REO Vacant Properties - Federal Reserve

REO&Vacant Properties

Strategies for Neighborhood Stabilization

Features ? REO markets and how they operate ? Keeping properties occupied despite delinquencies ? Stabilizing neighborhoods after foreclosures

Research and Commentary from ? Nonprofit and municipal practitioners ? Federal Reserve, academic, and policy researchers ? Private sector partners

September 2010

A Joint Publication of the Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board

REO&Vacant Properties

Strategies for Neighborhood Stabilization

A Joint Publication of the Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board

The views expressed here are those of the editors and individual authors and are not necessarily those of the

Federal Reserve Banks, the Federal Reserve System, or the authors' affiliated organizations. ?2010, all rights reserved.

Table of Contents

Introduction 4 Letter from Presidents Rosengren and Pianalto and Governor Duke 5 About the MORE Initiative 6 Foreword

Section I: Research and Analysis The Scope and Nature of the REO Challenge

13 REO Properties, Housing Markets, and the Shadow Inventory by Alan Mallach, Brookings Institution

23 Shuttered Subdivisions: REOs and the Challenges of Neighborhood Stabilization in Suburban Cities by Carolina K. Reid, Federal Reserve Bank of San Francisco

33 Holding or Folding? Foreclosed Property Durations and Sales during the Mortgage Crisis by Dan Immergluck, Georgia Institute of Technology

47 REO and Beyond: The Aftermath of the Foreclosure Crisis in Cuyahoga County, Ohio by Claudia Coulton, Michael Schramm, and April Hirsh, Case Western Reserve University

55 Examining REO Sales and Price Discounts in Massachusetts by Kai-yan Lee, Federal Reserve Bank of Boston

65 Maximizing the Impact of Federal NSP Investments through the Strategic Use of Local Market Data by Ira Goldstein, The Reinvestment Fund

77 Servicing REO Properties: The Servicer's Role and Incentives by Stergios Theologides, CoreLogic

Section II: Solutions Strategies for Dealing with REO and Vacant Properties

89 Acquiring Property for Neighborhood Stabilization: Lessons Learned from the Front Lines by Craig Nickerson, National Community Stabilization Trust

95 REO Disposition and Neighborhood Stabilization: A Servicer's View by Jay N. Ryan Jr., Fannie Mae

101 Acquiring Privately Held REO Properties with Public Funds: The Case of the Neighborhood Stabilization Program by Harriet Newburger, Federal Reserve Bank of Philadelphia

107 Nonprofit Strategies for Returning REO Properties to Effective Use by Daniel Fleischman

115 Purchasing Properties from REO and Reselling to Existing Occupants: Lessons from the Field on Keeping People in Place by Elyse D. Cherry, Boston Community Capital, and Patricia Hanratty, Aura Mortgage Advisors

123 The Community Asset Preservation Corporation: A New Approach to Community Revitalization by Harold Simon, National Housing Institute

131 Embracing Renting to Accelerate Neighborhood Recovery by Danilo Pelletiere, National Low Income Housing Coalition

141 Cleaning up after the Foreclosure Tsunami: Practices to Address REOs in Northeast Ohio by Frank Ford, Neighborhood Progress, Inc.

145 How Modern Land Banking Can Be Used to Solve REO Acquisition Problems by Thomas J. Fitzpatrick IV, Federal Reserve Bank of Cleveland

151 The Community Reinvestment Act and NSP: A Banker's Perspective by Mike Griffin, KeyBank

Project Team Project Directors and Content Editors

Prabal Chakrabarti, Federal Reserve Bank of Boston Matthew Lambert, Federal Reserve Board Mary Helen Petrus, Federal Reserve Bank of Cleveland

Managing Editor Anne O'Shaughnessy, Federal Reserve Bank of Cleveland

Content Editor Lisa Nelson, Federal Reserve Bank of Cleveland

Designer Julie Weinstein, Federal Reserve Bank of Boston

Acknowledgments The project team would like to acknowledge the following individuals, whose expertise, insights, and support were critical to the completion of this report: Heidi Furse and Richard Walker of the Federal Reserve Bank of Boston; Ruth Clevenger, Amy Koehnen, and Michele Lachman of the Federal Reserve Bank of Cleveland; and Joseph Firschein and Theresa Stark of the Federal Reserve Board. The team would also like to thank Tammy Edwards, Scott Turner, and Alicia Williams of the Federal Reserve's Mortgage Outreach and Research Efforts Committee.

Cover image: iStockphoto

Letter from Presidents Rosengren and Pianalto and Governor Duke

Foreclosures are the hard reality of the housing crisis. In 2009 alone, roughly 2.5 million homes received a notice of foreclosure, according to the Mortgage Bankers Association. That represents a nearly 25 percent increase from already-elevated 2008 levels and is far higher than previous years. Given the magnitude of these numbers, the question then becomes how best to help communities, particularly low- and moderate-income communities, where foreclosed properties are concentrated.

The purpose of this volume is to shed light on the problem of vacant and abandoned properties in the hands of lenders who have foreclosed but continue to hold them as real-estate-owned (REO) on their books. We have asked a variety of experts to address such questions as

? What are the key challenges faced by communities as the REO inventory grows?

? What do the data tell us about REO markets? ? What incentives influence buyer and seller decision-making? ? What strategies guide community, municipal, and nonprofit responses?

This collection of work examines field-tested solutions for neighborhood stabilization, such as code enforcement, maintaining occupancy through tenants, and land banking. It reports on ongoing programs such as the federal Neighborhood Stabilization Program and a national "first look" program for community-minded buyers. The volume also examines unintended consequences and proposes new solutions.

