According to USA Today, the Halloween bash at the six-bedroom mansion was a huge success, drawing 1,000 people. It ended only when traffic gridlock got so bad police had to be called.

But the party wasn’t an isolated event. Similar unauthorized parties are taking in place in other cities with vacant homes — evidence of how the problem of empty and foreclosed homes are causing neighborhood blight and other problems. Although some places, like the Phoenix metro area, are showing some signs of progress in dealing with vacancies, there’s been no widespread solution.

As a result, for some neighbors, falling property values from empty homes aren’t the only issue they have to deal with:

In San Diego County, young people have taken over foreclosed houses for late-night rave parties, says Detective Jeff Lauhon of the San Diego County Sheriff’s Office. Lauhon says the culprits were well-organized in some instances: A young couple would get a realtor to give them a tour of a foreclosed house — usually in a rural area on a large property. The woman would distract the realtor while the man surreptitiously left a window open or door ajar. They would then return and invite others for parties that lasted until the wee hours.

At least they’re not pushing dump trucks out of windows.

A party is a temporary way to fill a house, of course. For many cities, the long-term problem of vacant and abandoned foreclosed homes remains a crisis.

As we reported last week, Fannie Mae has a new program to allow owners of foreclosed homes to stay in their properties and rent them back for as long as a year. But filling foreclosed homes with former owners-turned-tenants is also beginning to take hold, on its own, in some of the Sunbelt states that have been hit hardest by the foreclosure crisis, according to Alan Mallach, a visiting scholar with the National Housing Institute and the Brookings Institution.

Mallach told TWI last week that investors increasingly are buying up bank-owned foreclosed homes in the Phoenix area, then renting them back to their former owners. The strategy is to allow the rental for at least five years or so, by which time the investor probably can sell the house again at a profit, while the borrower has a chance to improve his credit. And the best part: Some investors say their plan is to offer the house for sale first to the former owner.

Everybody wins, and if the idea spreads, it may be one way to address the vacancy problem.

Until then, there’s not a lot else out there to clear the backlog of bank-owned homes sitting empty in many neighborhoods.

So in the meantime, unauthorized parties will just have to do.

A foreclosed home in Winchester, Va. (Jay Mallin/ZUMA Press)

Mortgage giant Fannie Mae’s recent announcement that it will give homeowners facing foreclosure the chance to stay in their properties as renters for as long as a year is the latest aggressive move by the government to help troubled borrowers and tenants avoid being evicted. But as past efforts to stem the foreclosure crisis have already shown, even well-intentioned programs haven’t managed to reach significant numbers of people in peril – meaning any new approach faces a tough road ahead.

Image by: Matt Mahurin

The problem has been particularly widespread surrounding a provision in the law, called the Helping Families Save their Homes Act, that allows for borrowers with Section 8 affordable housing vouchers the option to also stay in their residences when their landlord is in foreclosure. Some tenants who call their state or local housing authorities in Massachusetts and Connecticut after a foreclosure eviction notice are mistakenly told they have to move, noted Judith Liben, a senior housing attorney with the Massachusetts Law Reform Institute, a nonprofit legal services advocacy group. Better training of housing authority staff would help fix the situation, she said.

“Even with well-intentioned policies, there’s a disconnect between a good idea put into law, and what really happens on the street,” Liben said. “We see that disconnect on the ground, all the time.”

Despite anti-foreclosure initiatives by the government and lenders, the housing crisis has continued to worsen. Foreclosure notices totaled a record high of nearly 938,000 in just the third quarter of this year, according to RealtyTrac, an online foreclosure database. The Center for Responsible Lending predicts a total of 9 million foreclosures by 2012. Vacant and abandoned foreclosed properties are adding to neighborhood blight problems. Renters increasingly have become caught as innocent bystanders, evicted often without notice when their landlord faces foreclosure.

