Cleveland: Foreclosure Recovery and Prevention in Six Neighborhoods

Background

The scale of foreclosures in Cleveland is vast. In 2007, Cleveland had more bank owned (REO) properties than any city in the nation other than Detroit; 3 percent of its owner- occupied properties were owned by banks or servicers. Foreclosures in Cleveland are concentrated in a small number of low- and moderate-income neighborhoods. African- American neighborhoods were particularly hard hit: in some of Cleveland’s African- American neighborhoods, over half the homes are in foreclosure. Home values in Cuyahoga County have dropped up to 50 percent, and the median home sales price has dropped 28 percent.

Cleveland has a three-decade long history of trying to return vacant and abandoned properties to productive use. The City of Cleveland and its extensive nonprofit community that includes over fifty community development corporations have been fighting for the last thirty years to revitalize city neighborhoods and reclaim abandoned properties.

At the beginning of the decade, progress was visible to all: neighborhoods had started to experience revitalization and newfound market strength. People were paying more for newly constructed homes and quality rehabilitated homes in virtually all areas of the city. John Wilbur, the City’s Assistant Director of the Department of Community Development, says the City was caught unawares when the impacts of the foreclosure crisis and the economic downturn landed at its door. They had underestimated the power of these global forces to weaken neighborhood real estate markets. Neighborhoods that were stable prior to 2000 seem to be surviving well but the neighborhoods that were just starting to see progress between 2000 and 2005 with a few new development projects in place are not doing so well. Home values in these fragile emerging successes are now dropping precipitously.

Two different but related foreclosure recovery efforts are now being carried out to reclaim this progress and stabilize neighborhoods: the Opportunity Homes effort led by nonprofit intermediaries and the Neighborhood Stabilization Program led by the City.

Opportunity Homes

Neighborhood Progress, Inc. and the Cleveland Housing Network are partnering to implement the Opportunity Homes effort to recover foreclosed properties in six neighborhoods. The six targeted neighborhoods, selected through an RFP process, share three characteristics: each neighborhood is attractive to new residents, has a local community development corporation with capacity to acquire and rehabilitate foreclosed properties, and is planning a large-scale project to anchor the recovery of the neighborhood. (Note: Since the national economic downturn, construction for many of these large anchor projects has been postponed.) Overall, the program is expected to meet the following goals over the next three years:

• Rehabilitate 150 homes;
• Demolish 300 residential structures; and
• Prevent 300 foreclosures adjacent to or very near to houses being rehabilitated in order to protect that rehabilitation investment.

Resources are being targeted to small four- to six- block areas surrounding the anchor project, called “Model Blocks,” in order to maximize impact. CDC’s coordinate relevant resources, including home repair and landscaping assistance, to bolster the model block efforts, engage residents in home improvement and restore healthy markets. This foreclosure recovery project is an extension of the community revitalization work that Neighborhood Progress and partner CDCs have been performing for the past 15 years in these neighborhoods.

The annual budget for the Opportunity Homes effort to reclaim and rehabilitate 50 vacant homes each year for three years is $6,350,000. The budget assumes an average cost for acquisition and rehabilitation of $127,000 per house. The annual budget to demolish 100 homes per year is $1 million and assumes a demolition cost of $10,000 per property, an increase over the past couple of years due to more stringent asbestos remediation requirements. The City of Cleveland will pay for the demolitions.

So far, Opportunity Homes is on schedule to meet its targets. Twenty-six properties have been acquired, 46 have been demolished and 21 foreclosures have been averted, as of April 2009

