Zip Code Inequality: Discrimination by Banks in the Maintenance of Homes in Neighborhoods of Color August 27, 2014
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Zip Code Inequality:
Discrimination by Banks in the Maintenance
of Homes in Neighborhoods of Color
August 27, 2014
ABOUT
THE Founded in 1988 and headquartered in
Washington, DC, the National Fair Housing
NATIONAL Alliance is a consortium of more than 220
FAIR private, non-profit fair housing organizations,
HOUSING state and local civil rights agencies, and
ALLIANCE individuals from throughout the United States.
Through comprehensive education, advocacy
and enforcement programs, NFHA protects and
promotes equal access to apartments, houses,
mortgage loans and insurance policies for all
residents of the nation.
ACKNOWLEDGMENTS
This report benefited greatly from the knowledge, expertise, and wisdom of a number of people working
within the fair housing movement. The National Fair Housing Alliance and its partners would like to
thank:
• Stephen M. Dane and the team from Relman, Dane & Colfax, PLLC and Janell Byrd-Chichester
from Mehri & Skalet, PLLC for their trusted legal assistance throughout the investigation and incisive
analysis of the legal issues uncovered; and
• David Lauri and Jim McCarthy of the Miami Valley Fair Housing Center for their outstanding
technical support in developing a database used by all the fair housing centers involved in this project
nationwide.
This report would not have been possible without the commitment and dedication of the staff at both
NFHA and its partner fair housing agencies.
TABLE OF
CONTENTS
EXECUTIVE SUMMARY ................................................ 2
SECTION 1: INTRODUCTION .................................... 4
SECTION 2: BACKGROUND ...................................... 8
SECTION 3: METHODOLOGY ................................ 21
SECTION 4: FINDINGS ........................................... 23
SECTION 5: RECOMMENDATIONS ......................... 39
SECTION 6: COMMUNITY RELIEF INITIATIVES ............44
SECTION 7: CONCLUSIONS .....................................50
APPENDIX: LOCAL FINDINGS ................................... 52
The work that provided the basis for
this publication was supported in part
by funding under a grant with the U.S.
Department of Housing and Urban
Development. The substance and
findings of the work are dedicated to
the public. The author and publisher
are solely responsible for the accuracy
of the statements and interpretations
contained in this publication. Such
interpretations do not necessarily reflect
the views of the federal government.
NFHA and its partners also used
their own resources to undertake this
investigation. We would like to thank
Freddie Mac and Wells Fargo for
providing us with information on their
best practices and for helping us to
better understand the REO disposition
process.
3
EXECUTIVE SUMMARY
In the past few years, banks and the federal property, including curb appeal, structure,
government have attempted through signage, indications of water damage,
counseling, short sales, deeds-in-lieu and and condition of paint, siding, and gutters/
principal reduction to cut down on the number downspouts. Many of the investigations were
of foreclosures that complete the process and conducted in stable neighborhoods where
become bank-owned (also known as Real the rate of homeownership was high.
Estate Owned or REO properties). Despite
these efforts, vacant REO properties still exist The investigation revealed a continuation of
in record numbers in neighborhoods across extremely troubling disparities in maintenance
the country, particularly in neighborhoods and marketing practices along racial lines.
that had been targeted with predatory loans REO homes in White neighborhoods were
and in neighborhoods of color. Although cared for in a far superior manner than those in
foreclosure rates have fallen nationwide, African American and Latino neighborhoods.
recent estimates are that foreclosures still While REO properties in predominantly White
affect 1 in 96 households in the U.S. and that neighborhoods were more likely to have neatly
another three million troubled loans will likely manicured lawns, securely locked doors, and
reach the foreclosure pipeline by 2017.1 attractive, professional “For Sale” signs out
Properties that complete the foreclosure front, REOs in communities of color were
process are then owned by the banks and more likely to have overgrown yards, trash,
maintained by a bank’s contracted vendors. unsecured doors, and broken or boarded
REOs often remain vacant for many months windows. REO properties in communities of
or years before being sold and can create color were not maintained to the standards
blight and other negative outcomes for of nearby homes and generally appeared
neighborhoods when not managed and abandoned, blighted, and unappealing to
maintained responsibly. potential homebuyers, even though they
were located in stable neighborhoods
As these properties are critically important in which neighboring homes were well
for community stabilization, the National maintained. On the other hand, REOs in
Fair Housing Alliance (NFHA) has led a White communities were maintained to the
nationwide examination of REO maintenance standards of other houses in the neighborhood
and marketing practices of major lenders and would have been attractive to real
and Fannie Mae over the last 5 years. Since estate agents and potential homebuyers.
its last report on REO maintenance and
marketing practices in April 2012, NFHA The REO investigation findings in 29
and 16 of its partners have investigated more metropolitan areas were aggregated, and
than 2,400 REO properties. The evaluations significant differences in treatment were
took into account over 30 different aspects found, including:
of the maintenance and marketing of each
• REOs in communities of color were 2.2
1 WashingtonsBlog, “Home Foreclosure Rates are
times more likely to have significant
Comparable to the Great Depression,” May 17, 2013, amounts of trash and debris on the
http://www.washingtonsblog.com/2013/05/have-more- premises than REO properties in White
people-lost-their-homes-than-during-the-great-depression.
html.
communities.
2
• REOs in communities of color were 2.3 properties that are for sale or rent without
times more likely to have unsecured, regard to the race or national origin of the
broken, or damaged doors than REOs in residents of a neighborhood. It is illegal to
White communities. treat a neighborhood differently because of
the race or national origin of the residents.
• REOs in communities of color were 2.0
Moreover, these laws obligate banks, trustees,
times more likely to have damaged,
investors, and servicers to monitor the actions
broken, or boarded windows than REO
of vendors engaged in performing housing-
homes in White communities.
related transactions to ensure that those third
• Holes in the structure of the REO were party entities are complying with fair housing
2.1 times more likely in communities of laws and regulations.
color than in White communities.
