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Communities Stung by Fannie Mae Sales to Speculators

Image has not been found. URL: /wp-content/uploads/2008/09/temp_house1.jpgPhoto Credit: W. Marsh, Flickr CC

of ‘TOXIC ’

As the subprime crisis spreads, solutions seem to be in short supply.

Given the enormity of the problem – the mortgage crisis ranks right up there with the savings and loan debacle of the 1980s, when hundreds of thrifts failed because of high-risk real estate investments – some wonder why the response isn’t in any way proportional. No one in Washington seems to be talking about creating an entity like the Resolution Trust Corp., which Congress set up to seize failed S&L’s, noted Barry Zigas, a housing consultant and former head of the National Low Income Housing Institute. There’s no enthusiasm, in fact, for any kind of national effort to help deal with the foreclosed or abandoned properties, he said. Most of the focus so far has been on freezing adjustable rate mortgages.

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Illustration by: Matt Mahurin

“Why aren’t big institutions and Congress coming up with bigger kinds of solutions for this?” Zigas asked. “You’d think it would be in their self-interest and for the good of the communities where these properties are located.”

It would also preserve the gains made in those communities during the last 35 years. Neighborhood groups, corporations and governments poured in money and effort to revitalize urban communities, not just in the Midwest, but in places like Newark, N.J. They counseled people to prepare them for home ownership and rehabbed properties. In the 1990s, Cleveland enjoyed a comeback; later, Newark neighborhoods did as well. But one or two foreclosures on a block can lower property values for all and trigger a downward spiral, challenging the fragile improvement in places like Indianapolis, Pittsburgh, and Birmingham, Ala.

“Thanks to irresponsible lending, outright fraud, and avaricious real estate players, much of this progress is now threatened,” Zigas wrote on his housing blog.

Rokakis is pushing the idea of a land bank, a nonprofit entity that could purchase and manage foreclosed properties. But since it requires legislative approval, it’s not a tool he can use right now. With no support from Washington, the task of cleaning up the “trash” falls on nonprofit groups, municipal housing court judges, county treasurers and tax collectors. And they say they’re not even getting help from places where they might have expected it.

Most local officials in Cleveland reserve much of their ire for Fannie Mae, the government-sponsored enterprise that provides mortgage money. Fannie Mae delved into the subprime market and got stung by delinquencies. It also wants foreclosed properties off its books.

Neighborhood groups complain, however, that Fannie Mae, more so than other lenders, aggressively sells off its properties to out of town speculators. They expect more of Fannie Mae because its mission is to encourage home ownership. But it refuses to deal or bargain with community groups trying to reclaim properties, said Mark Seifert, executive director of the East Side Organizing Project. He and others cited a case involving a property Fannie would not sell to a nonprofit; it wound up with a speculator who walked away, leaving a toxic title.

The Fannie Mae manager of foreclosed properties in Cleveland is based in Texas and wasn’t available for comment, a spokesperson said.

In cities with soft markets, speculators tend to pull lease-purchase scams. They buy a house for $2,000 or $3,000, slap on a coat of paint, charge a tenant several hundred dollars extra each month that should go toward a downpayment to buy the house, and then take off with the money, Seifert explained. Or they just let the property sit to see if someone else will pay more for it, and if not, they leave it to be seized for taxes.

The city’s housing court can, and does, go after speculators and banks for housing code violations on foreclosed properties, but it can’t do much to the mortgage holder about a walkway, even when taxes go unpaid, since the issue of ownership remains in question.

Housing Court Judge Ray Pianka recalls once hauling a family of five in for code violations. They had left their home three years earlier, thinking it was taken by the bank.

“I don’t understand why lenders are in such a hurry to get people out,’‘said Pianka, who deals with walkway cases all day long and sees foreclosures in his own neighborhood, “and then they let the property sit there. It’s happening everywhere, in rural areas, and all around the country.

“It’s a calamity.”

In Washtenaw County in eastern Michigan, home to Ann Arbor and Ypsilanti, foreclosures dot suburban subdivisions, not urban neighborhoods. But even here, where foreclosures are announced by publication in the local legal newspaper, lenders aren’t always following through, said Treasurer Catherine McClary. Properties are just beginning to get trashed. “Banks and lenders are so large one hand doesn’t know what the other is doing,” she said. Her office advises people not to rush the process of leaving their homes.

In Cleveland, Tanya Wims received a foreclosure notice from Deutsche Bank on a two-family income property she’d purchased on the city’s East Side. So she moved her tenants out, and wrote off her experience to overpaying for a property with an inflated appraisal.

To her surprise, Within weeks she was notified by the housing court that she needed to address code violations on the property. But as her painters got to work, she said, a property management company showed up, telling her the mortgage company, which was intending to foreclose, hired them. They told her to leave the property. So she did.

But the house just sits there. The bank still hasn’t foreclosed. In the meantime, the house is now only a shell, she said.

“If I thought they weren’t going to foreclose I would have hired a property management company,” said Wims, 47. She’s been a title examiner for 30 years and “personally, I’ve never seen anything like this.”

The Maynard house is gone, but for another walkway, on the city’s East Side, there might be a happier ending. Housing court officials say the mortgage servicer is working with a neighborhood group to clear the lien and donate the property, once owned by an elderly, deaf man who has since moved out.

It’s the only tactic that’s working so far, a house-by-house effort, and it isn’t enough to solve the problem. But as so often happens, ingenuity comes from the grass-roots level. Consider that homeless advocates have noted fewer people on the street as winter set in. Turns out, they’re staying in foreclosed and abandoned homes to keep warm.

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