Foreclosure Mitigation, Abandoned Properties, What’s Missing?

At an upcoming housing summit in New Jersey, there are promising presentations for anyone who sees the grave danger associated with the foreclosure crisis and the subsequent effects on neighborhoods, but does it go far enough?

While the conference will have a presentation on foreclosure mitigation, and another on dealing with abandoned properties — two pieces to the puzzle of community stabilization — I am concerned that the bigger picture is being missed. While foreclosures have precipitated a dramatic decline in thousands of neighborhoods, stopping the foreclosures won’t be enough to bring those neighborhoods back.

So, focusing on two important aspects of the problems facing communities devastated by the foreclosure crisis is helpful, but also serves to draw attention away from the underlying deeper problem. Without explicitly making the broader connection and paying attention to the other pieces of the problem, our neighborhoods will not come back, and CDCs will be judged as having failed.

12 COMMENTS

  1. CDCs have become more uni-dimensional than ever riding a wave of cheap credit on the promise that they could revive real estate markets. Naturally, when the tide of cheap credit went out, there were going to be problems. This isn’t from some lack of understanding or something. Community development organizations have rationalized around this model because that’s where the money was. It was a very good model when money was cheap and they were very good at building houses, but it was also a narrow focus as many articles in Shelterforce have long argued.

    Now that a new urban crisis is here, it is unclear what CDCs are supposed to do. They can’t build their way out of the problem and they are staffed incorrectly for other approaches.

    What is needed are political solutions that will redistribute government and private sector resources. The mostly apolitical model of community development is of little use here.

  2. I think it’s pretty clear what cdc’s can do – foreclosures and vacant properties are destroying the very neighborhoods they’ve worked so hard to build. The opportunity, (and the obstacle) is to transform themselves from the uni-dimensional approach you correctly noted to acquirerers of abandoned properties who can control, rehab and convey them back to the market.

    If we wait for the political solutions, cdc’s will get left out of the mix, because we will be seen as irrelevant.

  3. “So, focusing on two important aspects of the problems facing communities devastated by the foreclosure crisis is helpful, but also serves to draw attention away from the underlying deeper problem. Without explicitly making the broader connection and paying attention to the other pieces of the problem, our neighborhoods will not come back, and CDCs will be judged as having failed.”

    Such as been the way of the old paradigm of community development. Quantifying the whole problem and root cause(s) have been an anathma to practitioners since Bobby Kennedy pioneered the movement. The fragmented approach to CED as a methodology for restoring inner city and some rural communities has failed presenting a see-saw effect. We’ve gone through this back and forth, up and down cycle dating back to the 60s under Urban Renewal. The vital missing part, although a lofty concept, is factoring in the downside of integration which in many aspects destroyed the essential fiber that produces wholesome and thriving communities.

    One aspect absent from the debates is the failure of social service delivery systems; and, the laws that literally stripped parents of their disciplinary duties. In hindsight, we note there has been, although well intentioned, many failures relative to the so-called empowerment of low-wealth individuals and families.

    This mortgage meltdown wouldn’t be a topic of discussion, except for forums such as this one, had it not permeated into the middle class and wealthy sectors. Predatory practices have preyed upon inner city communities since the exodus of white folks in the 60s. Government predators first…urban renewal then, redevelopment agencies, now. Then came the corporate vulchers posing under the guise of public private partnerships. So, this is not a new eagle flying. The difference, this time, is the wings are wider spread.

    Of course, the few tools and protections enacted over the years have now fallen victim to the blame game. CRA and fair lending especially in this instance. CDCs and advocates have made little noise, that is in the court of public opinion, in defense of the accusations launched against CRA during this mortgage meltdown. Right wing callers into the Washington Journal, the voice of the people, readily blame CRA and the Democrats for the crisis. They are quick to say…I ain’t racist..but… So euphemistically Po Black folks are responsible for this global economic meltdown caused by greedy corporate mongruls and nobody is shouting out from the rooflines.

    We marched, conducted sit-ins, lobbied congress and everything else to get CRA regulations passed, yet the industry, with exception to John Taylor, President/CEO of the National Community Reinvestment Coalition, NCRC, have remained relatively silent in the national media debates. Who can explain what happened to bring this catastrophe about better than those who have analyzed, scrutinized, advocated against; and, helped to repair other than the industry itself? That’s dangerous and dilutes the power of this valuable tool.

