Saturday, September 24, 2011

Predatory Maintenance; Post-Foreclosure Discrimination

Post and photos by the Hawthorne Hawkman.

Part 2 of 4 mortgage/policy wonkish posts.

In April of this year, the National Fair Housing Alliance (NFHA) released a study entitled "Here Comes the Bank, There Goes Our Neighborhood."

That report details significant differences between White, African-American, and Latino neighborhoods when it comes to how homes are maintained, marketed, and resold after a foreclosure.  Research focused on metropolitan areas of Conneticut, Ohio, Maryland, and Virginia, but by all appearances could easily indicate similar patterns in Minneapolis.  Now this may come as a shock to you, but foreclosed properties in White neighborhoods were more likely to have well-maintained lawns, better curb appeal, secured entrances, and professional sales marketing.  Similar Real Estate Owned (REO) properties in Black or Latino neighborhoods were more likely to be poorly maintained, unsecured, and look vacant or abandoned.  Care to hazard a guess as to which houses sold faster and for more money?


Where this bumps up against legal statutes is with the federal Fair Housing Act, which states that...

...banks and servicers must maintain and sell properties they own without regard to the race of residents living in the area.  If a bank fails to maintain and market homes equally in White or Minority neighborhoods, they are at risk of violating civil rights laws.  Different treatment in such neighborhoods damages those communities, prevents stabilization and economic recovery, and even harms investors by depressing property values. 

Even minor discrepancies with race as a factor can be violations of the Fair Housing Act.  If a landlord rents to a White tenant at $800 per month, but charges Black or Latino tenants $850 for the same kind of unit, that $50 difference constitutes a civil rights violation.  Imagine what happens when one considers the disparate impact of foreclosures on communities of color:  The Center for Responsible Lending estimates that between 2009 and 2012, African-American communities will lose $194 billion and Latino communities will lose $177 billion due to the depreciation of home values of properties near foreclosures.  This isn't even equity lost by victims of foreclosure; this is diminished values to the people who are left.


The department of Housing and Urban Development (HUD) makes it clear that "failing or delaying maintenance or repairs of sale or rental dwellings because of race" is a prohibited act.  Moreover, it is unlawful to "make unavailable or deny" housing to any person because of race.  If the poor maintenance or marketing of an REO property in a minority neighborhood makes it difficult for a purchaser to obtain a mortgage, then the bank, servicer, or listing agent has made the housing unavailable.


The house pictured above is 2939 Lyndale Avenue North.  This house was listed for sale last winter, and the city intended to purchase it for the purpose of demolition and land banking.  The house was - and still is, thankfully - an absolute gem.  But while the house was marketed, the steps were never shoveled.  Gutters and spouts were in obvious need of repair, the house did not have a typical "for sale" sign out front, and both signs in windows and boarded apertures made it clear the home was vacant.



The way this house was (not) maintained and (not) marketed is quite typical for properties in 55411 and 55412.  Fortunately in this case, the Hawthorne board recognized this home's potential and advised the city to refrain from purchasing for the purpose of demolition.  Other houses aren't so lucky.


The curb appeal of a house is one of the most important elements that attracts a buyer to a property.  And in the digital age, buyers "drive by" multiple properties via online searches long before they even contact a Realtor.  Many if not most foreclosed houses listed for sale in Hawthorne are both poorly maintained and have sparse, unappealing photos.  The study elaborates:

"A bank’s failure to adequately maintain a property may be related to an inaccurate perception of the house’s actual value and is also often related to the false belief that an REO in a distressed neighborhood is not worthy of financial investment...Moreover, deferring maintenance on properties in distressed neighborhoods virtually guarantees that the property will remain on the market for a longer time. The bank will lose even more money, the neighborhood will suffer with a blighted home and the local government will lose tax revenue."
The report assigned point values to the basic maintenance, safety, curb appeal, and marketing of homes in White, African-American, and Latino neighborhoods.  Homes in White neighborhoods consistently scored higher than those in communities of color, and minority communities had a prevalence of homes receiving low or failing scores.  In the Maryland study, every single "failing" home was in an African-American neighborhood.


