[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
NEIGHBORHOODS: THE BLAMELESS VICTIMS OF THE SUBPRIME MORTGAGE CRISIS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON DOMESTIC POLICY
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MAY 21, 2008
__________
Serial No. 110-166
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.oversight.house.gov
----------
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania DAN BURTON, Indiana
CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri CHRIS CANNON, Utah
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina
Columbia VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota BRIAN P. BILBRAY, California
JIM COOPER, Tennessee BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
Lawrence Halloran, Minority Staff Director
Subcommittee on Domestic Policy
DENNIS J. KUCINICH, Ohio, Chairman
TOM LANTOS, California DARRELL E. ISSA, California
ELIJAH E. CUMMINGS, Maryland DAN BURTON, Indiana
DIANE E. WATSON, California CHRISTOPHER SHAYS, Connecticut
CHRISTOPHER S. MURPHY, Connecticut JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
BRIAN HIGGINS, New York BRIAN P. BILBRAY, California
BRUCE L. BRALEY, Iowa
Jaron R. Bourke, Staff Director
C O N T E N T S
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Page
Hearing held on May 21, 2008..................................... 1
Statement of:
Been, Vicki, Elihu Root professor of law and professor of
public policy, co-director, Furman Center for Real Estate
and Urban Policy, New York University School of Law;
Phyllis G. Betts, director, Center for Community Building
and Neighborhood Action, School of Urban Affairs and Public
Policy, University of Memphis; and John Talmage, president
and CEO, Social Compact.................................... 29
Been, Vicki.............................................. 29
Betts, Phyllis G......................................... 59
Talmage, John............................................ 72
Kildee, Daniel T., treasurer, Genesee County, MI; and Nancy
Floreen, councilmember, Montgomery County, MD.............. 6
Floreen, Nancy........................................... 12
Kildee, Daniel T......................................... 6
Mallach, Alan, senior fellow, National Housing Institute;
Doug Leeper, Code of Enforcement manager, city of Chula
Vista, CA; and Dean Baker, co-director, Center for Economic
Policy Research............................................ 89
Baker, Dean.............................................. 116
Leeper, Doug............................................. 96
Mallach, Alan............................................ 89
Letters, statements, etc., submitted for the record by:
Baker, Dean, co-director, Center for Economic Policy
Research, prepared statement of............................ 119
Been, Vicki, Elihu Root professor of law and professor of
public policy, co-director, Furman Center for Real Estate
and Urban Policy, New York University School of Law,
prepared statement of...................................... 31
Betts, Phyllis G., director, Center for Community Building
and Neighborhood Action, School of Urban Affairs and Public
Policy, University of Memphis, prepared statement of....... 62
Floreen, Nancy, councilmember, Montgomery County, MD,
prepared statement of...................................... 14
Kildee, Daniel T., treasurer, Genesee County, MI, prepared
statement of............................................... 9
Leeper, Doug, Code of Enforcement manager, city of Chula
Vista, CA, prepared statement of........................... 99
Mallach, Alan, senior fellow, National Housing Institute,
prepared statement of...................................... 92
Talmage, John, president and CEO, Social Compact, prepared
statement of............................................... 74
NEIGHBORHOODS: THE BLAMELESS VICTIMS OF THE SUBPRIME MORTGAGE CRISIS
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WEDNESDAY, MAY 21, 2008
House of Representatives,
Subcommittee on Domestic Policy,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:10 p.m., in
room 2154, Rayburn House Office Building, Hon. Dennis J.
Kucinich (chairman of the subcommittee) presiding.
Present: Representatives Kucinich, Cummings, Watson,
Tierney, and Higgins.
Also present: Representative Turner.
Staff present: Jaron R. Bourke, staff director; Jean Gosa,
clerk; Charisma Williams, staff assistant; Leneal Scott,
information systems manager; Janice Spector, minority senior
professional staff member; John Cuaderes, minority senior
investigator and policy advisor; and Benjamin Chance, minority
professional staff member.