Communities of color are being left behind
• REO properties in communities of color
in our nation’s housing recovery because of
were 1.3 times more likely to have no
discriminatory treatment. Banks, lenders,
professional “for sale” sign than REO
trustees, investors, federal regulators, fair
homes in White communities.
housing and community development groups,
local governments, and law enforcement
In many communities, these disparities were
must work together to ensure that these sorts
even more acute. For example:
of discriminatory practices are eliminated in
• In Memphis, TN, REOs in communities of order to reverse and stabilize the negative
color were 8.8 times more likely to have outcomes they are creating, particularly in
significant amounts of trash and debris communities of color. Banks must restructure
littered throughout the property than their maintenance and marketing models to
REOs in White communities. ensure equal treatment of REO properties in
all neighborhoods so that communities of
• In Hampton Roads, VA, REOs in
color have a fair opportunity to recover and
communities of color were 6 times more
prosper.
likely to have unsecured, damaged,
or boarded doors than REOs in White
communities.
• In Miami, FL, REOs in communities of REOs in communities of color
color were 3.7 times more likely to have were
overgrown grass or dead leaves on the
property than REOs in White communities.
• In Kansas City, MO/KS, REOs in 2.2
times more likely to
communities of color were 3.6
times more likely to have damaged, have substantial trash
broken, or boarded windows
than REOs in White communities. when compared to REO
properties in predominantly
The federal Fair Housing Act requires banks, White communities
trustees, investors, servicers, and any other
responsible party to maintain and market
3
SECTION 1: INTRODUCTION
Despite recent headlines reporting that market values that result in wealth loss for
the housing market is recovering and that homeowners who live near foreclosed homes.
foreclosure rates are the lowest since the
foreclosure crisis began, neighborhoods Within this context, the increasing number
across the country are still reeling from the of REO properties and how well they are
effects of the crisis. As of 2013, 4.4 million maintained and marketed presents itself as
foreclosures have been completed and the a critical civil rights and fair housing issue.
crisis continues to strip communities of wealth.2 NFHA began to look into the issue of REO
In December 2013, 9.3 million properties maintenance and marketing in 2009. The
were reported to be deeply underwater, initial investigation uncovered a pattern
meaning that the owners owed 25 percent of differing treatment of REO properties in
more on their mortgage than their homes were White neighborhoods and REO properties
worth.3 These properties are at high risk of in communities of color. This differential
becoming foreclosures in the coming months treatment because of race and national
and suggest that the damage will continue for origin was a clear violation of the federal Fair
quite some time. Housing Act. In April 2011, NFHA published
the initial findings of its REO maintenance
The large volume of foreclosures has not investigations in the report, “Here Comes the
only stripped families of their homes and Bank, There Goes the Neighborhood,” which
wealth but has left a large inventory of empty included data from 624 REO investigations in
homes repossessed by the banks. These REO four cities. The report was designed to put
properties have surfaced in unprecedented banks, as well as Fannie Mae and Freddie Mac,
numbers in communities throughout America on notice about the discriminatory practices
since the advent of the foreclosure crisis in identified with respect to the treatment of REO
2007. In fact, in 2013 REOs represented 9.3 properties.
percent of all residential sales, up from 8.7
percent in 2011, and these numbers are more In April 2012, NFHA published another
heavily concentrated in communities of color.4 report outlining findings from an in-depth
These properties present a huge obstacle for investigation of more than 1,000 additional
recovery as the municipalities in which these bank-owned properties. This report, entitled
REOs are located suffer negative effects such “The Banks are Back, Our Neighborhoods Are
as a depleted tax base, neighborhood blight, Not,” included findings from nine metropolitan
health and safety concerns, and decreased areas. NFHA completed the investigations in
conjunction with four other fair housing centers.
2 Corelogic, “Corelogic National Foreclosure Report Subsequently, NFHA and its partners filed a
-December 2013,” http://www.corelogic.com/ research/
foreclosure -report/national-foreclosure -report- number of housing discrimination complaints
december-2013.pdf. with the U.S. Department of Housing and
3 Christie, Les, “Foreclosures hit six-year low in 2013,” http:// Urban Development. The first complaint was
money.cnn.com/2014/01/16/real_estate/foreclosure- filed against Wells Fargo Bank in April 2012.
crisis.
Wells Fargo and its REO division met with
4 Realty Trac, “RealtyTrac (2014) Short Sales and Foreclosure
Sales Combined Accounted for 16 Percent of US Residential NFHA and HUD over the course of a year which
Sales in 2013,” http://www.realtytrac.com/content/ resulted in a HUD conciliation agreement in
foreclosure-market-report/december-and-year-end-2013- June 2013. The agreement provided $27
us-residential-and-foreclosure-sales-report-7967.
4
million to NFHA and its 13 fair housing Valley Fair Housing Center in Dayton,
partners to administer programs in targeted Ohio; Housing Opportunities Project for
neighborhoods to increase homeownership Excellence (HOPE) working in Miami-Dade
opportunities and stabilize communities in and Broward Counties, Florida; Metro Fair
19 cities. Wells Fargo also paid $3 million Housing Services in Atlanta, Georgia; North
in damages and attorneys fees and provided Texas Fair Housing Center in Dallas, Texas,
funds for a national conference to increase serving the greater Dallas/Fort Worth area;
awareness about REO issues. Wells Fargo also HOPE Fair Housing Center in West Chicago,
provided $11.5 million to HUD for relief in an Illinois; Open Communities in Winnetka,
additional 25 cities. Currently, NFHA and its Illinois; South Suburban Housing Center in
partners have complaints pending at HUD Homewood, Illinois; Greater New Orleans
against Bank of America, U.S. Bank, Deutsche Fair Housing Action Center in New Orleans,
Bank, and Fannie Mae’s field service vendors: Louisiana; Denver Metro Fair Housing
Safeguard, Cyprexx, and Asset Management Center in Aurora, Colorado; Fair Housing
Specialists. Only Wells Fargo stepped up to Center of West Michigan in Grand Rapids,
act affirmatively to identify issues and resolve Michigan; Housing Opportunities Made
concerns. When Freddie Mac became aware Equal (HOME) of Virginia in Richmond,
of NFHA’s concerns about REO maintenance, Virginia; Connecticut Fair Housing Center in
its REO division sought recommendations and Hartford, Connecticut; Fair Housing Center
training from NFHA. Freddie Mac modified of Central Indiana in Indianapolis, Indiana;
its REO maintenance and marketing business Metropolitan Milwaukee Fair Housing
model, and NFHA and its partners rarely find Council in Milwaukee, Wisconsin; The Fair
a Freddie Mac REO that is not in pristine Housing Continuum in Melbourne, Florida;
condition. Toledo Fair Housing Center in Toledo, Ohio;
and the Fair Housing Center of Marin in San
When other banks and Fannie Mae failed Rafael, California.