    CDC’s are to be commended for the work they do across this country in lieu of the many obstacles they must overcome to accomplish their missions. But as Barack’s presidency represents the dawning of a new day..hopefully that is, so too must the thinking of CDC practitioners change. As Barack faces the greatest economic and foriegn policy crisis ever faced by this country so do CDC’s with the foreclosure disaster. But, as always, we shall overcome and this too shall pass. We’re blessed with resiliency that way.

  4. “The opportunity, (and the obstacle) is to transform themselves from the uni-dimensional approach you correctly noted to acquirerers of abandoned properties who can control, rehab and convey them back to the market.”

    This seems reasonable, but it is part of the same market-oriented approach that has failed (it is the same “uni-dimension”). Many of the current producers started out as rehabbers of abandoned property and we see the end result.

    Markets are not a solution to anything despite the claims of many (not all) CD practitioners. They do what markets do. In good times they produce wealth. In bad times they produce poverty. All the time they produce inequality. Attempting to save communities by inflating real estate markets was always a bad idea. Until now it had the positive effect of building lots of nice houses. That won’t happen again anytime soon. Even if CDCs reorganize and survive, their partners, the builders, contractors, etc. are going out of business. The LIHTC market is blown up so financing is drying up. This is what happens when credit gets repriced to economically rational rates. I mean, do you really think that the debt of a CD low-income housing development really is the same risk as the debt of the federal government? It was that sort of irrationality that has fueled community development.

    The fact is: many cities have too much housing stock, and inappropriate housing stock. The ability to sell this stock in the first place was due to credit that was ridiculously cheap in historical terms. There is no way that such cheap credit will return anytime soon. So, rehab away, but there won’t be any buyers.

    But if you want to pursue this there are plenty of deconstruction, lease-purchase, and rehab models out there that seem to accomplish their goals pretty well.

  5. Michael I’m sure if you’re responding to David or me but I’ll comment since I rec’d notice. Tell me what new direction do you suggest CDCs take? And, pls. do explain what you mean by when “credit gets repriced to economically rational rates”. CDCs aren’t going anywhere and will continue to find creative ways to build housing and revitalize neighborhoods. Hopefully they’ll have a more equitable environment in which to operate. Maybe they’ll be more selective in choosing their partners since everyone made out like fat rats during this scandal…lowes, home depot, originators, banks, developers, contractors, etc. Afterall houses that were constructed and rehabbed were sold. Oh, plenty of money was made as the result of this so-called “cheap credit” you reference. The problem arose as the result of wicked financing schemes and pure corruption. Now families face homelessness and their credit is ruined with no bailout from the government. All because of greed, corruption and no oversight.

    CDCs do have their blame in this game because some folks simply shouldn’t have become homeowners; and, those who did qualify safely and soundly should have been consistantly warned about predatory practices and effectively tracked. But that requires capacity and many CDCs simply don’t have the assets to allocate.

    You state, “that many cities have too much housing stock and inappropriate housing stock? What are your suggestions to repatriate this stock back to the market since you claim it was cheap credit that allowed it to be sold and those days are gone? As an urban dwellers I’m anxious to hear your recommendations.

  6. Hi Ramona,

    Predatory lending, subprime lending are of course huge and tragic problems. However, I mostly see them as symptoms.

    CDCs have organized themselves and their activities around improving real estate markets as a path to community well-being. When credit was cheap this was an effective strategy. Cheap credit is not simply a matter of putting people in homes who don’t belong there. Cheap credit is like a hallucinogenic drug that makes whole developments seem viable when they aren’t. It makes homes appear affordable to families when they aren’t. It makes projects viable when they aren’t. The extensive use of leverage by the CDC industry to build new projects, put people in homes and temporarily inflate market values is not going to be viable again.

    As a country we are now deflating a massive credit bubble and in its wake are tens of thousands of homes that are not viable. These should not be “rehabbed and put back on the market.” They should be destroyed. They do not have buyers. They will not have buyers anytime soon. In the meantime they will be, as you and David point out, a blight. Can you build a community development strategy around deconstruction? Probably not, but it can be a component of such a strategy and there are pilot projects to demonstrate the positive results.