Citywide Neighborhood Stabilization Program

The second major Cleveland foreclosure recovery program was recently launched by the City and has an even greater emphasis on demolition. The City of Cleveland received $25 million in Neighborhood Stabilization Program Funds. Eight million dollars will be used to acquire and rehabilitate housing. The remaining $17 million will be used for demolition. According to John Wilbur, Cleveland’s Assistant Director for Community Development, demolition has become the default plan of action for vacant properties in Cleveland. The city has over 8,000 abandoned and vacant homes in a physically distressed condition. This is after demolishing 200 distressed properties a year for the first part of the decade, and demolishing 1,000 homes in both 2007 and 2008. In 2008, the City sent staff to survey vacant properties. Wilbur’s staff recommended that two-thirds of the single-family and small multi-family (up to 3 units) properties be demolished because the structure was not viable or because there were a significant number of other vacant and abandoned buildings on the block that made the neighborhood unattractive to buyers. Today, the presumption is that the property will be demolished unless there is interest from a buyer or a developer. The City has relationships with a group of developers who review all available foreclosed properties on the city’s website and can prevent demolition with an online expression of interest.

The City is currently focusing on two sources of properties: city tax foreclosed properties and HUD REO properties. The city has control of the properties in foreclosure for unpaid taxes so it is actively demolishing or rehabilitating those properties to return them to market. The City also reached an agreement with HUD to buy HUD homes valued at less than $20,000 in bulk for $100 each and to buy HUD homes valued at over $20,000 for a 50 percent discount. Furthermore, the City is in active conversation with Fannie Mae and with banks that act as depository banks for the City of Cleveland about their foreclosed inventory. They have tried to bring other lenders to the table but have found it incredibly difficult to locate an individual with the power to negotiate for the investors. Neighborhood Progress is working with two lender collaboratives – the “National Community Stabilization Trust” and the “REO Clearinghouse” to establish a vehicle for moving post-foreclosure vacant property into productive reuse by community development entities like Opportunity Homes, LLC. The City is actively watching these two pilot efforts with Neighborhood Progress to see if they will result in a more successful way to connect the City and its community development organizations with REO inventories.
 

Challenges

Substantial subsidy is required to rehabilitate each home due to a significant decline in market values. According to Frank Ford, Sr. Vice President for Research and Development at Neighborhood Progress, Inc, dramatic reductions in property values make it necessary to provide a greater subsidy to fill the gap between costs to acquire and rehab and the resale price. Over the last decade, typical costs were $30,000 for acquisition of a vacant house and $80,000 for substantial rehab; a sales price of $130,000 was then typical. That allowed $20,000 for soft costs and a developer fee. Today, however, even if Neighborhood Progress can acquire a foreclosed home for $15,000, it will need to invest an additional $85,000 for rehabilitation, while soft costs such as negotiating for acquisition, title search, appraisals and legal fees will amount to at least $25,000. As a result, neighborhood organizations put $125,000 into each property but in the current market may only be able to sell them for $85,000 or less. If Neighborhood Progress and its partner, Cleveland Housing Network, are not able to sell the homes they do acquire and rehabilitate, they plan to transfer them to responsible homeowners through a short-term lease-purchase program.

A growing network of flippers and speculators, many of them from out of state, is competing for these same properties: they will typically invest only about $10,000 worth of cosmetic repairs and attempt to sell for a profit. They specialize in helping lenders who have come to a decision that they want to “dump their garbage,” according to Ford. Speculators, for instance, will buy from a lender 150 properties located throughout the city for prices that are generally less than $10,000 per property, and in some cases perhaps only $1,500. Lenders don’t seem to be as interested in selling to a CDC or even to Neighborhood Progress – since they are only able to acquire foreclosed properties in the targeted areas in which they are working.

Will the Opportunity Homes program restore healthy markets to these 30 blocks? Frank Ford of Neighborhood Progress is hopeful but uncertain. The foreclosure crisis and its impact are unprecedented. “Under our feet, we have seen the foreclosure rates increase five-fold since 1995.” Market values for homes in challenged neighborhoods have always been low, but now values are slipping even further, as is demand. One impact that Ford hopes this project will have is to restore the capacity of CDC’s in Cleveland to rehabilitate and repair older housing stock. While historically nonprofit developers rehabilitated the properties in their neighborhood, during the 1990s the priority became new construction and the existing stock deteriorated.