Mr. Kucinich. Good afternoon. The Subcommittee on Domestic
Policy of the Committee on Oversight and Government Reform will
now come to order.
Today's hearing will explore the cost to neighborhoods
caused by concentrations of vacant and abandoned houses,
differences between strong housing markets and weaker ones,
strategies to mitigate the effects of and prevent vacancies,
and estimates of the size of the national problem.
Without objection, the Chair and ranking minority member
will have 5 minutes to make opening statements, followed by
opening statements not to exceed 3 minutes by any other Member
who seeks recognition.
And, without objection, Members and witnesses may have 5
legislative days to submit a written statement or extraneous
materials for the record.
I would like to remind everyone that, under a previous
unanimous consent agreement, Mr. Turner of Ohio is allowed to
sit as a member of the subcommittee on issues related to State
and local governments. As the former mayor of Dayton, Ohio, we
welcome him to these proceedings. And, of course, the issue
we're exploring today falls under the categories previously
described. As chairman of the Federalism Subcommittee in the
previous Congress, he has great knowledge on these issues.
And I want to say that we welcome his presence here today,
as do I welcome the presence of my colleague from California,
Ambassador Watson. Thank you very much for being here.
And I would like to thank everyone for their attendance.
The Domestic Policy Subcommittee of the Oversight and
Government Reform Committee has held three hearings on the
effects of foreclosures since 2007. These include a 6-hour, 15-
witness marathon hearing in March 2007, as well as a field
hearing in Cleveland, Ohio, one of the most foreclosure
devastated areas in the country.
While awareness has grown that the meltdown of subprime
lending has been a genuine tragedy for millions of individual
borrowers and lenders, today's and tomorrow's hearings are
about a largely unrecognized, deeply suffering and totally
blameless victim: neighborhoods.
Some foreclosed properties find new buyers; many do not.
When foreclosure leads to vacant and abandoned houses,
surrounding neighborhoods and local municipalities suffer
significant consequences.
Those effects include: falling property values of
surrounding houses; loss of equity held by neighbors in these
houses; loss of rental units for renters; loss of sales to
neighborhood merchants; increasing crime; rise in municipal
costs in police, fire due to vandalism and arson; increased
demolition and building inspection costs; increased legal
expenses; increased demand on city social service programs; and
a direct loss of property tax revenues.
Economic researchers have found that the police costs for
responding to criminal activity alone in vacant and abandoned
houses adds up to between $5,000 and $6,000 per property. With
demolition costs, the municipal cost per vacant property rises
to $19,227. If the property is subject to arson, the cost rises
to $34,199.
The collective cost to neighbors within a 150-foot radius
of a block in Chicago with a large concentration of vacant
properties amounted to $220,000 in terms of capital
depreciation of their own properties. To our knowledge, there's
no comprehensive cost estimate for the Nation, but it would
surely have to be in the many billions.
There are significant costs borne by people who had nothing
to do with the transactions that resulted in the subprime
mortgage meltdown. They weren't the lenders, they weren't the
investors, they weren't the borrowers. They were simply the
neighbors, renters and taxpayers.
This Congress has taken a significant step to help the
neighbors deal with the problem they're now facing. Two weeks
ago, the House passed H.R. 5818, the ``Neighborhood
Stabilization Act of 2008.'' This bill creates a new Federal
program to address the effects on neighborhoods caused by the
foreclosure crisis. The bill authorizes $15 billion in grants
and loans to be spent by localities on a variety of strategies,
including vacant-property acquisition, building rehabilitation
and demolition.
The House agreed to an amendment, which I had offered,
clarifying that the purpose of the bill is to address the
consequences for neighborhoods of a rise in the level of vacant
and abandoned buildings, and requiring local governments to
target their spending accordingly. Unfortunately, the President
issued a veto threat. I really can't understand this, but I
hope that today and tomorrow's hearing might do something to
change his mind. For if we can't help the totally innocent, the
neighbors of these vacant properties--and they are the innocent
victims of the foreclosure crisis--then who should we help?