    On the demand side we have a population of people that is going to take a massive hit to their incomes. Family equity in the United States is already at an all-time low and unemployment is increasing which means foreclosures will continue to increase which means more empty homes on the market. In such an environment, even if CDCs rehab and sell a bunch of houses, the only result will be to add to the debt levels of indebted households. This is not helpful. Nor does it develop the community.

    The housing mix is wrong because housing policy has been insanely skewed to homes for ownership. We have homeownership rates in this country that are unsustainable as is evident in foreclosure rates (not all foreclosures are the result of predatory lending). They are only more unsustainable in an environment of spiking unemployment. What is needed are rental units, and lots of them. Beyond that, what is needed are jobs that pay a decent wage. From this perspective, the most important community development legislation out there right now is the EFTA. hey, if that passes then maybe in a few years community residents will have enough income to buy houses again.

    I agree with you that CDCs aren’t going anywhere.However, there will be a large shakeout in the industry and the CDCs that are the most oriented around feeding a real estate market are the most vulnerable. In all likelihood their funding sources are the most under threat, they probably have the least adaptable staff, and their partners are also the most likely to be focused on housing production. There will be a die-off among this group. OTOH, CDCs with diverse funding sources, diverse programmatic activities that are not funded by developer’s fees, and staff with the broadest skill set will be the ones that survive. Less positively, CDCs that depend on political patronage are likely to thrive in relative terms. It is a simple question of the relationship between the organizational structure and the organizational environment. Market-oriented CDCs are now extremely ill-adapted to their environment. The result is not hard to predict. This is how organizational fields evolve and it is how the CDC field has evolved.

    The problem with David’s advice is that he is telling CDCs to do exactly what they shouldn’t be doing. CDCs that invest a lot of organizational resources in rehabbing homes and putting them back on the market will go out of business. The only thing that would save them are a return of cheap credit, a massive expansion in the equity of American families, and an immediate end to declining home values. You can bet on that, but a better bet would be to buy lottery tickets.

    The reason I recommend a political solution is because the only other way out is political intervention to save CDCs or, more broadly, to redistribute resources to the constituency of CDCs. David thinks that will take to long, but he only proposes organizational suicide as an alternative. I think that is a bad alternative.

    I have no interest in assigning blame to CDCs and I think charges that they are responsible for foreclosures are absurd (though I think they were stunningly passive about the problem). I also think that as an organizational field CDCs are adaptable. However, individual CDCs are much less so and are much less so than they used to be. We are at an inflection point in which everything that CDCs used to think was a great model for doing CD is now a lousy model. The ones that recognize that and make the switch will survive. Caveats about the specificities of local markets apply.

    So to answer your question: deconstruction, rental housing, and a turn to political solutions. The other alternative is non-market based CD strategies.

  7. <>

    Hi 1Michael,

    First and foremost, I really appreciate you taking the time to comment – I appreciate you engaging in this critical debate.

    I see the need to save neighborhoods – I see them going into decline specifically because the market has failed here. And yes, to do that, we’d better get busy making sure our neighborhoods are viable and vibrant. And you can’t do that with empty and abandoned properties. But I don’t think that’s necessarily incongruent with saying that there’s been too much focus on home ownership as a wealth builder. You advocate more emphasis on rental housing – nothing says that cdc’s can’t be rehabbing in that direction. Or there’s the renewed interest in shared-equity housing, landbanks and other creative ideas.

    I am inclined to agree that the problem isn’t a lack of affordable housing. The problem is that the housing that’s available is too crappy for people to want to live in.

    I think it’s clear that the market is failing here. But I think there ways to intervene. And, yes, rehabbing is certainly a way of intervening that isn’t getting enough attention or due.

    I think we’ve already seen a significant decline in housing prices. And through the bulk purchasing of REO properties, it’s possible to kill two birds with one stone – reduce the cost further and take a bigger bite at the problem. I disagree the economics don’t work – people who’ve succeeded too long in building communities through successful cdc’s have created thoughtful strategies to do just that. There are plenty of things to do to make it easier and more viable – for example reducing the transaction costs of financing, but I am not sure if your proposal, while appealing, isn’t really a throw the baby out with the bathwater response.