The new federal protections are supposed to address that. But in some cases, tenants in foreclosed homes either can’t reach real estate agents in charge of selling the properties to let them know they want to continue renting, or they get incorrect information from agents and think their only option is to move out immediately, said Shelley White, litigation director at New Haven Legal Assistance in Connecticut. In some instances, law firms send misleading letters that imply a financial incentive to move, known as cash for keys, is a renters’ only option, she said.

“We’re definitely seeing a lot of problems with tenants that just get notes from Realtors that say the bank has foreclosed on your property, and it’s time to get out,” Wright said.

The difficulties in outreach to tenants comes as the government continues expanding options and assistance to borrowers and renters dealing with foreclosure. In addition to the new federal law, the Treasury Department plans soon to rollout its plan encouraging more short sales by offering financial incentives to lenders and borrowers. In a short sale, a homeowner sells his home for less than the amount owed on the mortgage, and lenders forgive the remaining loan balance.

Both Fannie and Freddie Mac earlier this year began allowing qualified tenants in foreclosed homes under their control to sign month-to-month leases. Freddie Mac also started offering former owners of foreclosed homes the month-to-month lease option. Last week, Fannie announced its new policy, which significantly expands on the idea, allowing some owners who didn’t qualify for a loan modification and can’t afford their mortgage  the option of staying on in their homes. The owner would voluntarily turn over the property to Fannie in a “deed for lease” transaction, instead of going through a lengthy foreclosure process. The former owners in exchange would be given the option to rent back their homes for at least a year. Unlike in a short sale, their credit is unlikely to take a hit because of the transaction. And even investors may be eligible, meaning they would turn over their properties to Fannie, but their tenants would have the option to remain.

“This is huge,” said Dean Baker, co-director of the Center for Economic and Policy Research, who proposed a similar own to rent idea when the financial crisis first hit two years ago.

Baker would prefer that Fannie’s new policy extend the the rent-back period even further, to five or 10 years. But, overall, Baker said Fannie’s program addresses the problem of growing numbers of vacant properties, and represents a shift to promoting rental policies as a foreclosure solution. “You’re guaranteed a year, and that gives you some stability and a chance to plan ahead,” he said.

He and others also described Fannie’s new program as a big step forward over some efforts currently in place to help renters in foreclosed homes.

Fannie Mae, for example, already gives renters in foreclosed homes the option to continue renting on a month-to-month basis, or to accept a cash for keys offer. According to Fannie’s data, the financial help has been a far more popular option. Since January, it has tallied 3,500 cash for keys agreements, and 300 signed leases. Fannie Mae spokesperson Amy Bonitatibus said the program was set up to offer both choices to renters. It is open to all tenants of Fannie Mae-owned properties, but she had no information on specifically how many tenants had been approached with offers.

The small number of leases signed isn’t really surprising, said Danilo Pelletiere, research director for the National Low Income Housing Coalition. The options to renters were offered post-foreclosure, by which time some tenants may have decided to make other living arrangements. Cash for keys can be a more attractive option than a month to month lease. The new federal tenant protection law also overlapped with Fannie’s program, so some tenants may not have felt a need to sign leases, he said.

Pelletiere and other advocates said they have much higher expectations for Fannie’s new approach for former owners. A deed for lease transaction can happen far more quickly than a foreclosure, and having a longer-term lease will be more attractive to many people. Fannie also has hired a national property management company to handle the new program, while its existing rental initiative for tenants uses local real estate agents and property managers.

“Because of the way it’s designed, it should do a much better job,” Pelletiere said. “That makes it much more likely that we’ll see a national response. It provides a way for Fannie to be proactive and to get to the property earlier. And it costs less than getting someone out of a home and foreclosing on them.”

Alan Mallach, a senior fellow at the National Housing Institute and the Brookings Institution, agreed. “What’s interesting will be to look at how many people this new policy affects,” Mallach said. “I think it will be significant.”