to take corrective actions after the issuance
of the April 2012 report and the filing of This report documents the findings of
complaints, NFHA continued to investigate these investigations and outlines clear
REO maintenance and marketing practices recommendations for policy makers,
and expanded the partnership even further. community stakeholders, banks, investors,
Data included in this report was gathered and servicers to eliminate the disparities
between April 2012 and December 2013 in the treatment of REO homes. Everyone
by NFHA and its 17 partners at the Miami deserves a chance to build wealth and stability
47.5%
22%
of REOs in
Communities of Color
had substantial trash in predominantly
compared to only White
communities
5
Metropolitan Areas Where REO In
Vallejo, CA
Richmond, CA
Oakland, CA
Denver, CO
Las Vegas, NV Kansas City
San Diego, CA
Tucson, AZ
Dallas, TX
6
nvestigations Were Conducted
Muskegon, MI
Milwaukee, WI
Grand Rapids, MI
New Haven, CT
Chicago, IL
Gary, IN Toledo, OH
Philadelphia, PA
Baltimore, MD
Indianapolis, IN Washington, DC
Dayton, OH Prince George’s County
Richmond, VA
y, MO/KS Hampton Roads, VA
Memphis, TN
Charleston, SC
Atlanta, GA
Baton Rouge, LA
Orlando, FL
New Orleans, LA
Miami, FL
Each star represents one Metropolitan Statistical Area. Often an MSA
included several cities and jurisdictions; for example, in the Chicago
MSA data included REO properties from non-White communities in:
Aurora, Chicago, Country Club Hills, Dolton, Elgin, Evanston, Harvey,
Hazel Crest, Matteson, North Chicago, Skokie, and Waukegan.
7
through homeownership and to do so in to homeowners of color. The Center for
neighborhoods free of under-maintained Responsible Lending (CRL) reported that
properties and the associated increased for mortgages originated between 2004
health and safety concerns and property and 2008, African-American and Latino
value instability. An industry-wide change in borrowers were nearly twice as likely as
REO management and disposition practices White borrowers to have one or more “high
is essential to ensure a fair and equal recovery risk” features or conditions in their loans.
of all neighborhoods across the country, Such features included higher interest rates,
regardless of their racial or ethnic composition. option Adjustable Rate Mortgages (ARMs), or
a prepayment penalty.6 Even after controlling
SECTION 2: BACKGROUND for factors such as credit score and income,
African American and Latino home buyers
Due to the unprecedented rate of foreclosure were 80 percent and 70 percent more likely
over the last decade, recent research has respectively to receive a subprime loan than
highlighted and documented in depth White home buyers.7
the harmful effects of foreclosures on
the surrounding neighbors. Properties As a result of these predatory and
located on the same block of a foreclosure discriminatory actions by large banks, the
automatically suffer from dips in their own effects of the foreclosure crisis are more
property value, and vacant properties that heavily concentrated in neighborhoods where
are under-maintained or remain vacant and the majority of the residents are African-
on the market for an extended amount of time American or Latino. Estimates from 2012
only amplify these losses.5 These spillover are that the average American household
effects on neighbors and neighborhoods are lost $1,700 in just one year as a result of
an increasingly important civil rights issue as
foreclosures continue to be disproportionately
concentrated in African-American, Latino, Prior to the foreclosure crisis,
and immigrant communities. The wealth African-American home buyers were
and health of neighborhoods are suffering.
Poorly Maintained REO Properties
Strip Wealth from Communities of
Color
80%
more likely to receive a subprime
Communities across the country will continue loan when compared to
to feel the effects of the foreclosure crisis in White home buyers
the coming years, but none more acutely
than those in which the residents are primarily
African-American and Latino. Research and 6 Center for Responsible Lending, “Lost Ground, 2011:
numerous legal actions have established that Disparities in Mortgage Lending and Foreclosures,”
November 17, 2011, http://www.responsiblelending.org/
subprime loans, loans that were much more mortgage-lending/research-analysis/lost-ground-2011.
likely to experience default and foreclosure, html.
were deliberately marketed and originated 7 Alliance For A Just Society, “Wasted Wealth: How the Wall
Street Crash Continues to Stall Economic Recovery and
5 Han, Hye-Sung, “The Impact of Abandoned Properties Deepen Racial Inequality in America,” May 2013, http://
on Nearby Property Values,” Housing Policy Debate, allianceforajustsociety.org/wp-content/uploads/2013/05/
Routledge, 2013. Wasted.Wealth_NATIONAL.pdf.
8foreclosures alone. For neighborhoods that unmaintained, the more amplified its impact
had majority non-White households, the became on neighboring property values,
wealth loss increased to an average $2,200.8 even when localized foreclosure and market
Household wealth loss in general showed activity were accounted for.11 Neighbors of
even starker trends for communities of color bank-owned properties have been powerless
post-foreclosure crisis; from 2005 to 2009 to stop the depreciation of their own property
White households lost 16 percent of their net values, even if they invest in and care for
worth while African American households their own properties. Another recent study of
lost 53 percent and Latino households lost Maryland’s housing market analysis showed
66 percent.9 that Prince George’s County lost the most
home equity out of any Maryland county
Because African American and Latino after the foreclosure crisis in 2007, and by
homeowners disproportionately faced 2009 had lost a total of $13 billion.12 This
adverse actions on their loans, the is especially troubling as Prince George’s
neighborhoods and communities they lived County, included in this report’s investigation,
in disproportionately felt the impact. CRL’s was 85.1 percent non-White as of the 2010
most recent estimates are that families Census.
affected by nearby foreclosures have lost or
will lose a total of 8.8 percent of their home Poorly Maintained REO Properties
values. For residents in African American Are Costly to Local Municipalities
or Latino communities, that number nearly
doubles to a staggering 16 percent of their Wealth loss to neighboring families is not
home value. The same study finds that over the only costly outcome that results from
one-half of the spillover loss from nearby poorly maintained foreclosed properties.
foreclosures has or will occur in non-White Local municipalities are also forced to
communities because of the disproportionate shoulder heavy costs for each vacant, under-
concentration of foreclosures and resulting maintained property within their jurisdiction,
REOs in these communities. The total loss and these costs can increase exponentially
amounts to about $1.1 trillion in home equity when the particular local jurisdiction has a
stripped from communities of color alone. 10 high rate of foreclosures.