    As a last point, I’d be the last person to say we don’t need a political response and that the “apolitical cdc model” you alluded to needs to change. I whole-heartedly agree with that, and would entertain any ideas to get that moving.

  8. Hi David,

    First let me say: I think my tone is a little off and I apologize. It is rooted in my frustration with the fact that CD seems to be so slow to recognize how much the situation has changed and, frankly, I don’t want to see lots of bankrupt CDCs littering the landscape. Unfortunately, when I talk with intermediaries and such about their responses to the situation I am mostly flabbergasted at the suicidal/impotent trajectory they are on. And I have already written once for Shelterforce on the issue. This is the moment for CD to shine, cities will need them desperately in the coming years. It would be a shame if they weren’t around.

    “You advocate more emphasis on rental housing – nothing says that cdc’s can’t be rehabbing in that direction. Or there’s the renewed interest in shared-equity housing, landbanks and other creative ideas.”

    True enough. However, much of the stock that needs to be rehabbed was designed for ownership, not tenants. I have my doubts about the success of a lot of it if it is redeployed for rental use, but sure, its going to happen and I’m sure it will work somewhere and I am sure some CDCs will develop programs that will be helpful. I think lease-purchase models are probably helpful here. I just think that with a flood of new renters someone should start thinking about multi-family housing again and a new financing model (since LIHTC will only survive with large-scale political intervention and even then it is still too restrictive). I don’t really know anything about shared equity housing, so I will have to catch up on that. Landbanks are really only useful as a way to get housing back on the market more quickly, but that assumes a viable market model in the first place.

    “I disagree the economics don’t work – people who’ve succeeded too long in building communities through successful cdc’s have created thoughtful strategies to do just that.”

    They have indeed, basically since the government decided to subsidize bank lending for CD activity and the beginning of a secular bull market in real estate (which is now over). However, I think the evidence from many cities is more supportive of my case. You have frozen real estate markets, seized up CD financing, and builders dropping by the dozens. You have houses that are selling at auction for a couple of thousand dollars (caveats about local variation in market environments apply). And of course a historically unprecedented explosion of foreclosures that will continue through 2011 without political intervention. That means housing prices will be spiraling downward until 2011 (without political intervention). This doesn’t even take into account the effect of spiking unemployment.

    Take Cleveland as an example. In 2008 the county had something on the order of 16000 foreclosures. The capacity of its very well-developed and professional CD industry is probably around 7-800 units/year. Say they double capacity to 1600. All they will have done is build a sandcastle in the face of an incoming tide. The only places where the situation looks significantly better are places that continue to attract lots of private investment (e.g. New York and San Francisco).

    I think you are right to commend the creativity of CD practitioners for creativity in building effective economic models for their activity and perhaps I am being too glib and dismissive about the accomplishments of the field. That is not my intent. However, I still think the policies in place and their success was dependent upon an era of cheap credit. I think the action in credit markets bears me out.

    On a more positive note, the financing model that has worked so well over the last 15 years is new relative to the history of CD. Community developers have deployed other models that have relied on things such as sweat equity, expansion of useful public space, community land trusts (is that like shared equity?), and so on. There are other models for accomplishing CD that can be dug out of the history of the movement.

    The way I see it the relevant political issues for CD practitioners are that private and state investment have been concentrated to leverage growth. However, the price has been declining equity and incomes for communities that have not been privileged in this process. CD practitioners have been able to mitigate that by tapping private and state investment dollars. However, that path to mitigation will no longer work. At this moment what is needed is a bailout of communities and their residents, not banks. I am talking large-scale debt relief.

    I think foreclosures should simply stop. The argument that this encourages people to take on bad debt is absurd now that we have bailed out the people who most abused their credit. Moreover, it fails to account for the reality of foreclosure. Namely, it doesn’t just punish the homeowner, it punishes everyone within a mile of the homeowner. Republicans have painted the foreclosure issue as an individual issue. It is not. It is a community issue, a neighborhood issue, and mostly, an urban issue. The most important urban policy that could possibly be put in place are policies that halt foreclosures. After that, CDCs will have to have plans in place to deal with deteriorating municipal services (expect municipal bankruptcy to become a serious issue) and a reemergence of crime.