Pelletiere said he also found some encouragement in early results from Freddie Mac’s program earlier this year to rent back properties to former owners of foreclosed homes on a month by month basis. According to Freddie Mac’s figures, almost 12,000 units entered its portfolio of foreclosed homes between April and October. In 70 percent of cases, a borrower is working on a mortgage loan modification, leasing the home back, or accepting cash for keys. In another 27 percent of cases, the property was vacant by the time Freddie Mac took it over. In three to four percent of cases, an owner or renter faced eviction. Of those occupants who signed leases, two-thirds were owner occupants and one-third were tenants. Spokesman Brad German said he had no further breakdown of the numbers.

The long-held belief has been that owners would decline to become renters again, so having more owners than renters sign rental leases is an encouraging sign for Fannie’s new program, Pelletiere said.

Still, he and others noted the government wouldn’t be prompted to move toward a more aggressive rental policy if a greater number of loan modifications were successful. A recent report by the Congressional Oversight Panel for the government’s taxpayer-funded bailout program criticized the progress being made under the administration’s Making Home Affordable program, saying that in a best case scenario it would prevent fewer than half of expected foreclosures.

As foreclosure notices pile up, troubled tenants and borrowers don’t always understand they might be eligible for help, or they don’t know who to contact to apply for programs, or they just give up and leave upon a foreclosure – even in cases where they have new federal laws and programs intended to avoid evictions. To Liben, the Massachusetts housing attorney, one constant of the housing crisis has been that some people “get lost in the shuffle.” She’s waiting to see if that will finally change.

Detroit has 80,000 abandoned lots and buildings, according to the city’s planning department. Old housing projects, homes, strip malls and even high-rise buildings sit empty across much of the city. Motown has more vacant office, retail and industrial space than nearly every other big city in the country.

Like many of Detroit’s abandoned buildings, though, it’s anything but deserted. Rather, it’s a hive of activity, buzzing with scavengers, vandals, late-night revelers, arsonists, photographers and urban explorers who brave the crumbling buildings’ many hazards and create a good number of their own. The complex remains unguarded.

“Mayhem. That’s what they should call the place,” says John, a 36-year-old telephone-line repairman who spends his spare time exploring Detroit’s legendary industrial ruins. “If you decide you want to push a dump truck out of a window, this is the place to do it.”

There’s more to this. The pranksters’ playground of empty and abandoned properties represents a deep and lasting betrayal of the needs of urban America.  Some cities in the Rustbelt, hit first by the abandonment of their inner cores and then utterly devastated by foreclosures, bear scars from which they are unlikely to recover and that few seem to see. Years after the financial crisis ends, I wonder if we’ll look back at this as a time when we stood by and let some of the country’s once-great communities simply fall into disrepair and die.

In Washington, Congress ceded to the lobbying efforts of powerful interests like the National Association of Homebuilders, and passed an extension of a homebuyer’s tax credit that costs more than it delivers and puts money into the pockets of people who don’t need it. There are no lobbying groups for people who live in neighborhoods with foreclosures that even banks have abandoned because they aren’t worth the expense of taking back.

However, there are some bright spots in the overall dark landscape. As TWI’s sister site, The Michigan Messenger, pointed out last week, urban gardening has taken hold in parts of Detroit, which now boasts more than 700 urban farms within its city limits. The idea behind some of those farms is to present a healthy alternative to the liquor stores, gas stations, and convenience stores where residents often turn for high-cost groceries and fast food.

Like urban gardening, the best solutions to the abandonment crisis will come from the bottom up. But those efforts need government support to take hold and expand. In order to take off, any possible solution requires a sense of urgency among policymakers about the huge problems facing cities like Detroit, Cleveland, Chicago — and even the outer exurbs in the boom markets of California and Arizona, where foreclosures have caused property values to sink and have left communities stuck in a downward spiral.