Poor maintenance coupled with the resulting When banks neglect their assets, many of
extended time an REO spends vacant and the related expenses become the burden of
on the market also has a real effect on the the local government. Such costs can add
surrounding neighborhood beyond just the up quickly; according to the Government
effect of a regular foreclosure. A recent study Accountability Office (GAO) report 12-34,
based in Baltimore, MD, documents that the the city of Detroit, MI, estimated spending
longer an unoccupied property remained $1.4 million to board and secure 6,000
properties in 2010 alone.13 Similarly,
8 Ibid.
9 Pew Research Center, “Wealth Gaps Rise to Record 11 Han, Hye-Sun, “The Impact of Abandoned Properties
Highs Between Whites, Blacks and Hispanics,” July 26, on Nearby Property Values,” Housing Policy Debate,
2011, http://www.pewsocialtrends.org/files/2011/07/SDT- Routledge, 2013.
Wealth-Report_7-26-11_FINAL.pdf. 12 Maryland’s 2010-2015 Consolidated Plan - Housing
10 Center for Responsible Lending, “2013: Update: The Market Analysis, http://www.dhcd.state.md.us/Website/
Spillover Effects of Foreclosures,” August 19, 2013, http:// About/PublicInfo/Publications/Documents/2010-
www.responsiblelending.org/mortgage-lending/research- 2015housingmarket.pdf.
analysis/2013-crl-research-update-foreclosure-spillover- 13 U.S. Government Accountability Office, “Vacant
effects-final-aug-19-docx.pdf. Properties: Growing Number Increases Communities’ Costs
9a Woodstock Institute study from 2005 the city’s ability to provide vital services to
documents that the amount spent by local its residents, including good quality schools,
governments on a vacant and unmaintained police and fire protection, water service, and
property averaged $5,358 per property per garbage pick-up.
year.14
In May of 2011, the City of Los Angeles filed
Additionally, demolition costs become a lawsuit against Deutsche Bank alleging
necessary when much of the foreclosed that the bank failed to maintain hundreds
housing stock is uninhabitable or too costly of its foreclosed homes in low-income
to renovate for another owner occupant. neighborhoods and did not comply with
The City of Baltimore, which has a large local municipal code enforcement rules. The
stock of foreclosed row houses, estimated it City of L.A. argued that Deutsche Bank’s
would cost between $13,000 and $40,000 code enforcement violations of $2,500 per
to demolish each row house.15 On top of violation per day translated to hundreds
these documented costs of demolition and of millions of dollars in unpaid fines to
maintenance come other administrative the city. In July of 2012, the City of L.A.
expenses related to REO properties, such filed a similar lawsuit against U.S. Bancorp
as managing vacant property registries alleging the same claim. Both Deutsche
and the increased dispatching of police or Bank and U.S. Bancorp argued that they
fire services in response to 911 calls, code were not, in fact, responsible for the neglect,
enforcement, and other public safety issues. but instead that their loan servicers were the
actual contractual parties responsible for
While expenses pile up due to the increased maintenance of the foreclosure properties.
demand on city resources, tax revenues also The Deutsche Bank lawsuit was settled
suffer as a result of depreciating property in June of 2013, and Deutsche Bank
values. The National League of Cities collectively arranged for its loan servicers to
reported that cities continue to feel the pay the $10 million dollar civil penalty.17
downturn in real estate values and have
documented that property tax revenue Poorly Maintained REO Properties
declined for the third year in a row with a Create Health and Safety Concerns
decrease of 2.1 percent in 2012. Cuyahoga for Communities
County, which includes Cleveland, OH,
within its borders, has documented a loss Vacant REO properties that are under-
of over $46 million in tax revenue due to maintained also have significant, negative
REO properties.16 This lost revenue limits outcomes for neighborhoods in the arena of
and Challenges,” November 4, 2011, http://www.gao. health and safety. Recent research published
gov/assets/590/586089.pdf. by the American Heart Association suggests
14 Apgar, William, and Mark Duda, “The Municipal Cost that living near a foreclosure not only
of Foreclosures: A Chicago Case Study,” Homeownership
Preservation Foundation Housing Finance Policy affects neighboring property values but
Research Paper, February 27, 2005, http://www.nw.org/ in the One-to-Three Family REO Market: The Case of
network/neighborworksProgs/foreclosuresolutionsOLD/ Cleveland,” December 16, 2013, http://www.jchs.harvard.
documents/2005Apgar-DudaStudy-FullVersion.pdf. edu/sites/jchs.harvard.edu/files/w13-12_cleveland_0.pdf.
15 U.S. Government Accountability Office, “Vacant 17 Pettersson, Edvard, “Deutsche Bank Settles Los Angeles
Properties: Growing Number Increases Communities’ Suit over “Slumlord” Claims.” Business Week, June 19,
Costs and Challenges,” November 4, 2011, http://www. 2013. http://www.businessweek.com/news/2013-06-
gao.gov/assets/590/586089.pdf. 18/deutsche-bank-settles-los-angeles-slumlord-suit-
16 Ford, Frank and April Hirsh, “The Role of Investors allegations.
10also undermines the health of the neighbors window or other sign of abandonment will
themselves, as proximity to a foreclosure encourage further disinvestment and signs of
increases a person’s chance of developing abandonment, has long been an explanation
high blood pressure. The study also for increases in criminal behavior in areas
specifically found that homes that are quickly with many vacancies.20 These outcomes are
purchased do not appear to lead to a rise extremely harmful to the stability and sense
in blood pressure, but homes that become of community in a neighborhood. When
REOs and remain vacant do contribute to an residents feel unsafe walking on a street
increase.18 This study was conducted using with poorly maintained REO vacancies, it
data from a middle income, predominantly limits their pedestrian amenity and general
White neighborhood, and one can only well being. Some of the REOs visited in this
assume that the effects would be compounded investigation have become the homes where
in communities of color, where a higher people party on the weekends or engage in
concentration of REOs in poorer states of illicit activities or where squatters take over.
maintenance are located.