Now, fortunately, we have some of the Nation's leading
experts with us today and tomorrow to help explain the problem
neighborhoods face and help guide a Federal response.
When I speak of these issues, when I hear the witnesses, I
just want to add a personal note here, I started my career in
the city of Cleveland over 41 years ago. I started at the local
level, at the community level. I served on the Cleveland City
Council many terms, and I served the city as mayor. I realize
at a local level the kind of impact that this foreclosure
crisis is having.
When I was a Councilman, if there was a single house in the
ward that was abandoned, vacant or boarded up, it was a cause
to the whole community. Today, in some communities, there are
hundreds and maybe even over a thousand.
Just imagine you're a senior citizen who has taken care of
your property for your whole life, and the neighborhood around
you starts to change economically but you still take care of
your property. And then you get into the subprime situation. We
have all these vacant properties all of a sudden. The equity
that you had is your retirement security, and it's
disappearing.
This is a very serious matter that merits the attention of
the Congress, which is why we're having this hearing now. But
also it's good to know that we have Members of the House who
are going to be involved in this, not just from Ohio and
California, but from New York, the Buffalo area, with my
colleague that has just joined us, Congressman Higgins.
So does the gentleman from Ohio, do you have an opening
statement?
Mr. Turner. Well, thank you----
Mr. Kucinich. I recognize Mr. Turner from Ohio.
Mr. Turner. Thank you, Chairman Kucinich.
I appreciate you holding this hearing and you allowing me
to participate. It's great to have two former Ohio mayors come
together to look at the issue of what's happening in our
neighborhoods in Ohio. Unfortunately, it is a very negative
picture. But I appreciate what you're doing to highlight this
issue and to look at solutions and what we can do.
The home foreclosure crisis once associated with just Ohio
and Michigan is now being felt across the rest of the country
and is also rattling our international markets. As these
hearings hopefully will demonstrate, problems associated with
home foreclosures are felt by more than just the people whose
homes are foreclosed.
For the most part, individual foreclosures in and unto
themselves are not a community-wide issue. It becomes an issue
when a community faces multiple home foreclosures in a
concentrated area. Under this scenario, the problem, if left
untreated, can turn once-thriving neighborhoods into an area of
blight. Statistics show that this problem is encompassing both
our inner-city neighborhoods and suburban neighborhoods alike.
Fixing this problem will be easy. Although increased home
foreclosures are a national problem, a one-size-fits-all
solution is not the answer. Addressing the foreclosure problem
in Ohio will require a different solution than how we treat the
same problem in perhaps another State. If we are truly to
assist in resolving the foreclosure problem, then a Federal
solution must be well thought out with a formula that
recognizes that affected areas need more help, some than
others.
Many communities faced with high foreclosure rates will
have an easier time recovering. Foreclosures in areas where
real estate is considered highly marketable will need very
little Federal assistance. On the contrary, those with multiple
foreclosures and difficulty in resale will see that the process
of foreclosure frequently leads to abandonment.
Mr. Chairman, I appreciate your efforts to highlight these
problems associated with home foreclosures. I look forward to
working with you.
And I have to give one acknowledgement from my community,
as we go forward with this. When I served as mayor for the city
of Dayton, Commissioner Dean Lovelace on our commission brought
forth the issue of predatory lending and sounded the alarm in
our neighborhood of what was happening to families that were
being subject to foreclosure, with the prediction of what would
happen in our neighborhoods and, ultimately, the prediction of
what would happen nationwide and, as we've seen, failings in
our financial markets.
In July 2001, he pushed forward a predatory lending
ordinance which was intended to assist our community. In both
Ohio as a State and on the Federal level, we were very slow to
act, and I think this is a real reason why we need to step
forward in the many areas to provide assistance to both
homeowners and to neighborhoods to try to address some of the
impacts of foreclosure and abandonment.
And, Mr. Chairman, I just thank you for bringing this
forward and highlighting it so we can look at solutions and our
real impacts on our neighborhoods. Thank you.
