Ending Foreclosure Profiteering
During the real estate bubble, older urban neighborhoods across the nation, from Atlanta to Baltimore to Cleveland to Sacramento and countless communities in between fell victim to a devastating plague of predatory lending and mortgage fraud.
This was enabled by Wall Street’s bottomless appetite for financing home loans, lenders’ lax standards, and corruption among mortgage brokers and appraisers. Brokers set up borrowers with subprime mortgages knowing they were too big to pay, while organized mortgage fraud rings convinced lenders to issue mortgages for far more than homes were worth, pocketed the proceeds, and left boarded-up foreclosed houses behind.
But the bursting bubble has not brought relief to suffering neighborhoods. On the contrary, communities already hard-hit by mortgage fraud and subprime foreclosures are now enduring the next wave of profiteering: the selling of vacant and foreclosed real estate to speculators.
A few of the purchasers are doing a service by fixing foreclosures up and renting them out. But far too often the foreclosed homes stay vacant and derelict as they’re flipped from one buyer to another.
In areas with bottomed-out real estate markets, prospectors see an opportunity to profit from devastation. Houses are being re-sold at tremendous mark-ups -- sometimes upward of 1,000 percent -- under “rent-to-own” contracts, whose holders bear the responsibilities of homeownership but few of the rights. These foreclosed houses are purchased in bulk, sight unseen, by investment companies far away from the community.
The companies selling the foreclosed real estate are the middle men known as mortgage servicers. During the real estate bubble, investment banks bundled mortgages into securities. Servicers work on behalf of investors in those securities, collecting monthly payments from borrowers and distributing the proceeds. But when payments stop coming, servicers move to foreclose – and once the property is vacant, they decide what happens next. Most move to sell it off as quickly as possible, rather than spend substantial sums on upkeep -- and on advancing those monthly payments.
In hard-hit foreclosure zones across the nation, servicers have so much real estate to dispose of that they auction it in bulk for as little as a few thousand dollars a property. These fire-sale prices too often attract buyers who exhibit little concern for neighbors or neighborhoods. One foreclosed house in Atlanta burned down last year, but that didn’t stop a Florida servicer, from selling its scorched remains to a Utah speculator for $1,000.
This transaction is far from an exception. All over the country, servicers are dumping property that is uninhabitable and a hazard to neighbors.
As such wreckage accumulates so do crime, garbage dumping, and other ills that push high-foreclosure neighborhoods into downward spirals. Residents have no idea where to turn for help. Servicers operate in the shadows: their names are not searchable in public records, and once they sell a property their obligations for its upkeep ends. Their only responsibility is to maximize profits for investors in the mortgage-backed securities. As long as foreclosed properties fetch the best possible price at auction those investors are satisfied, however dire the outcome for neighborhoods.
Mortgage servicers must now step up and exercise responsibility to communities. The eight biggest servicers are divisions of financial institutions — Bank of America, Chase, Wells Fargo, Citigroup, GMAC, PNC, SunTrust, and U.S. Bancorp — that have received billions in federal bailout funds. Two others, American Home Mortgage Servicing and Ocwen, receive aid from the Federal Reserve. Four additional entities that sell foreclosed real estate — Fannie and Freddie, the FDIC and the Federal Housing Administration — are run directly by the federal government. All of these institutions receiving federal support should be required to dispose of foreclosed homes in a way that stabilizes battered neighborhoods.
One model is the nonprofit National Community Stabilization Trust, which works with servicers to offer vacant homes for sale to nonprofit organizations and other developers with track records in neighborhood revitalization. That voluntary effort should become mandatory for servicers benefiting from federal aid. A program governing responsible sales of foreclosures, as part of neighborhood recovery plans will make it possible for mortgage servicers to do the right thing for neighborhoods.
Local courts also have a role to play. Judges can follow the model set in Cleveland, where Hon. Ray Pianka ordered Wells Fargo to bring foreclosed houses into compliance with housing codes before selling them.
Mortgage servicers are in an unenviable position, stuck with the expensive mess bankers left behind. But the fate of fragile communities is in their hands. Government at the federal and local level must now require them to help neighborhoods recover from the foreclosure catastrophe.
Copyright (C) 2009 by the American Forum. 9/09