Cleaning up from Tornadoes, Both Natural and Financial
According to the NYT’s reporters Kevin Sack and Timothy Williams, the government response thus far to the tornadoes that spun their way across the South last week has been a marked improvement over the response to Katrina — the last major natural disaster of a similar size. Local, state, and federal agencies are working better together and coordinating their work with the various charitable groups to deal with the immediate needs for food, shelter, and the like.
President Obama, too, appears to have learned from the past:
Stung by criticism that he waited 12 days to tour the Gulf Coast after last year’s BP oil spill, Mr. Obama took barely 40 hours to land in Tuscaloosa, the hardest-hit area in the seven Southern states struck by tornadoes last week. The death toll stands at about 350 people; Alabama officials said that included 249 in their state, with 39 in Tuscaloosa County.
“I’ve never seen devastation like this,” Mr. Obama said after Friday’s tour. “It is heartbreaking.”
It is indeed. I have clergy friends who are giving thanks for the twisters having missed their churches and the cities in which they live, and others who are mourning the loss of both lives and property.
But I’m struck by the quote from Obama.
There’s another disaster that has wreaked havoc on community after community across the nation. I’m speaking of certain urban areas that have been destroyed not by tornadoes and forces of nature, but torn apart by the financial meltdown, the mortgage mess, and the foreclosure crisis.
Like parts of Alabama after last week’s tornadoes, these areas have block after block of blighted homes and empty lots. Plywood covers the doors and windows of some, while others simply fall to pieces. They didn’t get that way by an “act of God” but by virtue of deliberate acts of human greed and callousness on the part of unscrupulous lenders, mindless robosigners, and coldly calculating investment bankers.
The Woodstock Institute put out a report last January entitled “Left Behind: Troubled Foreclosed Properties and Servicer Accountability in Chicago” [pdf] that spells out the toll that the foreclosure crisis has placed on one major urban area. From the introduction (pdf p.4):
The ongoing foreclosure crisis has led to a dramatic increase in vacant and abandoned properties across the City of Chicago. While some of these properties are secured and maintained by their owners, many are not and can pose significant risks for neighborhood stability. Vacant and abandoned properties can rapidly spiral into disrepair, affecting the values of neighboring properties and attracting criminal activity. In many cases, vacant properties lack clear ownership, without which the substantial costs of dealing with these troubled properties are borne by the city and by the community. Often, the most troubled properties are concentrated in African American communities on the City fs South and West sides, frequently clustered on highly distressed blocks.
The foreclosure crisis has made some of the traditional concerns with vacant properties more complicated. In the past, concerns about vacant properties and foreclosure were largely tied to the disposition of properties that had completed the foreclosure process, entered a mortgage servicer’s portfolio of lender-owned properties, often called real estate owned (REO) properties, and sat vacant until they could be sold and returned to productive use. While the management of such properties remains an issue, there are growing concerns about vacant properties where a foreclosure has been filed but has not yet been completed. Properties that are not occupied or proactively maintained by mortgage servicers are at high risk of falling into disrepair and having a significant negative impact on the community. This is especially true for troubled properties that have been in this state for extended periods of time, raising concerns that the servicer has chosen to charge-off the mortgage after initiating foreclosure and has effectively “walked away” from the property.
If President Obama wants another eye-opening tour, he might ring up his old friend Rahm Emanuel at City Hall in Chicago and the two of them could stroll through some of the neighborhoods like West Englewood (176 properties), Roseland (137), Englewood (137), and Austin (110). [There’s a nice map on pdf page 11 of “Left Behind” if they need directions.]
After strolling the streets, perhaps they could retire to an office at City Hall to take a look at the larger picture of this non-natural disaster, as described by the Woodstock Institute (p. 3):
Foreclosures make up a significant portion of properties on the City’s vacant buildings index. There were 18,320 properties on the City’s vacant buildings index as of September 2010. Of these, 12,674, or 69.2 percent, were associated with a foreclosure filed between 2006 and the first half of 2010. Of these 12,674 properties, 10,778 were related to a foreclosure filing which was linked to a subsequent outcome such as a completed foreclosure auction or a property transfer such as a short sale. There were 1,896 “red flag” properties on the City’s vacant buildings index where there was a foreclosure filing with no subsequent outcome.
