For decades, nonprofit housing and consumer-focused organizations have worked in low- and moderate-income (LMI) areas to address improvident mortgage lending practices that have led to high rates of vacancy and unstable neighborhoods. Questionable lending is not a new problem in LMI areas, in short, but the pace of this lending in LMI areas increased as the last decade’s housing bubble inflated. Many unsound lending practices (including failure to prevent fraudulent use of primary residence mortgages to finance investment property1) spread to mainstream housing markets in the first half of the 2000s, and ultimately led to an unprecedented wave of foreclosures and an economic crisis. But like all economic downturns, the crisis hit LMI areas the hardest, and they, as always, look to be the slowest to recover. The foreclosure crisis has changed the housing landscape in Chicago, claiming many of the city’s smaller rental buildings, and thereby much of the affordable rental housing stock in communities that were economically struggling even before the crisis.
In January 2012, the Board of Governors (BOG) of the Federal Reserve System issued to the Congressional Committee on Banking, Housing, and Urban Affairs a white paper entitled, ”The U.S. Housing Market: Current Conditions and Policy Considerations.” The white paper characterizes foreclosures as “dead weight losses,” where costs incurred by borrower, lender, and community, “including the neglect and deterioration of properties that often sit vacant for months (or even years) and the associated negative effects on neighborhoods,” benefit no one. Lenders that take back homes through foreclosure end up with “real estate owned” (REO), which can be very costly to maintain. The bursting of the housing bubble ultimately resulted in the loss of roughly $7 trillion in home equity nationally, the BOG paper estimates. But unlike LMI markets, in otherwise healthier housing markets – those proximate to employment centers, public assets including quality public schools, hospitals, and transit lines – foreclosed homes seldom remain vacant long. If they do, local code enforcement ensures that they do not fall into disrepair.
The out-sized loss of U.S. home equity wealth also impacted consumer spending, particularly among the middle class, for whom home equity represents the majority of household wealth. Alarmingly, the paper estimated the national level of in-process foreclosures, often referred to as the “shadow inventory” of foreclosures, at four times the REO inventory.
Complicating and impeding the federal government interventions, such as the Home Affordable Refinance Program (HARP) and Home Affordable Modification Program (HAMP), as well as private sector efforts to modify or refinance loans, is a crosssection of policy, economic, and environmental factors. These factors include regulatory pressures on banks to diversify and/or shrink lending portfolios to control risk, falling real estate values, and widespread un- and underemployment. The crisis also left millions of borrowers with loans that exceeded the value of their home, or “under water,” further limiting refinancing, modification, or sale opportunities for home owners unable to afford their payments. Moreover, some mortgage servicer agreements (ostensibly designed when real estate values were increasing rapidly), incent servicers to foreclose on defaulted borrowers instead of modifying loans.
The main purpose of the Fed white paper was to summarize the state of the housing market and lay out potential policy steps and their relative merits and opportunity costs. Constrained credit and overall economic conditions have pushed former home owners and potential first time buyers toward rental housing, creating new market stresses for rental housing and affordable rental housing in particular. Among the key policy alternatives discussed in the paper was a strategy to convert bank/ lender real estate acquired through foreclosures (REO) to rental housing through bulk sales to private investors.
While management of scattered site rental housing presents difficulties in any market, some issues are amplified with LMI renters, who experience job loss and other negative economic impacts more frequently. Also, property condition and maintenance present greater challenges, particularly for buildings that have been vacant for some period. Attention to and maintenance of vacant property varies to a large degree by income demographics, meaning that wealthier communities do not allow blight to take hold as it does in LMI areas. Although the report did not focus on community development issues or lower income areas in particular, it did include cautionary language on property management, rehabilitation, and upkeep practices among potential bulk purchasers of (mostly) detached homes from government sponsored enterprise (GSE) REO portfolios. These concerns have been echoed by community development practitioners in Chicago. The report even suggests that, to the extent investors purchase buildings in economically struggling communities, they might engage established nonprofit housing organizations with ties to those particular communities to assist with property management.