Mr. Kucinich. I thank the gentleman. It's a pleasure to
work with him on this.
The Chair recognizes the gentlelady from California,
Congresswoman Diane Watson.
Ms. Watson. Thank you, Mr. Chairman. And thank you for
holding today's very important hearing about the subprime
mortgage crisis.
The mortgage crisis affecting our Nation is one of the most
pressing domestic issues of the new millennium. In California,
my home State, the number of homes that were lost to
foreclosure during the first quarter of 2008 surged 327 percent
from 2007 levels. In the terms of numbers, it means that there
were 517 foreclosures every day for 3 months.
If more is not done to restrain the trend of rising
foreclosures, I believe Congress will find that neighborhoods
would have significant increases in vacated or abandoned
houses; neighborhoods would lose value; local governments would
be overwhelmed with having to deal with increases in crime;
social service programs would be in greater demand, which
requires municipalities to spend more; and losses in tax
revenue from a declining property-tax base would help lead to
the decline in government infrastructure projects, such as
schools, roads and public safety.
Once the second quarter is finished and it is determined if
the economy is in recession or not, Congress should determine
immediately if the problem with the rise in foreclosures is
limited to the subprime market or has the problem spilled into
the mainstream home loan market.
Hopefully, that will not be the case. But if it is, we will
find that more and more neighborhoods would be affected by a
concentration of abandoned and vacant houses, which is not in
the best interest of our local communities or our Nation as a
whole.
I look forward to hearing the testimony, Mr. Chairman, of
our panelists today and working with my colleagues to help our
Nation recover from the foreclosure crisis.
Thank you, and I yield back the remainder of my time.
Mr. Kucinich. I thank the gentlelady.
The Chair recognizes the distinguished representative from
the Buffalo area, Congressman Higgins.
Mr. Higgins. Thank you very much, Mr. Chairman.
And I, like you, in representing the city of Cleveland and
the city council, I represented the city of Buffalo in the city
council as well. And much like a lot of areas of the urban
Northeast, these areas were great economic centers through most
of the 20th century and, over the past 30 years, have declined
significantly, losing population not only to other areas of the
country but also to the surrounding suburban areas.
The urban cores of these cities were once great. They can
be great again. But what fundamentally has to be addressed is
the issue of vacant and abandoned housing.
In the city of Buffalo, it's a problem that's pervasive and
growing. This administration has withdrawn from its commitment
to help urban areas and has an obligation to retool its efforts
to ensure that cities like Cleveland, cities like Buffalo and
the great urban centers of the American Northeast are restored.
And that starts and ends with a healthy, strong urban
environment. Fundamental to that is the housing stock.
So I look forward to working with you, Mr. Chairman, on
this issue, and I applaud your leadership in that regard.
Mr. Kucinich. I thank the gentleman.
I would ask the witnesses to come forward, Mr. Kildee and
Ms. Floreen.
While you're taking your seats, I would like to let the
Members know and those who are in our audience know who is
about to be testifying.
Mr. Daniel Kildee is the treasurer of Genesee County in
Michigan. Mr. Kildee initiated the use of Michigan's new tax
foreclosure law as a tool for community development in
neighborhood stabilization. He founded the Genesee Land Bank--
that was Michigan's first land bank--and now serves as its
chairman and chief executive officer. Mr. Kildee is also
president of the Genesee Institute, a research and training
program focusing on urban land reform, smart growth and land
banking.
And for those of you who are familiar with the name Kildee,
yes, according to the information we have, Mr. Kildee is the
nephew of Congressman Dale Kildee, who is one of the highly
respected Members of our U.S. Congress.
We welcome you, Mr. Kildee.
The next witness will be Ms. Nancy Floreen. Ms. Floreen is
testifying on behalf of the National Association of Counties,
the U.S. Conference of Mayors, the National Community
Development Association, and the National Association of Local
Housing Finance Agencies.
Ms. Floreen is a county council member in Montgomery
County, MD. She serves as a member of the council's Planning,
Housing and Economic Development Committee. Previously, she has
served as the commissioner of the Maryland National Capital
Park and Planning Commission. She's a member of the Montgomery
County Planning Board and a member of the Maryland Citizen
Planners Association.