We are pleased to present this volume as a joint effort of the Federal Reserve Banks of Boston and Cleveland and the Board of Governors that is part of a broader Federal Reserve initiative to address the impacts of foreclosures on individuals and neighborhoods. We hope you find the publication useful and pass on its lessons.

Eric Rosengren President & CEO Federal Reserve Bank of Boston

Sandra Pianalto President & CEO Federal Reserve Bank of Cleveland

Elizabeth Duke Governor Federal Reserve Board of Governors

4 REO and Vacant Properties: Strategies for Neighborhood Stabilization

About the MORE Initiative

Since the start of the financial crisis, the Federal Reserve System has undertaken a series of unprecedented actions to help stabilize the mortgage and financial markets and promote economic recovery. What is less well known is that the Federal Reserve has also been working to respond to the foreclosure crisis on "Main Street," leveraging the System's research, community affairs, and supervision and regulation functions to support innovative foreclosure prevention and neighborhood stabilization strategies at the local level. In the spring of 2009, the Federal Reserve's Conference of Presidents embarked on a collaborative effort to bring to bear the substantial expertise and knowledge of mortgage markets across the Federal Reserve System. Under the auspices of MORE--the Mortgage Outreach and Research Efforts initiative--the 12 Federal Reserve Banks and the Board of Governors have worked together determinedly, leveraging the System's expertise to inform and engage policymakers, community organizations, financial institutions, and the public.

This publication, REO and Vacant Properties: Strategies for Neighborhood Stabilization, is one of numerous MORE-sponsored projects designed to promulgate best practices and innovative programs for local communities and individuals who are working to improve the conditions of neighborhoods that have been affected by high rates of foreclosure. Information on other MORE projects, including foreclosure toolkits and other valuable information for borrowers and community organizations, can be found at and the Web sites of each of the Federal Reserve Banks.

The MORE initiative demonstrates the Federal Reserve's commitment to ending the foreclosure crisis and promoting neighborhood recovery. We will continue to use our resources to provide relevant data, research, and outreach in support of individuals and neighborhoods struggling to recover from the housing crisis and the resulting recession.

Charles Evans President & CEO Federal Reserve Bank of Chicago

Members of the MORE Committee

Douglas Evanoff Prabal Chakrabarti Larry Cordell Tammy Edwards Joseph Firschein Scott Frame Frederick Furlong Kristopher Gerardi Erica Groshen Joy Hoffmann Jacqueline King John Krainer

Co-Chair / Chicago Boston Philadelphia Kansas City Board of Governors Atlanta San Francisco Atlanta New York San Francisco Minneapolis San Francisco

Alicia Williams Matthew Lambert Andreas Lehnert Nellie Liang Harriet Newburger John Olsen Jeff Paul James Savage Theresa Stark Daniel Sullivan Douglas Tillett Scott Turner Richard Walker

Co-Chair / Chicago Board of Governors Board of Governors Board of Governors Philadelphia San Francisco Atlanta Cleveland Board of Governors Chicago Chicago San Francisco Boston

Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board 5

Foreword

Residents of Rust Belt cities harbor dark memories of past economic downturns. In cities like Lawrence, Massachusetts, and Cleveland, Ohio, economic shifts led to significant job losses and disinvestment, along with the related problems that frequently accompany such changes. In 1992, for example, Lawrence lost 120 buildings to arson. Crime and other illicit activity proliferated. But thanks to the hard work of community activists and successful public/private partnerships, the late 1990s and early 2000s saw redevelopment in Lawrence and dozens of cities like it. This urban renaissance also took hold in larger cities like Cleveland, which leveraged a robust community development corporation network to rehabilitate existing residences, construct new homes, and revitalize the city's commercial district.

The recent housing crisis threatens to undo the progress made in communities over the past 20 years. The viability of investments made in neighborhoods by banks, investors, nonprofits, foundations, business owners, and residents is in question as the foreclosure problem persists, compounded most recently by high unemployment levels. The issue of vacant and abandoned property threatens the very sustainability of many communities. But the effects of the housing crisis are not limited to urban areas; suburban and rural areas have been hit hard as well. Communities across the country have lost revenue because of dwindling property-tax bases; they face severe cuts in critical services such as police, social services, libraries, and schools despite sharp increases in demand. As older communities face familiar fears, neighborhoods in newer or rapidly expanding communities face different challenges, such as how to fund the provision of municipal services to the remaining residents of halfempty neighborhoods.

With this publication, we aim to shed light on how community development practitioners and policymakers can help stabilize the neighborhoods most at risk, that is, those beset by concentrations of foreclosures. The animating idea here is that community development practitioners should be guided by the best available research, by anecdotal reports of what efforts are working, and by the best new ideas about what other approaches might work. We culled the country for individuals and institutions that are deeply engaged in this issue, both academically and at street level. Our authors, figuratively speaking, have rolled up their sleeves and gotten their hands dirty in the data or in the field, whatever their institution or perspective. This publication is presented in two parts; one focuses on research and analysis and another focuses on policy solutions.

Market Dynamics Several articles look at selected cities, counties, or metropolitan areas to identify patterns and draw broader inferences about the REO market. These articles highlight the distinctions between so-called weak and strong markets, and among inner-city, inner-ring, and "exurb" communities. Claudia Coulton, Michael Schramm, and April Hirsh look at foreclosures in the Cleveland area, which experienced the rise in foreclosures earlier than other parts of the country. They find compelling evidence of disproportionate numbers of foreclosures in minority communities, changes in how REO properties are sold and to whom, and that many REO properties are being left to deteriorate. Kai-yan Lee takes us to some of the cities and towns of Massachusetts, many of them former mill towns that successfully

6 REO and Vacant Properties: Strategies for Neighborhood Stabilization

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