These “red flag” properties are of significant concern to City officials and communities, particularly if they sit vacant for extended periods of time. Of the “red flag” properties identified, over 40 percent of these “red flag” homes have been in the foreclosure process for more than a year and a half, which means their loan servicers likely have decided not to complete foreclosure.
“Red flag” foreclosures are disproportionately concentrated in Chicago’s African American communities. Over 71 percent of “red flag” homes are located in highly African-American communities, compared to only 6.5 percent in predominantly white communities. African-American communities are 11 times more likely to have a “red flag” home than are white communities, while they are 3 times more likely to have a foreclosed property and 6 times more likely to have a vacant building.
There are a substantial number of properties in the citywide inventory of likely vacant lender-owned properties that are not registered with the City as vacant properties. There are 2,558 lender-owned single family homes that are likely vacant but not registered with the City of Chicago. This represents over 57 percent of the inventory of lender-owned single family homes in the City as of the third quarter of 2010. These homes are likely not secured and maintained to the standards required by the City of Chicago and may be in an advanced state of disrepair.
The path toward recovering from this disaster — and preventing the disaster from continuing to spread — is not difficult to identify. The Woodstock Institute names four basic steps that can be taken to clean things up and prevent other communities from being blown apart by the winds of Wall Street’s shenanigans:
Keep properties occupied – For occupied properties, servicers should more aggressively pursue loan modifications that would allow owners to stay in their homes. In situations where loan modifications are not possible, servicers should allow occupants to remain in the property for a defined period of time so that the property remains occupied and does not become blighted. Servicers could also incent occupants to maintain the property so that it does not fall into disrepair. . . .
Hold servicers accountable – Where appropriate, state and federal regulatory agencies should hold servicers accountable for their property disposition strategies. Regulators should monitor whether servicers are complying with local vacant building regulations. Regulators should also ensure that servicers have developed and are implementing strategies to ensure that charged-off properties do not become blighted. Servicers should also be monitored to ensure that they are providing timely information both to city departments and the current property owner when they choose to charge off a loan on a property. . . .
Increase the ability of cities to enforce existing vacant building regulations – Local governments should be given more authority to ensure that mortgage servicers maintain vacant properties up to required standards. Such authority might include making financial institutions with a legal interest in the property responsible for property upkeep and any violations of local building codes and ordinances that might occur at a property even when the owner of record cannot be found or is no longer willing to maintain the property. Increasing the levels of servicer accountability for the outcomes of properties could work to shift internal cost-benefit analysis in favor of loss mitigation efforts, such as loan modifications, that would keep properties occupied.
Improve data sharing to increase information on vacant buildings – Many vacant building ordinances, including the City of Chicago’s, place the onus of registering a vacant property on its owner because a city has a limited capacity to catalog and keep current an index of all vacant properties. However, other entities already collect and update such data and could provide assistance to city governments. . . . These data are publicly reported at an aggregated level, but having such data available at the address level for certain types of properties, such as long-term vacancies, would better identify potential troubled buildings and vacancy hotspots.
Recommendation #2 is the key, and Obama is perfectly situated to make this at least begin to be a reality. Holding servicers and property owners accountable will make them much more interested in keeping the property occupied, either by doing loan modifications for the existing residents or by forcing them to maintain the property rather than letting it simply decay.
The communities that have been destroyed by the financial tornadoes are no less devastated than those destroyed by natural tornadoes, and the toll on the people is no less heartbreaking. The financial tornadoes didn’t roll through in a single night, but wreaked their destruction slowly over time. And they continue to spin out of control.
We may not be able to control natural tornadoes, but we damn well can control financial ones.
If we want to, that is.
(photo h/t: faceless b)