 percent in the three-county region and by 23 percent statewide over the year, according to RealtyTrac.

“We saw a small increase in REOs into a strong market as positive,” said Mike Pappas, president of the Keyes Co., who follows Florida data. “The market is easily absorbing them at higher prices, and we are cleaning out the remnants from our ponderous judicial system.”

Lenders continue to mop up from the housing crisis, while escalating property values have helped more homeowners avoid foreclosure.

Foreclosure activity nationwide fell 6 percent in August, which followed five straight months of year-over-year increases. Bank repossessions jumped 40 percent over the year.

“Foreclosure starts in August continued to search for a new floor below even pre-recession levels, indicating the housing recovery of the past three years is built on a solid financing foundation,” said Daren Blomquist, vice president at RealtyTrac.

“But the continued rise in bank repossessions indicates more batches of bank-owned homes will be rippling through the housing market over the next three to 12 months as lenders list these properties for sale.,” he said.

In Sarasota, lenders filed 299 foreclosure actions last month, with one in every 764 homes in some stage of the process.

Manatee recorded 195 filings, with one in every 889 homes in foreclosure.

Charlotte lenders filed 124 foreclosures, leaving the county with one in every 812 homes in distress.

On a 12-month, rolling basis — a measure that smooths out monthly swings — foreclosure activity was down by 19 percent in both Sarasota and Manatee and by 7.5 percent in Charlotte.

Lis pendens filings — the first step in the legal foreclosure process — dropped by 32 percent over the year in Southwest Florida, a sign that fewer homeowners are struggling to pay their mortgages.

The Tampa-St. Petersburg region posted the highest foreclosure rate among the nation’s largest metro areas, with one in every 527 homes with a filing in August.

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Le Meridien project in downtown Cleveland hit with foreclosure, receivership …

CLEVELAND, Ohio – A slow-moving downtown hotel project could land in the hands of a new developer or owner, as the result of a foreclosure case affecting one of the last vacant stretches of Euclid Avenue in the center city.

A New York-based lender initiated a foreclosure lawsuit Aug. 31 against the owners of the John Hartness Brown Building, a historic property earmarked as the future home of a Le Meridien hotel. At that lender’s behest, a Cuyahoga County judge recently appointed a receiver – an outside expert – to take control of the property and keep it from losing value as litigation proceeds.

The foreclosure suit adds a new wrinkle to a snarl that involves an out-of-town developer, scattered investors, local boosters and blighted real estate. A group led by Steve Goodman, a California businessman, has been trying to transform the John Hartness Brown Building, at 1001-1021 Euclid Ave., and an adjacent building at 1101 Euclid Ave. into a 206-room hotel with a restaurant and a rooftop lounge.

Goodman’s group has struggled to secure funding and start construction.

A walk through the buildings Wednesday made it clear that asbestos clean-up and some demolition – paid for using public money – are complete. But little else has been done. And Yidi, LLC, which claims it is owed more than $8 million in principal, interest and fees on a defaulted mortgage that dates back to 2006, is unhappy.

Receiver Mark Dottore took over the buildings and changed the locks earlier this month. He believes the Le Meridien still has legs, despite all the delays and the proliferation of new downtown hotels in the years since the project was announced.

“This is gonna work,” said Dottore, who focuses on troubled real estate and businesses from the Dottore Cos. office in the Flats. “All I can tell you is that I want this thing to go. And everybody in the city wants this thing to go.”

Through one of his business partners, Goodman declined to discuss the foreclosure and receivership. Court records show that the developer hasn’t yet filed a response to the foreclosure complaint.

“I’m still working with the development group that has all the different pieces and parts,” Tom Yablonsky, executive director of the nonprofit Historic Gateway Neighborhood Corp. in downtown Cleveland, said Wednesday of Goodman’s team.

Starwood Hotels Resorts, the parent company of the Le Meridien brand and the intended operator of the hotel, didn’t respond to a request for comment. The company’s website still lists the project with an opening date of January 2017.

“The only way this property maintains its value is if there is going to be a development,” said Robert Glickman, an attorney at McCarthy, Lebit, Crystal Liffman, the Cleveland law firm representing the lender.

Yidi, LLC filed its suit, in part, to prevent Ohio from rescinding a valuable tax-credit award for the project. The state awarded historic preservation credits to the building in 2007, when the property belonged to a group led by Eli Mann, a Cleveland Heights investor. The Ohio Development Services Agency has given Goodman’s team several extensions on the credits, which don’t actually flow to a property owner until a redevelopment project is complete.

The most recent grace period ended Sept. 1.

If the state voids the award, worth $11 million, any developer trying to tackle the John Hartness Brown Building would have to reapply and compete against other property owners for a limited pool of credits. Because of changes to the program, the maximum possible award would be $5 million in credits – leaving the Le Meridien with a larger financial gap.

