‘Toxic Titles’ Haunt Cities in Mortgage Meltdown
Image has not been found. URL: /wp-content/uploads/2008/09/temp_house2.jpgPhoto Credit: Jo Guldi, Flickr CC
It was a small, shotgun-style, wooden frame house in a modest neighborhood on Cleveland’s East Side. It was home to the Maynards, a family with six children and their grandmother, for just a few years before health problems and job loss forced them to live on disability payments and $8,000-a-year part-time income. They couldn’t afford the high-rate subprime loan they used to buy the house. The mortgage holder sent a foreclosure notice and forced them out.
Illustration by: Matt Mahurin
“The Maynards fell behind and were unable to get caught up, no matter what they tried,” Cleveland Housing Court files show. “The bank ordered them out of the property, insisting they had no rights to be there.” So they moved away, to rural Ohio. The house sat empty, and vandals almost immediately ransacked it—smashing the walls, ripping out wiring or copper pipes, breaking the windows, taking the furnace.
But the mortgage holder in question, Select Portfolio Servicing, had never gone through with the foreclosure. Instead, it just walked away, according to Cleveland Housing Court files.
With no one living in the home and no one taking care of it, the house soon fell into disrepair. It sat vacant—for almost five years. The city tore it down in November of last year.
Now it’s just another empty lot in a part of the country facing the abandonment of an unprecedented volume of properties by banks, mortgage companies, servicers and speculators. If you think things turned messy in the financial world of Wall Street as defaults on subprime mortgage loans spiked and investors fled the market for them, the Maynard house – or what’s left of it – represents the brick and mortar reality of the pain on Main Street.
Turns out the aftermath in cities and neighborhoods stuck with properties that Wall Street no longer wants is just as devastating as the meltdown investors and banks experienced to their bottom lines.
Banks and investors are still struggling to recover from the collapse of the subprime housing market, once the fastest-growing segment of the mortgage industry. Yesterday, Citigroup announced it lost a record $9.83 billion in the fourth quarter of last year, due to subprime mortgage-related problems and other bad loans.
Subprime lending involved high-rate mortgages made to borrowers with weak credit, and included products like mortgages with low teaser adjustable rates that soon reset to higher rates, loans for more than the value of the house, and loans with no documentation required for income or assets. Investors fueled the boom by buying securities backed by these mortgages, which carried higher returns.
But a combination of falling home prices, fraud and lax underwriting caused the subprime market to implode beginning last spring, as borrowers began defaulting on loans. Investors and lenders have little use for many of the foreclosed homes left behind. Cleveland recently sued 21 major investment banks involved in subprime lending, seeking to recover money the city has had to spend cleaning up properties.
“They’re just dumping their trash in the Midwest,” said Kermit Lind, a Cleveland law professor who specializes in housing cases.
That trash includes the walkaways, like the Maynard home. A mortgage holder usually walks away from a property when it decides the house has such little value that it’s not worth the money and effort required to keep it in good shape or even to foreclose on it—a common occurrence in neighborhoods already scarred by foreclosures. The borrower is gone, however, often unaware the house hasn’t been taken, Lind said. A property might sit vacant for months or even years, an easy target for vandals who strip it of plumbing fixtures, wiring, copper, or anything else of value.
Walkaways wind up with “toxic titles,’’ Lind says. The mortgage company retains a lien, or a charge, on the house, but the borrower still is considered the owner. The property sits in limbo, with the mortgage usually exceeding what it would sell for, because of its decline. If the city has to tear it down, it adds its own $8,000 to $10,000 demolition lien. Not surprisingly, potential buyers aren’t exactly lining up. Non-profit neighborhood groups that could fix up the property face long and expensive legal battles to claim it.