The signage was different in African-American homes as well.  In many White communities, it was difficult to tell the difference between a bank-owned property and a traditional sale; they were marketed almost identically.  In minority neighborhoods, foreclosed houses were often marketed as distressed properties, with "Bank Owned," "Real Estate Auction," or "Foreclosure" signs posted without the ubiquitous Realtor lawn sign.  "No Trespassing," "Vacant," and "This Property Has Been Winterized" signs were also more prominently displayed in African-American and Latino neighborhoods.


While the data did not cover Minneapolis at all, I think it's fair to say that we know conditions here aren't markedly better.  So the obvious question arises:  What do we do about it?  My knee-jerk reaction is to do a similar study here (only a true policy wonk looks at something as outrageous as this and says, "Knee-jerk reaction!  Do a study!"), find the worst offenders, and sue the pants off of them.  A more nuanced approach will be presented in an upcoming post.



15 comments:

  1. The documentation of inadequate maintenance, etc., is extensively documented and photographed on my blog, your blog, and other NoMi blogs for various specific addresses.

    If it comes down to it, I hope this archive of information will prove useful in lawsuits.

    However, as for a "nuanced approach," obviously it would be better to call out the worst offenders and get them to FIX THE ISSUES rather than spend years in court.

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  2. John, you're absolutely right that we need to get these homes more presentable as a first order of business. But the resulting depreciation of property values in north Minneapolis from these practices has resulted in a tremendous loss of revenue for individuals and local governments. The responsible parties should be made to correct this injustice, and that's going to take legal action.

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  3. Your "nuanced approach" is legal action?

    I thought you were hinting at something other than legal action.

    But, well, fine.

    Sue 'em.

    Who will be doing the suing?

    Also, will you be publishing lists of badly maintained Northside properties and the banks responsible, naming names?

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  4. John,

    Look at the time-stamp on this post. 3 a.m. And the previous post was finished at 9:30 p.m. the evening before. A post recommending a variety of policy recommendations will be published sometime today.

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  5. In the meantime, if you want to help me coin a name for this discriminatory practice, feel free. "Predatory Maintenance" was the best I could come up with as a first shot, but I've also been thinking of "Maintenance Redlining" as a possibility.

    But you and other readers are a creative bunch. I'd welcome any ideas for what to call this. The name has to be catchy enough and encapsulate what's happening to our community.

    I'll dedicate a post to anyone who comes up with a better name than I've got.

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  6. I look at a lot of bank owned homes in the suburbs and the city and one thing I think you're neglecting to mention is the condition of the home going into the foreclosure. Lets take the "race" of the neighborhood out of the picture because i'd submit to you that NOMI is NOT a "black" neighborhood. However homes in the suburbs enter foreclosure in better condition. The bank doesn't do much if anything to suburban homes either but these homes while neglected have vinyl siding, newer roof's (due to storms) and were built in the mid-70's to early 2000's. Homes in NOMI were neglected from their purchase in 2004-2005-2006 as owners getting zero down financing were paying most of their income into their payment. Now when a home is foreclosed in NOMI its worth maybe $20-$30k and you can't expect a bank to put another $5k-$20k into something that they are already going to take a huge loss on. I'd submit it would be better to require the bank to properly demolish the property which would be less expensive then bringing it up to the standard of homes you see in the suburbs. As a side note. I'd say more then 50% of the homes I tour in the suburbs are inhabited (short sales) by minorities and in the case of foreclosures there is often evidence that the home was owned by a minority so I think you are painting suburbs as "white" when that is not actually the case.

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  7. Anon 1:15, in terms of race and whether NoMi is a "Black" neighborhood, I'm quite sure that there are legal definitions under the Fair Housing Act that would make that determination. That's why I'd like to see a study done, to see if we even meet criteria for further action.

    Your point about the comparative condition of houses at the point of foreclosure is an especially good one. But I wonder where you get your $5-$20k estimate from? Here is what the report claims as the shortcomings of the bank owners and their brokers/property managers:

    "...they do a disservice when they allow REO properties to accumulate unread mail, and fail to mow lawns, clean up trash, secure doors and broken windows, leave signs lying in the yards of properties, and allow vandalism and exterior damage such as chipped and peeling paint, unsecured or missing gutters, or water damage to exist without remediation."

    Does that sound like it would cost $5-$20k per property to address?

    The median sale price of a home in Hawthorne was stagnating in the mid-$30k range earlier this year, although there were a few pending transactions at the time when I pulled that data that would have pulled it up by $10,000 or so. How much of that depressed value is due to poor maintenance and inadequate marketing of REO properties?