    CD could have a huge role to play in this environment, but I don’t see much action on the ground. The point is: we are looking at the worst urban crisis since the 1970s. In addition to foreclosures there will be municipal bankruptcies and declining services. CDCs can have a large role to play in mitigating that, but to do so they will have to get past their blind faith in markets and start analyzing the problems and developing rational solutions.

    All hands in the CD movement should be on deck. I hope NHI will work to get them on deck to do something other than moving deck chairs.

    I appreciate the venue and the dialogue. Thanks for being tolerant of a curmudgeon.

  9. Fascinating post. Areas we agree:
    Worst urban crisis in 40 years, being ignored by too many important policy makers.
    CDC’s could have a bigger effect on the field, yet are not.
    Private and state investment has been concentrated to leverage growth. [a big part of the problem]
    We need to bail out communities, not banks
    Foreclosures punish the homeowner, and everyone within a mile of the homeowner (very well said)

    areas we disagree:
    You argue the artificially low cost of credit is a necessary antecedent to successful neighborhood revitalization strategies that use the market. I think the low cost of credit helped, but I think even at higher costs, it still works. And perhaps as importantly, with the dollars being targeted to transportation and green building stimulus strategies, if we link neighborhood stabilization to those dollars, we leverage that money and more toward saving neighborhoods. Unfortunately, if we sit back and wait for the Obama administration to come in and do the right thing, we will be waiting a long time – now is the time to be speaking up on behalf of the urgent crisis facing our neighborhoods. (another area of agreement).
    I will say that, using your stark example of Cleveland (if nothing else serves as a wakeup call, this description should), the alternatives to a subsidized market-based strategy you propose (sweat equity, community partnerships etc) couldn’t possible begin to even touch the 1600 units per year. We need to do it all, much bigger and much faster. (as a side note, shared equity is well worth looking into more –
    and here’s self-serving reference on the subject! http://www.nhi.org/research/522/shared_equity_homeownership/

    You raise an important question underlying this whole debate – if we did do everything, how many neighborhoods, how many families, could be helped? What kind of resources would be required to address this problem in scale? And if someone gave CDC’s the money, would we be in a position to use it?

  10. I don’t think that those other models will replace production. I am just saying that production, to the extent it is still possible, won’t do anything. There are no buyers, even at the prices that were based on cheap credit. Now with expensive credit and high unemployment communities will simply not be “developed” by new housing production, especially not for ownership, other than in very selective settings. We need affordable housing on a huge scale because we haven’t paid much attention to truly affordable housing in a long time. CD has made housing “affordable” with leverage, but those days are over and the price is the debt peonage of American households. Unfortunately, something the CD industry was complicit in.

    So, the end of the Cleveland story is that they are attempting to get foreclosed properties into landbank and available for production as fast as possible. The problem is: CDCs have large and growing inventories of unsold houses, tax credits can’t get sold, and builders are gone. They were trying to sell houses for 100K. Now they are trying to sell them for 70K. Meanwhile, at auction you can get a suburban ranch style home for 35K. There is NO MARKET. Not only that, but there is no economically viable model for new production. CDCs that build at this point are simply assuring their demise. They are not designed to have unsold housing laying around.

    The only way to have a large and immediate impact on CD is not through more production, it is to increase the equity of households and increase labor’s share of social wealth. This requires political intervention. Barring that CDCs have to be looking to mitigate the emerging problems using tools other than intervention in the real estate market. The ones that figure that out will survive.

    The comparison with production-centered models is false. They aren’t apples and oranges. Plus, it wasn’t CDCs that built those communities, it was cheap credit which resulted in building everywhere. The demonstrable impact of CDCs on real estate markets is thin to say the least.

    I looked at the shard equity thing. I have seen these models and usually think of them as land trusts. I am in favor of them and think they should be used. However, as articulated in the piece you link to and in the examples I have observed up close, they are designed to keep housing affordable when values are increasing. Obviously, that is no longer a problem and won’t be again for some time (excepting a couple of markets). What should be done is to reengineer the idea to mitigate debt, which is the by far the biggest problem of the moment. Use this as a basis for mortgage workouts at lower interest rates and with lower principals in exchange for having the homeowner sacrifice some portion of future appreciation. If CDCs can do that at scale they are onto something…

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