One REO in a Latino neighborhood, owned
Properties that are vacant and boarded by Bank of America and investigated by the
up increase a sense of social isolation Denver Metro Fair Housing Center, has been
and anxiety for the residents living in those the site of many parties; neighbors told fair
neighborhoods. The physical deterioration housing investigators that the police visited
of a neighborhood associated with a high several times a week. One after-prom party
number of bank-owned, neglected vacant at the property had over 100 teenagers, and
properties also leads to a stigmatization of the the police had to block off the entire street to
neighborhood that further isolates residents clear out the party. Fair housing investigators
and allows for a more rapid decline of the have documented beer and liquor bottles left
community. at REOs.
High foreclosure rates are also associated
with increased criminal activity and arson.
Dan Immergluck’s 2005 study shows that
with every 1 percentage point increase in a
census tract’s foreclosure rate, violent crimes
increase by 2.33 percent, with all other things
being equal. He also suggests a correlation
between foreclosures and increased property
crime.19 The “broken windows theory,”
which essentially states that one broken
18 ElBoghdady, Dina, “Foreclosures may raise neighbors’
blood pressure, study finds,” Washington Post, May Figure 1: Broken beer bottles
12, 2014, http://www.washingtonpost.com/business/ at an REO in Denver, CO.
economy/study-foreclosures-may-raise-neighbors-blood- Vacant properties also present health risks for
pressure/2014/05/12/5f519952-da03-11e3-bda1-
9b46b2066796_story.html. the communities in which they are located.
19 Immergluck, Dan, “The Impact of Single-Family 20 U.S. Department of Housing and Urban Development,
Mortgage Foreclosures on Neighborhood Crime,” Vol.21 “Vacant and Abandoned Properties: Turning Liabilities into
No.6 in Housing Studies, 851-866, http://www.prism. Assets,” April 10, 2014, http://www.huduser.org/portal/
gatech.edu/~di17/HousingStudies.pdf. periodicals/em/EM_Newsletter_winter_2014.pdf.
11Accidental injuries from fires, as well as
injuries related to unsecure and unstable
structures, may occur. REOs that appear to
be abandoned attract illegal dumping, rodent
and insect infestations, and deterioration of
lead paint which are all extremely hazardous
to neighboring families and make the home
hard to market to owner-occupant buyers.
Figure 3: Standing water and mold at an
Many factors influence health and safety REO property in Memphis, TN.
in homes, including structural and safety
aspects of the home; quality of indoor air; Poorly Marketed REO Properties
water quality; exposure to chemicals; resident Result in High Numbers of Investor
behavior; and the house’s immediate Purchases
surroundings. A home’s structural and safety
features can increase risk for injuries, elevate In recent years, investors ranging from mom-
blood lead levels, and exacerbate other and-pop small businesses to large Wall
conditions. Poor indoor air quality contributes Street investment firms have been buying
to asthma, cancers, cardiovascular disease, foreclosures in targeted communities. While
and other illnesses. Poor water quality can responsible investors undoubtedly have the
lead to gastrointestinal illness and a range potential to assist in the housing recovery
of other conditions, including neurological by renovating homes and providing new
effects and cancer. Standing water in rental or buyer opportunities, their presence
uncovered and unmaintained pools can be is all too often damaging in neighborhoods
a breeding ground for mosquitoes carrying that were once vibrant and stable, with high
diseases. All of these issues are influenced homeownership rates. Another culprit in this
both by the physical environment of the home situation is a bank or GSE that sells these REO
and by the behavior of the people living in homes in bulk sales or fails to even bid on
the home.21 its own homes at auction. Because investors
are purchasing large portions of the housing
market and banks are paving the way for them
to do so, communities with historically high
homeownership rates are now transitioning
into high rental communities. Often,
communities of color are hit the hardest as
homeownership constitutes a larger portion
of an African American or Latino’s family
wealth portfolio when compared to a White
household.22
Investors of all sizes and with all sorts of
Figure 2: Dead rat found practices and patterns have taken advantage
at an REO in Richmond, CA. 22 Institute on Assets and Social Policy, “The Roots of the
Widening Racial Wealth Gap: Explaining the Black-White
21 U.S. Department of Health and Human Services, “The Economic Divide,” February 2013, http://iasp.brandeis.
Surgeon General’s Call to Action To Promote Healthy edu/pdfs/Author/shapiro-thomas-m/racialwealthgapbrief.
Homes,” 2009. pdf.
12of the large number of foreclosures available investors were responsible for buying 42
on today’s housing market. However, for percent of the REO market from 2007 to
the first time institutional investors and large 2011. Research suggests that whether
real estate brokerage firms are now entering investors buy foreclosures and flip them or
the market in a substantial way. Wall Street hold on to them for undisclosed amounts of
created the rental-backed security which is time, they often soon realize that they will
the investment tool to fund these bulk REO not turn a profit. These properties are then
purchases. These investors, whose purchases abandoned and quickly become vacant,
have been targeted in large metropolitan blighted eyesores for the community.24
areas, have spent more than $17 billion in
recent years on foreclosed properties. These In all of the above scenarios, high numbers
large investors generally buy properties en of investor purchases in a neighborhood can
masse and hold them as long-term rental lead to higher rates of property abandonment
properties. Many also rent the properties and deterioration of the properties by allowing
with the hopes that the property values will them to either sit vacant, failing to renovate
recover and they will then be able to sell the home or by renting the home without
them for a large profit in several years. Such bringing it up to code. Coordinated buying
investors have bought up large portions of and selling of properties by large investment
the REO inventory in Miami, Phoenix, Las companies can also cause increased market
Vegas, metropolitan Atlanta and California. volatility.25 In Atlanta, census tracts with
To accumulate a large inventory of REOs high investor activity also tend to be heavily
in a specific market, the large firms hire African-American, and these same tracts have
individuals to purchase the homes at auction a high number of purchases from medium
for cash. The Wall Street Journal reported that and large sized investment companies.26
investors study thousands of to-be auctioned
properties and conduct price comparisons to NFHA’s pilot review of a sample of properties
determine the highest price they should pay in Prince George’s County, Maryland,
to still make a profit.23 Often times these shows that poorly maintained properties
investors end up purchasing the home for were much more likely to be purchased by
far less than their maximum allotted bid, and an investor than an owner occupant. As a
many homes sell far below the market value result, because poorly maintained properties
or mortgage balance because at foreclosure are more heavily concentrated in Latino
proceedings banks are not bidding on the and African-American communities, these
properties for which they have issued loans. neighborhoods of color that formerly had
high owner-occupancy rates are at risk of
Some investors are also following their becoming investor communities.27
traditional behavior by “flipping” homes— 24 Edelman, Sarah, “Cash for Homes: Policy Implications
buying properties, doing minor rehabilitation of an Investor-Led Housing Recovery Center for American
Progress,” September 5, 2013, http://americanprogress.