Even cases that aren’t walkaways add to the problem. Take 4111 Archwood, a house on the street where Cleveland blogger Bill Callahan lives. Curious about its ownership, he looked it up to find that, well, no one really owns it. Most subprime mortgages were transferred or packaged and sold to investors as securities. So just because a bank’s name might appear as the owner in official records, the actual loan owners may be someone else, like a group of unnamed investors, and they didn’t issue the loan to begin with. Some federal judges have held up foreclosures because it’s not clear who’s in charge. As Callahan pointed out, there are more than 900 other properties like the Archwood house in the Cleveland area. If you’ve got a foreclosed home on your block, good luck tracking down the out-of-town investor responsible for it
This all adds up to one big mess in Cleveland and in other parts of the Midwest, which have soft housing markets and lots of subprime loans gone bad. Ohio, Michigan, Indiana and Illinois ranked in the top 10 states for foreclosure filings in November, and they led most of the most of the country in 2006 as well. This region has been hit especially hard because home prices didn’t appreciate as much as on the East and West Coasts.
Cleveland’s current problems provide a glimpse of what’s coming elsewhere, in markets where lenders and servicers are stuck with thousands of foreclosed or unwanted homes. It’s less a problem in places like California, Colorado, Nevada and Arizona, where banks and mortgage firms are more inclined to keep and maintain properties that could someday once again increase in value.
“Places like Cleveland have just been hit so hard,” said Alan Mallach, a senior fellow at the National Housing Institute and a visiting scholar at the Federal Reserve Bank in Philadelphia. “I shudder to think of the future of those neighborhoods.”
He’s not the only one. Cuyahoga County Treasurer Jim Rokakis so far has fielded calls from Litton Loan Servicing and Wells Fargo Bank, offering to donate hundreds of foreclosed properties. Rokakis and other Cleveland officials told Litton thanks, but we’ll need a check for a $1 million or so to cover the costs of demolishing about 80 percent of them; Litton withdrew the offer.
When Wells Fargo called in early January, Rokakis said thanks, but you don’t actually own some of these properties, you’re the servicer. That means Wells Fargo collects payments on the loans for investors, but isn’t the owner. Wells Fargo promised to figure things out and call back, Rokakis said, and he’s waiting to hear.
Rokakis fully expects banks and mortgage companies this year to stop paying property taxes on the foreclosed homes they still own and move on—another sort of walkaway. “Eventually, it’s going to happen,” Rokakis said. “How long do you keep paying on property that’s dead?”
People have been walking away from individual properties for years, but not at this level. The Cleveland area experienced more than 14,000 foreclosures last year, and “all these walkways are just beneath the surface,” said Michael Schramm, an analyst at the Center on Urban Policy and Community Development at Case Western Reserve University.
The center is trying to compile total numbers of walkways. Lind, who works with neighborhood groups on toxic titles, is bracing for them to occur in the thousands, and to increase greatly in the first half of this year. “I’ve been expecting this for a while,” he said. “The walkway phenomenon will be something on a scale we’ve never seen before.” He thinks of toxic titles as akin to environmental racism, with neighborhoods blighted by abandoned homes.
Callahan, the Cleveland blogger a longtime community organizer, described the situation as “four times as bad as anything we’d ever seen in the 1970s.” At that time, many federal housing subsidies meant for inner city development were stolen or misused, leaving neighborhoods marked by vacant homes. And back then neighborhoods had only the U.S. Department of Housing and Development to deal with, not a long list of trustees, servicers, mortgage holders and investors, some of whom may or many not still be in business.
Questioned on walkaways, Deutsche Bank, which Callahan names as the most active forecloser in Cleveland, issued a statement explaining that the servicer makes decisions on foreclosures. But walkways involve properties that banks haven’t foreclosed on yet. Deutsche Bank spokesman John Gallagher responded, “In the event of a walkaway, the servicer is tasked with the decision to move ahead with a foreclosure.
He referred questions to the servicer, Option One Mortgage Corp.
Option One’s spokesperson said that due to plans to sell the company, she couldn’t make any comments.
Select Portfolio Servicing, which is listed in court filings as the mortgage holder of the Maynard property, didn’t respond to a request for comment. The firm, based in Salt Lake City, recently reached a revised settlement with the over its practices. Wells Fargo also couldn’t be reached. Litton declined to comment. The Maynards couldn’t be contacted at their last known address.