I want our witnesses to know, Mr. Kildee and Ms. Floreen,
that it is a policy of the Committee on Oversight and
Government Reform to swear in all witnesses before they
testify.
I would ask that you rise and raise your right hands.
[Witnesses sworn.]
Mr. Kucinich. Thank you very much.
Let the record reflect that each witness answered in the
affirmative.
I would ask that each of the witnesses now give a brief
summary of your testimony. Keep the summary under 5 minutes in
duration. Keep in mind that your entire statement will be in
the record of this hearing and will be available to all the
Members, not only of this committee but of Congress.
Mr. Kildee, you are going to be our first witness. I want
to thank you, and I would ask that you proceed with your
statement.
STATEMENTS OF DANIEL T. KILDEE, TREASURER, GENESEE COUNTY, MI;
AND NANCY FLOREEN, COUNCILMEMBER, MONTGOMERY COUNTY, MD
STATEMENT OF DANIEL T. KILDEE
Mr. Kildee. Thank you, Mr. Chairman.
And thank you for your leadership on this issue. You and
other members of the committee obviously have helped to bring
this entire issue to the national stage. And for those of us
that are working in places like Flint and Dayton and Buffalo
and other communities across the country that have experienced
significant population loss and decline, we appreciate it.
In fact, many of us have been working on this issue for
quite some time. It's only recently that this mortgage crisis
has brought the issue of vacant and abandoned properties to a
higher level of consciousness. So it's, first of all, my hope
that the current conversation taking place surrounding the
mortgage crisis will lead to more fundamental reforms that
place a higher value on the urban landscape generally.
I'm from Flint, Michigan and, as the chairman said, the
home of myself and my Congressman, Dale Kildee. Flint is the
birthplace of General Motors. We once had 79,000 people working
for the same company in our city. We had a population in 1960
of 197,000. Today it's about 115,000 people. And so, while we
have a lot of anxiety about the 5,000 or 6,000 mortgage
foreclosures that are pending in our own community right now,
we've been dealing with vacant and abandoned property for quite
some time.
When we lost 40 percent of our population over 30 years,
those people who left did not take their houses with them. And
they left behind a landscape that has seriously deteriorated.
The cost of that abandonment is what concerns us. Seventy
percent of the fires that take place in Flint, Michigan, take
place in an abandoned house. So our fire department in the city
of Flint has to be three or four times what it would be if that
fuel were not out there in the neighborhoods.
This year, we have seen an increase in tax delinquency. All
of this mortgage meltdown is resulting in higher rates of tax
delinquency as well. Two years ago, I had $29 million of
delinquent taxes in the county. Last year, it was $37 million
of delinquent taxes. And, this year, there are $49 million in
unpaid taxes in Genesee County. All of it being exacerbated by
the fact that literally thousands of properties held by lenders
or servicers are not paying their taxes.
In my community, about 5 or 6 years ago, we began the
process of getting our arms around this problem by creating a
land bank authority and reforming our tax foreclosure
procedures.
We eliminated the somewhat antiquated procedure of selling
tax liens to private investors, because we saw with tax
foreclosure how negative the liquidation model had become for
the urban landscape. That old tax lien system is a lot like how
mortgage lenders are now disposing of mortgage-foreclosed
assets.
We reformed our process. We now, as the county treasurer,
get control of these properties and dispose of them in a way,
through our land bank authority, that considers the long-term
interests of the neighborhoods, of the urban landscape, of the
private equity that's already in place.
Our fear, of course, is that, while we have made great
progress in Flint in getting our arms around the problems
associated with that first wave of abandonment--for example,
we've taken title to 7,400 properties in the last 6 years into
our land bank authority, 12 percent of the parcels of land in
the city of Flint. Our fear is that, while we've done all this
work to reform our State and local systems to deal with
abandonment, this next wave of property is sitting out there,
heading our way.