and selling them quickly for a profit. Small org/issues/housing/report/2013/09/05/73471/cash-
and individual investors were recorded as for-homes-policy-implications-of-an-investor-led-housing-
purchasing 66 percent of all REO properties recovery/.
25 Ibid.
in Miami-Dade County. And in Oakland,
26 Immergluck, Dan, “The Role of Investors in the Single
23 Whelan, Robbie, “Firms Flock to Foreclosure Auctions,” Family Market in Distressed Neighborhoods: The Case of
The Wall Street Journal, September 12, 2012, http:// Atlanta,” February 2013, http://www.jchs.harvard.edu/
online.wsj.com/news/articles/SB1000087239639044369 sites/jchs.harvard.edu/files/w13-2_immergluck.pdf.
6604577644700448760254. 27 National Fair Housing Alliance, “The Banks Are Back –
13WHAT IF THIS WERE YOUR NEIGHBORHOOD?
Many of the REO properties that NFHA and its members evaluated were within close proximity to each other. As detailed in
Section 2, the presence of just one foreclosure in a neighborhood will have lasting effects on the neighboring homeowners
and their property values, the neighborhood as a whole, and the local municipality in which it falls. When multiple
foreclosures exist in a neighborhood these effects are intensified. In the example below there were four poorly maintained
REO properties in a predominantly Latino neighborhood in Oakland, CA; all evaluated within one day of each other, these
four bank-owned homes spread the negative effects of a poorly maintained REO to the entire community and beyond.
1415
REO Maintenance Overview Some lenders also contract with nationwide
asset managers or field service vendors
Once foreclosure proceedings are who make the decisions about repairs and
completed and the property becomes become the final arbitrator regarding all
real estate owned by a bank, the Federal repairs.
Housing Administration (FHA), Fannie Mae
or Freddie Mac, each corporation utilizes its Though the specific models of maintenance
own system for maintaining and selling an and marketing may vary, routine yard
REO. Some lenders only act as trustees for maintenance, securing of the property,
the properties; they delegate maintenance trash removal, and cleaning are generally
and marketing responsibilities to the loan contracted to a property maintenance and
servicers listed in their Pooling and Service preservation company or asset management
Agreements. Some contract with a real estate company. This contractor may be a national
broker who is tasked with the maintenance, company that subcontracts at the regional,
marketing, and sale of the home. The state, or local level, or may be a local
broker may be required to secure the REO, small business that works directly within the
assess the value of the property, subcontract lender’s network of vendors. The specific
with a preservation maintenance provider, requirements for these vendors differ by
and develop a marketing strategy for selling lender, but typically these vendors are
the REO. expected to visit the property weekly and
conduct maintenance to ensure that the
The real estate broker or a preservation REO property complies with local building
vendor may also be responsible for requesting and public safety and health standards.
interior and exterior repairs. More often
than not, these brokers/vendors do not have REO properties that are not properly
offices in the communities where the REOs maintained by these vendors are subject to a
are located which can be problematic when host of harmful effects. A home with unsecured
it comes to determining the proper pricing, doors, broken windows, overgrown grass, or
marketing, and maintenance of the REO. trash around the property signals to vandals
and looters that the property is abandoned
Our Neighborhoods Are Not,” April 12, 2012, http://www.
nationalfairhousing.org/Portals/33/Banks%20are%20
and makes the home and neighborhood a
Back%20Final%2012.3.2012.pdf. target for illegal activity. In addition, homes
Job loss, hardship,
or predatory loan
becomes too Redemption
burdensome for period
homeowner (varies by state)
90 days 128 days 63 days 88 days REO
Delinquency Foreclosure Foreclosure Foreclosure sale Property
begins/loss Initiated judgment repossessed by
mitigation Bank
Figure 4: Foreclosure to REO timeline adapted from a
graphic from the Government Accountability Office.
16Figure 5 - Common Lender structuring of vendors for REO Maintenance.
that appear abandoned and look unsightly
due to poor maintenance will often deter
real estate agents from showing the REO
to homebuyers; consequently, the poor
condition of the home reduces the pool
of potential owner-occupant buyers and
negatively affects the price of the home.
17Poor REO Pricing and Marketing of any maintenance or repair against the
Practices by Banks Harm projected income the bank will receive from
Neighborhoods the sale of the property. Moreover, some
banks may even set a lower maintenance
A bank’s failure to adequately maintain standard for properties the bank presumes
an REO property may be due to a false will be sold to an investor. The presumption
perception of the house’s actual value or of whether or not a property will be sold to an
the bank’s erroneous assumptions about investor can be based on the trend of previous
a potential return on its investment. These REO sales in the neighborhood. Turning a
impressions could be based upon an formerly owner-occupant neighborhood into
inaccurate appraisal of the property’s market an investor-owned neighborhood can be the
value and/or faulty perceptions about the result of poor maintenance and marketing.
neighborhood in which the property is The remaining homeowners suffer serious
located. These impressions could also be loss of value to their homes and problems
the result of discriminatory factors or bank that arise with absentee landlords.
