Two Faces of Foreclosure

The house at 608 Oxford Avenue is in bad shape, but its neighborhood is worse. Next door sit two vacant lots where condemned residences already have...
by | March 31, 2008

The house at 608 Oxford Avenue is in bad shape, but its neighborhood is worse. Next door sit two vacant lots where condemned residences already have been torn down. Like 608, the houses at 602 and 604 are boarded up, while all that's left of the house across the street is a set of concrete steps leading up to nothing. The story is the same on block after block of this old working-class district, just across the Mad River from downtown Dayton, Ohio. Driving around, Dayton City Commissioner Dean Lovelace points to a big empty parcel of land and says, "Even drug dealers are starting to abandon this neighborhood."

Nearly 2,000 miles to the west, in the vast sea of stucco-and-tile houses that surrounds the Las Vegas Strip, foreclosure is, if anything, even more prevalent. Fifteen of the 20 ZIP codes with the highest foreclosure rates in the country are located in Clark County, in and around Las Vegas. The water was turned off six months ago at the bank-owned house at 525 Brown Breeches Avenue in North Las Vegas, while the window frame of the master bedroom at 528 is speckled with droppings from the hundreds of pigeons and sparrows who are starting to reclaim the Creekside II subdivision.

But what Lovelace calls "the visibility of despair" in Dayton is not nearly as acute in southern Nevada. The Creekside homes were built only four years ago, aren't boarded up and haven't been stripped of pipes, doors and gutters like so many houses in Dayton. One real estate company is running a foreclosure bus tour through the Las Vegas Valley in order to expedite bargain shopping. A problem that signals permanent decline to central Ohio is seen in Las Vegas more as a bump on the path to continued growth.

In short, what looks from a distance like one national crisis turns out on close inspection to be two very different ones. And the reaction of local leadership presents just as much of a contrast. "We have to come up with some clean-up-the-mess strategies," says Dayton's Lovelace. Phil Rosenquist, the assistant county manager in Clark County, talks a laissez-faire game. "We're really not doing too much, to be honest with you," he says.

It's not just a difference in political philosophy. It's a difference in the reality on the ground. In suburbs and cities throughout the Sun Belt, strong growth and rising prices led to widespread speculation. Second homes and investment properties are empty, with individuals who got in over their heads deciding it's best to walk away and let the banks deal with the consequences. Major sections of Florida, California, Nevada and Arizona that had become dependent on growth are suffering the consequences of robust housing sectors suddenly going bust.

In the industrial Midwest, however, the consequences are more serious. The end of the housing bubble coincides with a weak manufacturing job market, and the loss of jobs, more than anything else, is causing foreclosures to proliferate. "Look at Dayton, Toledo or Akron and you'll find that local depressed economies are just miring the housing economies down," says Sam Staley, a Reason Foundation economist who lives just outside of Dayton. "Since there isn't any job growth, you're not seeing any resilience in the housing markets, and it's not clear when it's going to rebound."

Beyond the drop in sales and property tax revenue -- and the effect on the ability of governments themselves to borrow money -- the impact of foreclosures includes new challenges in terms of public safety and combating blight. "Vacant property attracts crime," says Michael Coleman, the mayor of Columbus, Ohio. "How do we get the mortgage industry to step up and take care of these properties?"

Home-values are going down in Las Vegas just as they are in Dayton. But the long-term impact will not be the same. In Las Vegas, times are tough today, but multi-billion-dollar projects on the Strip and elsewhere suggest a future filled with thousands of new jobs -- and new buyers to inhabit the thousands of empty houses. Dayton's mortgage meltdown marks another low point on a long downward trend, leading some city officials to think more in terms of retrenchment than recovery.

Jobs and Houses

In Ohio as a whole, the foreclosure rate last year was nearly double the national average, and seemingly everybody in state and local government is trying to come up with a fix. The legislature last year dedicated $100 million to help struggling homeowners refinance and hold on to their homes. Governor Ted Strickland is handing out other funds to implement the multiple recommendations of his high-profile task force on the issue. The chief justice of the state Supreme Court, Thomas Moyer, has publicly encouraged lawyers to offer pro bono help in foreclosure cases that are clogging dockets across the state. Attorney General Marc Dann has sued more than a dozen lenders and brokers he believes inflated values as part of what he calls "the largest financial scam in American history." The city of Cleveland is suing nearly two-dozen lenders over public nuisance complaints, seeking to force them to take better care of their thousands of vacant properties.

In Columbus, Coleman is taking a multi-pronged approach, cracking down on landlords with tougher code enforcement, offering to help pay for roofs, furnaces and other improvements to keep homeowners in their properties, and acquiring many more properties directly for rehabilitation or demolition. Coleman says the city has managed to address 600 homes in this way over the past 18 months.

And yet, over the same period, the number of vacant or abandoned properties has nonetheless grown from 3,100 to 4,100. "We're seeing the destruction of entire areas of the city as a result of the mortgage crisis," Coleman says. "There is not a city in this country that can handle the extent of this problem."