But there’s  been no big national push for possible solutions like land banks, which would allow local communities to seize and reuse vacant land and buildings. There’s been no national summit to talk about the tragedy of declining neighborhoods due to foreclosures. Treasury Secretary Timothy Geithner apparently picks up the phone and chats with his Wall Street friends several times a day. Hey, Secretary Geithner — How about making a call to a homeowner surrounded by foreclosed homes? Or maybe taking a stroll down one of those blocks in Detroit where every single home is owned by a real estate speculator? In America’s abandoned neighborhoods, they’ve been waiting to hear from you, or from anyone in Washington, for a long time. And they’re still waiting.

The 1977 Community Reinvestment Act was intended to end redlining, a practice in which banks in effect walled off many inner-city neighborhoods from mortgage loans. But some GOP lawmakers say it has outlived its purpose and is being used inappropriately by ACORN to shake down banks for money. They want to repeal the law, scale it back or at least block a Democratic proposal to expand it.

Critics of the law are linking it to ACORN — a subject many Democrats wish would go away — at every opportunity.

This is just silly. The idea that the CRA is to blame for the subprime mess is nothing more than an urban myth, picked up and repeated by people in power who should know better. We’ve said this many times before, but let’s repeat it again, for all those lawmakers who continue to cling to the idea of the CRA as an easy target: The overwhelming majority of subprime loans made during the housing crisis came from unregulated lenders not covered by the CRA.

And although CRA opponents portray it as a burdensome regulation that forced banks into making bad loans to poor people, the mortgage industry never looked at the CRA that way. Guy Cecala, publisher of Inside Mortgage Finance, which covers the subprime industry, told us last year the CRA was seen as a loose regulation that caused little concern.

Banks were routinely found in compliance with the CRA, and an insider joke among bankers was that you’d have to mug a disabled, elderly, minority homeowner to lose your outstanding CRA rating, Cecala said.

Beyond that, as the housing boom grew, so did the number of unregulated mortgage lenders, who made the bulk of subprime loans and who didn’t even have to comply with CRA rules, said John Taylor, president of the National Community Reinvestment Coalition, which represents housing and community development groups. Some 75 percent of subprime loans were made by independent mortgage banks and lenders not covered by the CRA, he said.

The blame-the-CRA movement has grown into a debate almost entirely divorced from the facts. Throwing ACORN and its troubles into the mix only makes that situation worse. A robust, informed discussion on homeownership and low-income borrowers would be welcome. The CRA/ACORN dustup is just the opposite, an exercise in ignorance and headlines that adds nothing to the worthy investigation of America’s housing policies and prudent financial regulation.

But, alas, the state protections were overruled by the Office of the Comptroller of the Currency, which gave national banks a pass and said they didn’t have to comply with those laws. And guess what happened next.

States that adopted tough anti-predatory lending laws had lower foreclosure rates than states without those laws, according to a new study conducted by the UNC Center for Community Capital.

In addition, after 2004, when the federal government exempted national banks from state anti-predatory lending laws, national banks increased their subprime lending the most in states with those laws. After this loophole opened in 2004, national banks made riskier loans, especially in states where other lenders remained subject to strict anti-predatory lending laws.

These conclusions suggest that when state laws did apply, the laws did a better job of promoting quality lending.

This study is a perfect reminder, as Congress and the administration tackle financial regulatory reform, that not all regulations are onerous, anti-business, and aimed at choking off financial innovation. And it’s more evidence that borrowers buying beyond their means weren’t the only only players in the subprime mess.

The same banks that found their way around these state anti-predatory laws are the ones getting government bailouts, and financial incentives to modify loans. And bonuses for top employees. The  study is an important reminder of their motives and behaviors during the housing boom, at a time when those same banks are lobbying against new reforms.

As Clusterstock noted, the fall of Enron occurred back in 2001 — but it’s still making news.

If Enron is any indication, we’ll be hearing about the collapsed businesses of the financial crisis for years to come.  The Enron bankruptcy seems like eons ago, but the fallout never ends.

Maybe. But where’s the legal fallout from the current financial crisis?

