Empty Promises

*In Today’s Gloomy Real Estate Market, Vacant Properties Offer a Glimmer of Hope*
First it was the subprime explosion. Next it was concerns about adjustable-rate mortgages (ARMs)—creative loans with artificially low ""teaser"" rates scheduled to reset to higher rates through 2009. Now the new worry is what will happen when the foreclosure moratoriums end.
Add to that mix the dismal unemployment picture. According to CNN, in January alone, more than 200,000 job cuts were announced in the United States, and more than 71,000 came on January 26, the day referred to as ""Bloody Monday.""
The Mortgage Bankers Association recently reported that one in 10 homeowners was behind on his or her loan, the highest number since statistics began tracking in 1979. The Bureau of Labor Statistics reported in December, 524,000 jobs were lost, and 1.9 million were lost in the previous four months.
In 2006, Freddie Mac reported 37 percent of all loans more than 90 days’ delinquent were related to job losses. In the first half of 2008, that became 46 percent. In 2009, it is certain to be even higher. 
All of these statistics point to the likelihood the foreclosure crisis will be with us for a while—certainly beyond 2009 and probably well into 2010.
*Challenges for Investors and Communities*
Large inventories of REO properties aren’t in anyone’s best interest. From an investor perspective, taxes, utilities, maintenance and repairs, marketing, and other carrying costs quickly add up and provide a strong incentive to move REO properties off its portfolios as quickly as possible.
At the same time, most investors and servicers are sensitive to the potential impact these properties can have on a neighborhood or community if they are not disposed of responsibly. This is why the preference for most servicers and investors is to return REO properties to family homeownership. When that isn’t possible, the next best thing is to seek alternatives to enhance the community or at least ones that do not contribute to the problems that lead to neighborhood blight.
In an attempt to reduce some of these problems, many cities enacted, or are considering, vacant property registration ordinances or have begun to enforce ordinances that have sat unused on their books for years.
The problem with such ordinances is the parties involved in the most troubled properties are the ones least likely to comply. The conscientious servicers and investors who do maintain their properties and take prompt action when issues arise are the ones who incur the additional burden of compliance paperwork. As a result, municipalities often find they are investing a lot of time and administrative effort for very little return.
Additionally, no matter how well-tended a vacant property is, the reality is that in many communities around the country—its marketability may be limited due to the surplus of properties on the market.
According to a 2008 study by the National Vacant Properties Campaign (NVPC), vacant and abandoned properties in eight Ohio cities cost communities $15 million annually in demolition expenses, service costs, code enforcement, police and fire protection, and other services. This doesn’t even include the millions of dollars lost in annual tax revenues.
*Increased Interest in Land Banks and Trusts
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Vacant properties do, however, offer potential opportunities for community revitalization, first-time homeownership, land reuse, a stronger tax base, and other benefits. In fact, states, municipalities, community development agencies, housing nonprofit organizations, and other entities are establishing or considering land banks and trusts as a mechanism to facilitate the rehabilitation or repurposing of surplus vacant homes.
Land banks themselves are not a new concept. The cities of Cleveland, St. Louis, Atlanta, and Louisville have had them for decades. In 2003, Genesee County, Michigan, created a land bank that has become a national model for cities considering aggressive programs to facilitate reclamation, demolition, and rehabilitation of vacant properties to spur large-scale economic development.
Late in 2008, the state of Ohio passed legislation to permit the creation of regional land banks across the state to stem the devastation to neighborhoods. In the city of Cleveland in particular, unscrupulous speculators have wreaked havoc on entire neighborhoods that were once thriving communities for hard-working, middle-class families.
Jim Rokakis, treasurer of Cuyahoga County, in which Cleveland resides, led the charge to pass the Ohio legislation and is in the process of creating a countywide land bank whose goal is to be a self-sustaining entity that would accept foreclosed properties in the city and the suburbs.
Another initiative gaining attention is the development of community land trusts. Under a land trust, an entity—usually a not-for-profit corporation—will acquire properties, either as part of a redevelopment project or for rehabbing to provide housing for first-time or lower-income buyers.
Recently, Enterprise Community Partners announced a program with a national servicer to facilitate the transfer of foreclosed properties to municipalities receiving grants from the federal government. Other private entities with national reach have been considering similar initiatives.
*Overcoming Logistical and Funding Obstacles
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Many servicers have REO alternative disposition programs they utilize to reduce their portfolios and allow their surplus properties to support community and economic development programs in cities across the country.
A major challenge, however, both for servicers wishing to dispose of REO properties and municipalities that might have interest in acquiring them, has been coordinating a partnership that meets the goals and objectives of each.
Because servicers manage national portfolios of properties, they face the challenge to connect with potentially hundreds of different municipalities and entities when they wish to dispose of aged and troubled properties using alternative methods.
Similarly, municipalities and community development organizations looking to acquire properties, either individually or in clusters, have a difficult time figuring out where and how to begin and whom to contact.
One solution being investigated by a handful of industry leaders is the creation of clearinghouses that would maintain databases on surplus properties, offering a ""one-stop-shop"" both for investors and municipalities. These clearinghouses would match available properties with community opportunities to refurbish homes, putting homeownership within reach for many first-time or low-income buyers, who otherwise might not be able to pursue their dream.
With databases on large pools of properties in specific areas, municipalities and land banks may even be able to identify and assemble surplus parcels in targeted areas to create more attractive land packages for economic or community reuse. Vacant and abandoned properties can be acquired and converted to public gardens, playgrounds, parks, and other green spaces. Even better, vacant lands can be redeveloped for retail and commercial enterprises that provide jobs and strengthen the community’s tax base.
Of course, even with aged and troubled properties being acquired by these entities at minimal cost, funding will be a major hurdle. Communities will incur expenses to hold, maintain, demolish, and repurpose properties. The federal government has allocated $4 billion to communities to acquire foreclosed properties under the Housing and Economic Recovery Act of 2008. But given the enormity of our country’s housing crisis, these dollars won’t go far—especially in the hardest-hit communities.
Overcoming the funding challenge will be an important component in structuring a new and better way to dispose of and reclaim surplus properties. This is why it is essential for the servicing industry to help support programs such as those being developed in Cuyahoga County.
Regardless of the challenges, there is great potential in the concept of aligning the opportunities and needs of investors, servicers, municipalities, and community development organizations to create a resource that benefits everyone.
With a little imagination, a large dose of commitment, and a strong spirit of cooperation between the industry and government, we have the ability to turn today’s foreclosure crisis into an opportunity for community revitalization—providing homes, creating family-friendly neighborhoods, building economic prosperity, and breathing new life into communities now devastated by hopelessness and decay.
In fact, what we may discover is that we can’t afford to commit to anything less.