Additional Efforts

As existing blight is eliminated either by renovation or demolition, Neighborhood Progress believes it is also imperative to prevent new foreclosure – and new abandonment – on the very streets being stabilized. Accordingly, the intermediary expanded its focus to include foreclosure prevention. Neighborhood Progress purchased proprietary mortgage data from First American Title Company for $9,000, so that they would be able to identify homeowners with adjustable rate mortgages due to reset between July 2008 and December 2010. Michael Schramm, an analyst-programmer at Case Western Reserve University's Center on Urban Poverty and Community Development, cross-referenced the databases with sheriffs’ sales and other public records to make sure nonprofits could approach at-risk homeowners identified by this early-warning data. A GIS mapping and data system maintained by the Center on Urban Poverty and Community Development’s Northeast Ohio Community and Neighborhood Data for Organizing (NEO CANDO), provides the neighborhood teams with the information they need to act to prevent the foreclosure of individual properties within the target area. Neighborhood Progress pays a nonprofit organizing group called Empowering and Strengthening Ohio’s People (ESOP) $20,000 to knock on doors of homeowners at risk for foreclosure to counsel them on their options. See a case study of the effort here.

In addition to ESOP, Neighborhood Progress is also working with three other foreclosure prevention agencies to prevent the foreclosure of one hundred homes per year over three years. The four agencies are already funded to do counseling and loan modification and collectively a success rate of helping 52 percent of the mortgage holders who seek their help.

Tracking Property Conditions and Activities in the Buckeye Neighborhood Model Block Area

Neighborhood Progress has also participated in a city-wide attempt at policy reform. Neighborhood Progress co-convened with Cleveland Neighborhood Development Coalition (CNDC), a CDC trade association, the “Vacant Property Coordinating Council,” which has been meeting monthly for the past three years to address policy reforms at the City and County level. It has brought together for the first time funders, CDC’s, two local universities, City council, the Mayor’s office, the Cleveland Housing Court, representatives of County government, and the Cleveland Federal Reserve Bank. Frank Ford chairs this group. This Council has been effective at coordinating resources and bringing about changes in policies and practices but Ford concedes that the group is not an advocacy group so is limited in its ability to compel change.

Neighborhood Progress is also suing two of the lenders holding the largest inventories of vacant REO property. The lawsuit alleges that Deutsche Bank and Wells Fargo own hundreds of vacant houses, and, in an effort to “off-load” their liability, are “dumping” these houses to speculators who flip the properties or hold onto them without any level of investment, waiting for a windfall and letting them blight the community in the interim. John Wilbur states that the City has not been approached by either lender with any proposals to donate or sell their REO inventory at a discount but the City is hoping this will be part of the lawsuit’s resolution.

Reforming the City’s Land Bank

The City of Cleveland has also found that its dated land bank structure no longer meets its needs. The existing land bank, one of the first land banks established in the country, has a policy of only banking vacant land, so structures must be demolished first. During the last few months of 2008 it amended its policy to accept land bearing a structure if a demolition order for the structure is already in place. The land bank has very limited resources so often cannot compete with speculators, who are contributing to the decline of Cleveland’s housing market. Cuyahoga County recently created a new land bank that will bank residential homes until the housing market is once again viable; this land bank will have the resources to competitively purchase foreclosed properties, board them up, maintain them, or demolish as necessary. The City is deeply involved in establishing this new land bank and hopeful that it will succeed in preserving more homes until certain neighborhood markets are once again viable.

Conclusion

After dealing with abandonment for decades, Cleveland is ramping up to deal with the foreclosure crisis with far more experience than many other cities. Nonetheless, Cleveland has found that some of its tools, like its land bank that is often cited as a national best practice, are unable to meet the demands of the crisis and that resources are too limited to allow effective response in every neighborhood. By targeting resources and by having the City and nonprofits jointly attack the foreclosure problem, Cleveland hopes to regain the community revitalization progress made over the last ten years and establish healthy real estate markets throughout the city.