Dayton's Commissioner Lovelace is pleased that state officials have "gotten the gospel," but he doesn't forget that the state squashed his efforts years ago to try to head off disaster. He blames foreclosures on the "aggressive predatory lending phenomenon," and sponsored a law in 2001 to curb the worst industry practices. His ordinance was almost instantly challenged in court by lenders, and was soon preempted by a weaker state law. Ohio toughened its approach in 2006, but by that time, Lovelace says, "the damage had been done. These predatory lenders and mortgage brokers have just been feasting."

Dayton didn't need a housing price bubble to create a foreclosure problem. The city has lost roughly 100,000 residents over the past 40 years, and hasn't experienced net job growth since 1990. An estimated 5,000 to 7,000 homes were vacant even before the current crisis took root -- and it took root much earlier in Dayton than in most of the country. Between 1997 and 2001, the number of local foreclosure filings more than doubled, and they've continued to rise since then. In each of the past two years, the number of filings in Montgomery County, where Dayton sits, has topped 5,000. "Sometimes," jokes Dan Foley, a county commissioner, "we say we have a foreclosure court that dabbles in other cases."

Willis Blackshear, the Montgomery County recorder, keeps a careful eye on foreclosure filings. Working with an academic and a former mortgage company employee, Blackshear has identified the most active subprime lenders in his county, and in recent months has sent out thousands of letters to their customers, in hopes of alerting them to potential problems before their interest rates are reset and they find themselves unable to make monthly payments. "When you talk about foreclosure prevention, most organizations look to the people to come to them, but most people won't seek help until the problem has basically exploded," Blackshear says. "If you can't get people to come in prior to their loans caving in, what good is it to counsel them after the fact?"

Blackshear has seen a 10 percent response rate to his letters, which "people say is great, but I think it's terrible." He's been able to refer many borrowers to "money mentors" who help them qualify for more favorable loans before payment problems get out of hand. He is seeking grant money to step up his outreach efforts and entertains hopes of preventing 200 foreclosures, but concedes that his program is a small-bore solution to a widespread problem. "The funds that keep basic city and county government running are going to suffer until this turns around," he says.

Blackshear uses past lender performance to help decide which homeowners to contact, but that's far from an infallible method. Because of the convoluted nature of mortgage financing, governments often have to spend months simply trying to track down who holds the title to properties once they've been abandoned. A few years ago, Dayton started putting up "shaming" billboards featuring pictures of lending company CEOs, along with their phone numbers, in hopes that angry neighbors would put pressure on them. That had little impact.

John Carter, a housing inspector for the city, then came up with a different approach. He found that the complications of modern lending made it difficult for title-holders themselves to keep track of their properties and the conditions they were in. So he began sending out "nuisance property" lists that lenders can scour to find out about the shape of their own holdings. He makes direct contact with property companies when he knows who owns the buildings that are in the worst shape. Mortgage companies may not be universally cooperative, but many are glad for a tip about a home that can still be salvaged if they take quick action. Some have responded with repairs or cleanups within 24 hours of hearing from Carter. "The bottom line," he says, "is their assets get better attention and we save in money and resources."

Carter's list has expanded to include more than 500 contacts. His e-mail blasts have become must-reading for mortgage companies, and Carter has become an in-demand speaker on the conference circuit, fielding information requests from localities throughout the country looking to copycat his efforts. "Whether it's a broken window or an overgrown lawn, cities have a better chance of abating the problem and getting rid of the nuisance by trying to be proactive and solving problems, rather than slapping on a fine," says Rob Hicks, of FIS Field Services, which performs preservation work for mortgage companies on hundreds of homes per year in Dayton alone.

But all these efforts on the ground -- the different kinds of outreach performed by Carter and Blackshear, and even the city's plans to double its demolition target to 300 homes this year, while boarding up another 1,000 -- are far from enough to keep up with the backlog of 10,000 vacant and abandoned properties. "This is stuff you deal with over decades and generations, and make adjustments where you can," says John Gower, Dayton's director of planning and community development.

Greed Wave

Maybe it comes easily in a culture shaped by the highs and lows of gambling, but local officials in Las Vegas sound rather casual talking about their foreclosure situation, which is the third worst of any metropolitan area in the country. They see it as a problem that government may need to recognize, but not one that requires drastic action

As the nation's youngest big city, Las Vegas doesn't have much in the way of old infrastructure or blighted buildings to worry about. There are more vacant properties in Clark County than in Dayton -- including more than half of the 25,000 homes currently listed for sale -- but while a lot of people have lost money, neither area governments nor the real estate industry appear too worried about the situation. In many cases, it's homeowners associations that are on the hook for streetscapes and payment of special improvement district bonds.

Even as vacancies mount and prices plummet in Las Vegas, property taxes continue to rise, since a state-imposed 3 percent annual cap on increases in residential property appraisal means the appraisals are still catching up to values reached during a once-hot market. "I feel sorry for our property assessor," says Rosenquist, the assistant county manager. "He's getting killed by people who don't understand why their property taxes are going up while property values are going down."