As we mentioned on Monday, save for Bernard Madoff, there haven’t been any high-profile prosecutions over the subprime mortgage market mess. Wouldn’t backdating financial reports to mask a bank’s failing situation, as apparently was the case with IndyMac, qualify as criminal? Enron failed after all the accounting tricks it used for years couldn’t hide its real situation anymore. Courts have found the actions of its top executives worthy of jail terms. When will we hear about bankers going to jail?

Enron’s bankruptcy should be small change, compared to a global financial crisis. Let’s see how far the fallout goes, this time around.

First some background: The vanilla option means a consumer gets presented with the most basic financial product first, then can choose to add on or buy into something more complex. With the vanilla option, a borrower would first be offered a standard, 30-year fixed loan. If the borrower wanted something more exotic, like an adjustable rate mortgage with a balloon payment, he or she would deliberately choose to go that route. The idea is to avoid all the confusion that surrounds some financial products, from add-on insurance on credit cards and checking accounts to mortgages so complicated the borrower isn’t entirely sure of the terms of his own loan.

From Rortybomb:

I was at a dinner party with some friends a few weeks ago, and the topic of credit cards came up. One friend talked about how she had just realized she had been paying for “credit card insurance.” What is that? If she died, her balance would be paid off. She is a 24 year old law student, who doesn’t carry a balance and has no dependents – it didn’t seem like it was a great value for her. She had to jump through some paperwork to get it turned off, and ultimately did, but for a few months there her credit card company was earning fees off something their customers didn’t want.

The funny and sad part is that we all had these stories (what are yours?). I had “unemployment insurance” on my checking account, where I’d get like two months salary if I was laid off – or something, the terms seemed so off for what I wanted (I was 22), I also shut it off after a few months of paying fees for it. The table was a collection of very well educated people who work in new economy jobs and lead upper-middle class with no families, so we could chuckle at the fact that the companies that provide us financial services were able to “get us” for maybe a couple hundred bucks, and felt a pang of sadness and guilt about what that difference would mean if we lived paycheck to paycheck. The question we asked ourselves was, what do you do about it?

The answer is obvious: you create a baseline, a vanilla option, and then let consumers decide what extra options they want to have in addition to it. Credit card insurance and unemployment insurance is probably valuable for someone, and that person would be excited to pay extra fees to have it. As Daniel Davies famously said, good ideas do not need lots of lies told about them in order to gain public acceptance. A corollary for innovation would be that you shouldn’t need to trick people into signing up for something that is genuinely innovative. Nobody was tricked into the internet.

Despite that obvious answer, the vanilla option seems to have bitten the dust – and it really didn’t have to end this way:

I don’t think it was ever explained very well by anyone in the administration, and perhaps I should have done a better job trying to explain how it is less adversarial than it looked on first examination. It is adversarial to the current way things are done, with massive profits coming from providing services consumers don’t want; and it is my fear that those profits contribute so much to the “safety and soundness” of large banks, the Fed’s first responsibility, that the Fed will have zero interest in breaking this terrible equilibrium financial services have gotten themselves into.

R.I.P., vanilla option. One more win for the banks, and another defeat for consumers.

Be sure to check the fine print on all your credit card and banking statements. No one else will be looking out for you.

The bank has denied all the charges, and has said it will strongly fight the lawsuits.

There’s a lot for the bank to answer to. Here’s a bit more from the suit by Illinois Attorney General Lisa Madigan, regarding the bank’s marketing tactics:

As part of Wells Fargo Home Mortgage’s marketing plan, Wells Fargo Home Mortgage utilized a computer function that purportedly permitted employees to customize Wells Fargo marketing materials to target African Americans by choosing “African American” in a pull down menu of “language” options.

If that’s true, it’s certainly a creative use of language options by the Wells’ marketing people.

And the end result of all these efforts, according to Madigan?

The lawsuit also follows a recent Chicago Reporter analysis of mortgage data submitted by Wells Fargo to the federal government. That study found that, in 2007, Wells Fargo sold high-cost, subprime loans more often to its highest-earning African-American borrowers in Chicago than to its lowest-earning white borrowers. According to the study, in 2007, about 34 percent of African Americans earning $120,000 or more received high cost mortgages from Wells Fargo in the Chicago metro area, while less than 22 percent of white borrowers earning less than $40,000 received high-cost mortgages from the lender.