    And is that discrimination?

    I'd sure like to know.

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  8. Banks are not rehabbers. You also forget that when a realtor is selling a property for $20-$30k the incentive to market that property is not equal to a property in the suburbs that is worth $150k. People (and banks) will put their efforts in the direction in which they are best rewarded. Racism does not come into play. If the city of Minneapolis wants to pay a $8000 comission on each $30k house i'd think you'd see more marketing and attention to the signs and properties. You can't expect a realtor making $1500 on a sale to spend much time at all on a listing. It's a numbers/volume game at that point.

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  9. First off, I'm not expecting the bank to do rehab work. Basic curb appeal is what's been advocated at this point. I do agree that Realtors making minimal commissions on a cheap foreclosure sale is a problem, and that dynamic is directly related to the way a house here gets maintained and marketed.

    How exactly is it that you think the city of Minneapolis is going to pay a commission to these Realtors?

    If, and it's still an if at this point, discriminatory practices are found to exist, then the cost of compliance becomes irrelevant. Financial institutions, other sellers, and their representatives will have to comply.

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  10. @John, to answer a few of your questions, the Housing Preservation Project, who represented Hawthorne when we sued Citimortgage, would be among the first places we'd go to seek representation. The Legal Aid Society of Minneapolis is another option.

    And I'd keep exposing such practices if the attorneys advised it.

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  11. I think you have the name already in your headline, just in a different order. To me, "predatory maintenance" sounds like sneaky little maintenance men are hiding behind bushes waiting to pounce on a house and maintain it.

    But rather "discriminatory maintenance" sounds like it fits the situation better. Discriminately deciding which houses get maintained and which don't.

    @Anon, I manage multi-units of mixed incomes, we have to maintain the low income units in the exact manner as we do the market rate units, even though we make more money on the market rate units. If we didn't, we'd be violating the fair housing laws. I'd venture to say the same thing about realtors who do less to market a property in a minority neighborhood than a predominately white neighborhood.

    And while it might be true that NoMi is barely a predominatly one race neighborhood these days, have you seen the old city planning docs that have this area labeled 'Negro' versus the southwestern Minneapolis area laveled "Gold Coast"?

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  12. In regards to 2939 Lyndale, what in your opinion makes this property a "gem"? That word seems to be used frequently in describing a lot of properties in Hawthorne. I vaguely remember this address from one of our Housing Committee meetings, but I can't remember if we saw any interior photos? Do you Jeff?

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  13. Certainly "gem" can mean different things to different people, and for me the built form and remaining architectual features on the exterior alone are enough to deserve the label. But I did get interior photos as well. The house has more intricate hardwood floors than I've seen in a long time. The bannister is exquisitely detailed as well.

    Unfortunately for te structure, that bannister is not part of any living area as it is in the stairs leading up to a second floor duplex conversion. That's a good argument for proper acquisition and re-purposing of the house; not for demolition. The city also claimed there was mold in the basement ceiling. Along with people experienced in home rehab, we did confirm the existence of traces of mold. However nothing rose to the level where demolition was an appropriate response.

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  14. Anon- 8:57

    Bankers are not rehabers - However, when a bank makes investments in a community at the levels that many major banks have, they should be expected to use due diligence to maintain those properties and mitigate further losses as the result of ownership.

    Lets remember that most of these homes did not start out with a $30K mortgage (that's a monthly payment of approx. $150.00 at current rates). The actual loan amounts were much higher and as a result of the Banks greed, the original owners were most probably foreclosed upon. Had the banks restructured those loans, most of these empty homes would have homesteaders in them willingly maintaining the property.

    It comes with the territory. Bus drivers aren't auto mechanics either, but they better know something about what makes their vehicles run!

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  15. Presumably municipal records can be accessed as to numbers of certifications of unpaid nuisance abatement costs as special assessments in order to compare levels across different districts.

    In municipalities with vacant building registration ordinances, it may be interesting to research the practices of lender REO departments to pay the fee and maintain the property as vacant, to demolish the structure, or to apply resources to move the asset of its inventory.

    You have described what amounts to another spillover effect of post-foreclosure potential unequal and discriminatory property maintenance that negatively impacts property owners trying to hang on. Thanks.

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