What went wrong with the Vegas housing market is, in retrospect, pretty simple to understand. Housing prices escalated rapidly starting in 2004. The area was pinched not only by the lack of available land -- Vegas is surrounded by mountains and federally owned desert -- but also by the continuing in-migration of several thousand people every month. Legitimate demand was bound to lead to a building boom and escalating prices. Soaring prices, coupled with easy credit, led thousands of people to get carried away on what Richard Lee, of First American Title Co. of Nevada, calls "the greed wave."

It used to be that perhaps 20 percent of homes in the Vegas area were bought by investors, but in recent years, that share grew to nearly 40 percent. At the height of the boom in 2006, homebuilders bought and sold more than 36,000 new homes, representing an 80 percent increase over recent annual averages.

Too many of those homes were bought by people who didn't have nearly enough personal or rental cash flow to sustain payments and counted on ever-escalating prices to carry them through. Once the run-up in prices came to its natural end, many were caught short. There are entire subdivisions that were purchased by speculators, and some individual investors have up to 40 foreclosed houses to their names. "It was that Vegas mentality," Lee says. "The irrational exuberance Alan Greenspan talked about with the stock market happened here in Las Vegas real estate."

But if many investors mistook a speculative bubble for ongoing reality, that doesn't mean that growth in Vegas has suddenly ground to a stop. The city's core industry of gambling is expanding mightily, with major new hotel-casinos -- Palazzo, Echelon, Encore -- opening up every few months. The area is providing a home for other newly arrived enterprises -- everything from massive furniture and jewelry marts to a new national center for brain research. Project CityCenter, an $8 billion mixed-use development rising in contorted steel and glass on Las Vegas Boulevard between the Monte Carlo and the Bellagio, is expected to generate 12,000 new jobs all by itself.

The Vegas area, in other words, fully expects to build its way out of its current slump. Area population continues to rise and it is simply assumed that in a year or two job growth will translate into people moving into most if not all of the vacant houses. Prices will continue to soften, but in Vegas, this is seen as more of a needed market correction than a crisis for government to worry about.

Rosenquist notes that if county finances continue to weaken, there could be a hiring freeze, but so far layoffs have not been necessary. There has been increased demand on social services, but even amid the depressed housing market, the most challenging problems for local officials remain those tied to the strain growth puts on education, health care, public safety and the courts. "When you grow so quickly," says Clark County Commissioner Rory Reid, "government is in a constant struggle to keep up and provide the services that people expect. And all of a sudden, the revenues we use to run that race are not there."

Dayton's Dilemma

If political leaders in newer markets such as Las Vegas are counting on growth to pull them out of the doldrums, those in places such as Dayton know they can count on no such thing. Most Midwestern foreclosures were caused not by interest-rate resets but by traditional culprits such as layoffs, medical expenses and divorce. "Here, it's much more a result of the economy," says Diane Shannon, of Dayton's budget office. "It's probably bad to lose your second home or your investment property, but here I think the social distress is much more pronounced."

Dayton has a long and proud history as a manufacturing center. The Wright brothers lived here, converting their bicycle business into flight, and Dayton was the birthplace of the heart-lung machine and the cash register. More than anything, Dayton has been an automobile town. General Motors, long the mainstay, recently invested $69 million in a local plant, but GM and its spun-off parts-making arm, Delphi, along with other companies, have let go tens of thousands of Dayton workers. A vacant lot marks the spot in the Edgemont neighborhood where a million-square-foot Delphi plant stood just a few years ago. Around the corner, on the 1200 block of Wisconsin Boulevard, nearly every house has been torn down or boarded up. Even the Pentecostal church has been boarded up. "Little pockets of despair ripple out everywhere," Lovelace says.

There are little pockets of hope in Dayton as well. A local nonprofit group has been building new homes on land donated by the city, training troubled youth in construction trades as an important side benefit. The school district is engaged in a $650 million building program, prompting the construction of a few new homes near each of the fresh school campuses, and helping lure back at least a few students from one of the nation's densest concentrations of charter schools. Dayton's hospitals have been helpful partners in rebuilding not only their own facilities but surrounding neighborhoods as well, in some cases even helping to finance community-based policing. Just outside the city, Wright-Patterson Air Force Base -- already Ohio's top employer -- was a big winner in the most recent round of base closures and realignments, prompting hope for growth in contract- and research-related jobs.

Overall, though, there is a recognition that the jobs that are coming in are not only fewer in number but mostly lower-paying than the manufacturing jobs that have been lost either to overseas competition or more efficient mechanization. "We know we will continue to lose population," says Gower, Dayton's planning director.

There was a time when the city's policy would have been to mothball vacant properties, hoping they would be worth restoring and reusing some day. But Dayton officials now admit, as Gower puts it, that "the region is stunningly overbuilt." That's why the city is stepping up its "strategic demolition" and looking to use zoning to encourage concentration of the remaining population in areas with good housing stock.

Like jurisdictions across the country, Dayton now hopes that the silver lining of the foreclosure crisis will be that cheaper property allows for more aggressive and more thoughtful land management. "Part of the solution here is fundamentally rethinking what the vision of the city is going to look like," Gower says. "Part of the reason people here aren't freaked out is because we continue to believe we can turn this into an opportunity."


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