policies that on paper are neutral but which
have a discriminatory impact when applied to Many banks evaluate the performance of
properties in communities of color. their brokers based on a set list of success
measures, one of which is the average
An REO property is typically priced using a time an REO spends on the market. Most
Broker Price Opinion (BPO) to determine the banks reduce the price of an REO every 20
value of the home before it is listed for sale. to 30 days, so if the home starts out with a
Depending upon state law requirements, low appraisal, the value of the home just
either an appraiser or a real estate agent continues to drop. Since a broker is evaluated
conducts the BPO. An Internal BPO examines by “days on the market,” these practices
the inside of the home, which is viewed and incentivize brokers to encourage an investor
photographed, and a Drive-by BPO includes purchase over an owner occupant because
photographs of the exterior and estimates investors make cash offers which expedite the
about the interior features. sales and shorten the time on market. This
misalignment of broker incentives results in
A Drive-by BPO might be appropriate for homes lowering the home’s value, discouraging
in relatively newer subdivisions. However, a owner-occupant sales and lowering property
Drive-by BPO lessens the likelihood that the values in the neighborhood.
estimated value will be accurate, especially
in cases where renovations or improvements Lastly, while all foreclosures go through the
have been made to a home located in an auction process, more and more lenders
older neighborhood. An internal BPO or full are not even bidding on the foreclosure
appraisal gives a bank the best estimate of a and allowing properties to sell at auction
property’s actual condition and value. The at a price far below the mortgage balance.
Federal Housing Administration requires a This tactic by banks removes the property
full appraisal on all of its REO homes. from the REO sales channel and results in
investor purchases at prices below what the
Banks may also determine the type or extent market will sustain. This practice hurts the
of maintenance actions for a property based former owner who may be responsible for
on the bank’s perceived return on investment. paying the difference between the auction
In other words, some banks weigh the cost price and mortgage balance, and it has a
18direct impact on real estate agents’ ability enforcement mechanism.
to make a living by listing and selling REOs.
In the past, investors have been wary of The Fair Housing Act has two goals: to
these sorts of purchases because access to eliminate housing discrimination and to
the properties is restricted before auction promote residential integration. HUD’s
and professional inspections are impossible regulations interpreting the Fair Housing Act
at that stage. However, some investors state:
have found ways to view the inside of the
property prior to the sale and have bypassed It shall be unlawful because of race, color,
this obstacle.28 Because they acquire these religion, national origin, sex, familial status,
foreclosed properties at such an early stage, or disability to restrict or attempt to restrict
often without inspections, and at such a low the choices of a person by word or conduct
price, some of these investors are more likely in seeking, negotiating for, buying or renting
to abandon properties that need renovation. a dwelling so as to perpetuate segregated
housing patterns, or to discourage or obstruct
choices in a community, neighborhood or
development.
The differential maintenance of REO
properties based on the racial composition
of neighborhoods is a violation of the Fair
Housing Act.
• HUD’s regulations clearly state that
“failing or delaying maintenance or
repairs of sale or rental dwellings
because of race” is a prohibited action
Figure 5: An REO in Waukegan, IL under the Fair Housing Act.
with auction signage.
• Steering by real estate agents based
on neighborhood racial composition
REO Maintenance and the is illegal, and other behavior in the
Application of the Fair Housing Act housing sales or rental market that
operates to discourage potential buyers
President Lyndon B. Johnson signed the from purchasing or renting homes in
federal Fair Housing Act into law on April minority neighborhoods, such as failing
11, 1968, one week after the assassination to adequately maintain properties in
of Dr. Martin Luther King, Jr. In 1988, minority neighborhoods, can also violate
President Ronald Reagan signed the Fair the Act.29
Housing Amendments Act, which provided
• Under the Fair Housing Act, it is
the Department of Housing and Urban
unlawful to “make unavailable or deny”
Development (HUD) and the Department
housing to any person because of
of Justice with a much-needed federal
28 Immergluck, Dan, “The Role of investors in the Single- 29 Gladstone Realtors v. Village. of Bellwood, 441 U.S.
Family Market in Distressed Neighborhoods: The Case of 91, 94 (1979); see also Zuch v. Hussey, 394 F. Supp. 1028,
Atlanta,” February 2013, http://www.jchs.harvard.edu/ 1047 (E.D. Mich. 1975) aff’d and remanded by 547 F.2d
sites/jchs.harvard.edu/files/w13-2_immergluck.pdf. 1168 (6th Cir. 1977).
19race.30 Damage to REOs resulting from hard hit by these discriminatory practices, and
poor maintenance may make homes the fair housing offices that are conducting
“unavailable” by creating obstacles to these investigations.33
the sale of those properties, whether by
rendering homes uninhabitable, implicitly The Fair Housing Act specifically names trusts
sending a message that the home is not and trustees in its definition of a “person”
on the market, or making it more difficult covered under the Act. Many lenders hold
for buyers to secure financing. the title to an REO property as a securitization
trustee and argue that the servicer listed in
• In addition, actions that perpetuate
their Pooling and Servicing Agreement, or
housing segregation violate the Fair
contract dictating the management of their
Housing Act.31 Discrimination in
securitized loan, is solely responsible for
the maintenance of REO properties
any discriminatory behavior or conduct that
perpetuates segregation by discouraging
violates the Act. While the servicer does in
diverse buyers from purchasing property
fact service the loan, collect payments on
in affected neighborhoods of color.
the loan, and oversee maintenance of the
Additionally, poorly maintained REOs
property, it does so for the benefit of the
lower neighboring home values, making it
lender and is effectively acting as the lender’s
more difficult for people of color and other
agent. A lender cannot change the legal
homeowners living the neighborhoods to
obligations it has under the Fair Housing Act;
sell their homes and move to other areas.
it is responsible for items such as real estate
taxes, zoning and code compliance, nuisance
The Fair Housing Act establishes broad liability
avoidance and abatement, and compliance
for violations. The term “person” in the Act is
with all other federal and state laws imposing
defined to include “one or more individuals,
duties on landowners. This would include
corporations, partnerships, associations,
the responsibility of non-discriminatory
labor organizations, legal representatives,
maintenance and marketing of REO properties
mutual companies, joint-stock companies,
across all communities, regardless of race or
trusts, unincorporated organizations, trustees,
national origin.
trustees in cases under Title 11, receivers, and
fiduciaries.32 Under this broad definition and
Finally, all federal agencies and their grantees
the fact that the courts have held that agency
associated in any way with housing and
principles apply to actions under the Act, parties
community development have a special
that may be held liable for discriminatory REO
obligation to further the purposes of the
maintenance and marketing practices include
federal Fair Housing Act. The law also covers
banks, GSEs, trustees, and those parties that
policies and practices that have a disparate
contract for the servicing and marketing of the
impact on protected classes.