So … a black borrower making more than $100,000 could be more likely than a white borrower earning, say, $35,000 to get a subprime loan? No wonder the lawsuits against Wells are flying.

The point about the suit in Illinois, and a similar suit filed by the city of Baltimore against Wells, is that all these subprime loans took a huge toll on minority neighborhoods, and devastated the cities themselves. These are dramatic, even unprecedented charges — that a major U.S. lender, a recipient of $25 billion in government  bailout money, caused lasting damage to some major American cities by deliberately targeting minority neighborhoods for risky high-cost loans. The cities are suing Wells to recover money to fix the mess that remains in neighborhoods wrecked by foreclosures.

Now Smiley has distanced himself from Wells, and teaming up with the bank for “Wealth Building” seminars won’t be on his agenda again.

But what about the rest of it? If the bank’s lending practices were fair and beyond reproach, as the bank maintains, then what happened? Why are black and Hispanic communities in some cities crumbling under the weight of so many subprime foreclosures?

Smiley may have left the stage. But that still hasn’t answered all the questions regarding Wells Fargo, subprime loans and the broken neighborhoods left behind.

Homeowners who were hoping for lower payments are discovering to their dismay that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That is one reason that many reworked mortgages are sliding back into default.

Yep. There’s a big difference between writing down the loan balance on a house, and merely setting up an “extend and pretend” repayment plan. If you can’t afford the house now, you’re probably not going to be able to afford it later, especially with all the new fees added on.

The problem is the same one that has plagued loan modifications from the start: Lenders don’t want to write down loan balances. There’s no cramdown provision in bankruptcy court to force them to do so, thanks to opposition in Congress and inaction by the Obama administration.

Yet, as loan modifications fail to stem the foreclosure crisis, the government continues to offer financial incentives to servicers and calls them to Washington occasionally to give them a hard time about not doing more loan mods.

And in the end, here’s what we’re left with, according to USA Today:

“Payments have gone up …. (and) the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind. He has studied the subprime mortgage situation for 10 years. “(The lenders) focus on today and not on the future.” Even under the Obama plan, they don’t focus on permanent debt reduction, White says.

The majority of borrowers who’ve gotten mortgage modifications have seen their overall principal balance go up, according to an analysis by CreditSights and ICP of about 660,000 mortgages modified this year. In about 90% of the modifications, the principal balance after a modification was larger, CreditSights said.

If you’ve ever wondered why the foreclosure crisis doesn’t seem to be easing, despite the government’s vow to help homeowners, loan mods that actually increase a borrower’s monthly payment are an obvious reason why.

But what I really liked about her piece — in addition to taking on a subject few have paid attention to during the crisis — is her description of a new subprime documentary, set in Baltimore.

In a new documentary film about the subprime crisis, “American Casino,” solid black citizens — a high school social studies teacher, a psychotherapist, a minister — relate how they lost their homes when their monthly mortgage payments exploded. Watching the parts of the film set in Baltimore is a little like watching the TV series “The Wire,” except that the bad guys don’t live in the projects; they hover over computer screens on Wall Street.

As TWI noted last week, lawsuits over racial discrimination in subprime lending are winding their way through the court system. Some of the allegations are nothing short of shocking; in one suit recently classified as a class action case, Wells Fargo is accused of using loan software with discounts on rates and fees in white communities, but forbidding loan officers in minority communities from access to it.

Wells Fargo has strongly denied these and other charges. But Ehrenreich’s report is further evidence that the conversation over the racial implications of subprime lending is shifting. It’s no longer just about blaming poor and minority borrowers for the crisis. Instead, the focus is turning to questions about the the morality of lenders, who discovered a gold mine in selling high-rate mortgages to minority communities, and took full advantage of it.