A spokeswoman for the Ohio Development Services Agency said the credits haven’t been pulled. Court records indicate that the award won’t be terminated until after more hearings. The next hearing is scheduled for Sept. 30.

Yidi, LLC bases its foreclosure case on a series of loans that date back to 2006, when the borrowers were companies tied to Mann and his partners. In court records, the lender claims that those mortgages were consolidated and assigned to a company managed by Goodman in 2011. As of Aug. 31, the total balance on that $4.3 million loan was approaching $8.5 million, according to the foreclosure suit.

In legal filings, Yidi, LLC acknowledges that the John Hartness Brown Building is likely to fetch far less than that unpaid debt at a foreclosure sale. The lender, and anyone else with an investment in the project, has far better prospects of being repaid if the tax credits stay in place and a redevelopment happens.

On Sept. 1, Cuyahoga County Common Pleas Judge Brendan Sheehan appointed Dottore as the receiver responsible for figuring out the best path.

“Now I have to complete my deal with the taxing authority to hold onto the tax credits, which I believe I’m well under way to do,” Dottore said this week. “I need to interview some contractors. I need to deal with all these parties and bring them together so that we can move on this.”

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Mass. foreclosure bill clears titles of homes

Photo Courtesy: MGNonline
Photo Courtesy: MGNonline

BOSTON (WWLP) – The State Senate voted 31 to 7 in favor of a bill that would benefit owners of foreclosed properties.

It’s a complicated issue. The proposed legislation would clear the titles of previously foreclosed homes. Many current homeowners are struggling to refinance their mortgages or sell their homes because of the uncertainty of their titles. People who have lost their homes due to illegal foreclosure believe the bill will limit the resources they have to recover.

Longmeadow State Senator Eric Lesser told 22 News he’s seen many homes foreclosed on in the Pioneer Valley. Lesser said, “I’m in support of measures that make sure that banks are accountable for some of the mistreatment and the wrong things that they did related to the foreclosure crisis that we’ve gone through in Springfield.”

The bill now heads to the House of Representatives for their consideration.

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N.J. foreclosure rate again ranks among top in U.S. as repossessions spike

While the number of homes entering the foreclosure process in New Jersey fell in August from a year ago, data released on Thursday shows that overall foreclosure activity still rose in the state because of a big spike in bank repossessions.

The state’s foreclosure rate again ranked near the top in the country last month, according to report from the Irvine, Calif.-based housing firm RealtyTrac. Only Nevada and Maryland posted higher rates in August.

MORE: N.J.’s ‘zombie foreclosure’ rate highest in U.S. 

More than 2,760 properties in New Jersey started the foreclosure process in August, a 38 percent decrease from a year ago. But, meanwhile, nearly 1,800 properties in New Jersey were repossessed by lenders last month. That’s an increase of 295 percent from a year ago, according to the RealtyTrac data.

Overall one in every 539 housing units in New Jersey had a foreclosure filing in August, the third highest rate in the country. New Jersey, which has a judicial foreclosure process, has consistently ranked near or at the top in the country for its foreclosure rate in recent reports.

Among New Jersey’s counties, Cumberland County posted the highest foreclosure rate in August, followed by Atlantic and Sussex counties, the RealtyTrac report shows.

Though foreclosure activity fell 5 percent in August from a year ago in Atlantic City, that region still had the highest foreclosure rate among metro areas with a population of at least 200,000.

One in every 307 housing units in the Atlantic City area had a foreclosure filing in August, according to RealtyTrac. That is nearly four times the U.S. average. 

Trenton posted the second-highest metro foreclosure rate in August, with filings on one in every 384 housing units. 

Erin O’Neill may be reached at Follow her on Twitter @LedgerErin. Find on Facebook.

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No injuries, $30K damage in St. Charles house fire

ST. CHARLES – An early-morning fire damaged an unoccupied home at 1549 Independence Ave. in St. Charles on Wednesday, according to a news release issued by the St. Charles Fire Department. There were no injuries.

Firefighters stated the blaze was discovered by a neighbor who called 911. The loss was estimated at $30,000 to the structure.

At 12:37 a.m. Wednesday, the fire department responded to a report of a fire at the building. They were on the scene by 12:42 a.m. and found smoke showing from the garage of the home, the release states.

Firefighters were able to stop the fire before it entered the rest of the house. According to the release, the property was subject to foreclosure proceedings, and nobody was inside.

Firefighters stated they were able to have the fire extinguished in about 20 minutes, but they remained on the scene to conduct an investigation and perform salvage and overhaul operations.

The cause of the fire is under investigation, the release stated. Firefighters stated that the building is not habitable.

The St. Charles Fire Department reported it was assisted by the Geneva, Batavia, and West Chicago fire departments.

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