REOs. Furthermore, because standing under
the Act is held to be as broad as Article III of
This obligation is defined in Section 808(d) of
the Constitution will allow, potential aggrieved
the Fair Housing Act:
parties for the identified discriminatory REO
practices may include the residents living in
All executive departments and agencies
communities of color, cities that have been
shall administer their programs and activities
30 42 U.S.C. § 3604.
31 Huntington Branch, N.A.A.C.P. v. Town of Huntington, 33 See, e.g., Havens Realty Corp. v. Coleman, 455 U.S.
844 F.2d 926, 937-38 (2d Cir. 1988). 363, 372 (1982) (citing Gladstone Realtors v. Village of
32 42 U.S.C. § 3602(d). Bellwood, 441 U.S. 91, 103 n.9 (1979)).
20relating to housing and urban development majority of the residents were White, Non-
(including any Federal agency having Hispanic, Latino, African-American, or where
regulatory or supervisory authority over the majority was a combination of non-
financial institutions) in a manner affirmatively White, Latino and African-American. These
to further the purposes of this subchapter and neighborhoods were also selected because
shall cooperate with the Secretary [of Housing their recent foreclosure rates were high in
and Urban Development] to further such comparison to other neighborhoods in the
purposes.34 (emphasis added) same metropolitan area.
Executive Orders and other provisions of Once the target zip codes were identified, data
the Fair Housing Act related to affirmatively providing the addresses of REO properties,
furthering fair housing provide additional as well as the banks or GSEs listed as the
guidance on this obligation.35 In this context, owners of the homes, was collected in each
the need to address and ameliorate the poor of the areas. These lists were compiled using
maintenance and marketing of REO properties a bank or GSE’s own website, county property
in communities of color is of paramount records, records kept by the clerk of courts,
importance to the resurgence of communities RealtyTrac, vacant property registries, auction
already devastated by the foreclosure websites, and other database sources. As
crisis. Poorly maintained REO properties property records are often not updated for
often result in costly expenditures by cities months after a transaction is completed,
to mitigate public safety hazards and other records were also reviewed several months
related concerns in these neighborhoods. By after the investigation to ensure sale had not
neglecting to properly maintain and market occurred and simply not been recorded at the
REO properties, particularly in communities of time of investigation.
color where REOs are heavily concentrated,
banks, trustees, investors, and servicers extend REO properties that were either owned by
the amount of time a property remains vacant several major lenders or were owned or
and becomes a source of blight in cities across overseen by FHA and the GSEs were the
the nation. subject of the investigation. Because this data
was collected for enforcement purposes, it
SECTION 3: METHODOLOGY is not limited to a research methodology of
random sampling of the REO properties in
NFHA and its members investigated REO each neighborhood. Within each zip code, all
maintenance practices in 29 metropolitan REO properties owned by the lenders selected
areas, selecting zip codes in which the were investigated and evaluated. However, if
investigators arrived at a property and found
34 42 U.S.C. § 3608(d). it to be clearly occupied, the property was not
35 Section 805 of the Fair Housing Act lays the groundwork evaluated. Similarly, if a property was actively
for this mandate by detailing discrimination in residential undergoing some type of repair or renovation
real estate-related transactions; Section 808 of the Act spells
out the responsibility of the Secretary of Housing and Urban at the time of the visit, the property was also
Development (HUD) to administer the Act, and the Act’s not evaluated.
application to other federal agencies; and Executive Order
11063, signed on November 20, 1962, and Executive
Order 12892, signed on January 17, 1994, together state Between April 2012 and December 2013,
the responsibilities of all federal agencies to administer their NFHA staff, along with staff from partner
programs in a manner that affirmatively furthers fair housing organizations, visited more than 2,400
and clarify what is meant by programs and activities relating
to housing and urban development. single-family and townhome properties. Staff
21evaluated each property using a checklist evaluators would only mark “yes” once.
that included over 30 factors, such as curb Table 1 shows an overview of the scoring
appeal, structure, signage and occupancy, categories.
paint and siding, gutters, water damage,
and utilities.36 Evaluators answered “yes” To ensure consistency, investigators were
or “no” to indicate whether each of these given a thorough training with examples
factors was or was not present on the and field training. They also utilized a
property, and took pictures of the property glossary of terminology developed by NFHA
and surrounding homes. For example, next and its partners at the beginning of this
to “trash” on the score sheet, the evaluator investigation with pictures and descriptions
would mark “yes” if there was a visible to illustrate various examples that would
amount of trash on the REO property, which constitute a “yes” answer for each of the
would then translate into a deduction from scoring components. The glossary also took
the overall score. A lack of certain criteria, into account and illustrated variations in
like a missing “For Sale” sign, also would severity for some of the scoring criteria. For
constitute a deduction. In some cases an example, if a property had a small amount
REO might have several instances of the of dead grass, it would receive a smaller
same deficit, such as multiple boarded deduction than if 50 percent or more of the
windows or multiple hanging gutters, but lawn was filled with dead grass. Similarly,
36 This checklist has been in use by NFHA and its the severity of invasive plants and mold or
partners since 2010 and matches up almost exactly with
the checklists used by the GSEs and several banks who
discoloration was also taken into account
have shared their practices with NFHA. It has also been when evaluating an REO property.
adopted by at least one bank since NFHA published its
methodology.
Curb Appeal Structure Signage & Paint & Gutters Water Utilities
Occupancy Siding Damage
Trash Unsecured or Trespassing Graffiti Missing or Water Exposed or
Broken Door or warning Peeling or Out of Place Damage tampered
Mail
signs Chipped Broken or Small with
Accumulated Damaged
Steps or Marketed as Paint Hanging amount of
Overgrown mold
Handrails distressed Damaged Obstructed
Grass/leaves
Broken or Siding Pervasive
Overgrown/ For Sale sign mold
Boarded Missing
dead shrubbery missing
Windows Shutters
Dead Grass Broken or
Damaged
Invasive Plants Roof discarded
signage
Broken Mailbox Damaged
Fence
Holes
Wood rot
Table 1: NFHA’s REO maintenance and marketing checklist.
22You can also read