The cost is enormous. The cost to local government, with
the reduction of the tax base and the uncollected taxes that
we're unable to use to provide basic services, occurs at the
same time that the conditions in these neighborhoods increase
the demand for government services. Our water and sewer systems
are built for a population of 250,000. We've got 150,000 users
paying to maintain that system. The stress on local government
is enormous.
And the loss of private equity, those homeowners in those
neighborhoods, as the chairman said, who pay their mortgage,
they pay their taxes, and they're having the equity that
they've invested in that home robbed from them for something
that they, quite honestly, had nothing to do with.
This is a problem--interesting now that places like Flint
and Dayton and Buffalo and others, Cleveland for sure, that
have been associated with the problem of vacant and abandoned
property historically, this is a problem now being experienced
in all sorts of cities.
The concern that I have as the Federal response is being
developed is that there be some recognition that the older--
particularly older, industrial--cities that have been dealing
with abandonment for quite some time do not have the strength
in the real estate market to absorb, in our case, 5,000, 6,000,
7,000 new abandonments.
I mean, every community that's dealing with mortgage
foreclosures obviously are going to have a difficult time. The
problems in a place like Flint, where we already have an
oversupply in a very weak demand market of a low-value housing
commodity, the problems associated with 5,000 new abandonments
or 5,000 distressed sales coming into our marketplace are
frightening.
What we have to avoid, I think, in our community and as a
Nation is a situation that could lead to mortgage lenders and
servicers essentially privatizing the profit by liquidating the
properties that have value and socializing the loss by passing
them on to us.
I just foreclosed on March 31st, through the tax
foreclosure system, on 1,194 properties. Over 300 of them had
mortgages on them, and they're upside down in value. Those
lenders have passed that problem on to us. We're willing to
accept it, but we would like to accept it with the ability to
also go to those same servicers and lenders and say, ``You
know, there are other assets that you own in our community, and
we would like to talk to you about them as well.''
This a problem that, obviously, I care deeply about. It's a
problem that's affecting Flint, Michigan, in my own
neighborhood. And it's one that I look forward to providing you
assistance with as you deliberate on this very important
subject.
Thank you.
[The prepared statement of Mr. Kildee follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I thank the gentleman for his very fluid and
comprehensive statement about the underlying economic crisis
that is occurring in urban communities and in cities and, of
course, in your own county of Genesee, with respect to the
concomitant effects of the subprime mortgage fiasco.
I look forward to the testimony of the next witness, Ms.
Floreen.
I would ask that you proceed, and please keep your
statement to 5 minutes or less. Thank you.
STATEMENT OF NANCY FLOREEN
Ms. Floreen. Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, thank you
very much for the opportunity to appear before you today to
address the impact of the mortgage crisis on neighborhoods.
It's a special honor for me to be with former local elected
officials who have been elevated to this position, because, as
you know, at the local level, that is where the rubber hits the
road.
Local officials across the country are pleased that the
House of Representatives recently passed the Neighborhood
Stabilization Act of 2008, providing $15 billion in urgently
needed loans and grants to help cities, urban counties and
States deal with the foreclosure crisis that's overtaking the
Nation. This really does recognize the severity of the problem
nationally.
Cities and counties will be able to use this funding for
the purchase and rehab of vacant and foreclosed homes. It would
help stabilize communities by reselling the homes for occupancy
as soon as possible. We really need this legislation to address
the crisis.
You've heard from Mr. Kildee, certainly the chairman's
comments at the beginning. There's very little to add. But
across the United States, this problem threatens billions of
Federal dollars invested in neighborhood revitalization over
the years. It is a fact that foreclosed homes drive down the
value of surrounding problems. And the sooner that we solve
this problem, the less collateral damage we'll have with
depreciating home values.
This cuts directly to what's the mainstay of local
government revenues: property taxes. We cannot adequately fund
schools and other essential public services if we have a
prolonged decline in property values. Some estimates put the
number of foreclosed properties at 600,000 or more, and the
problem is simply too great for counties and cities to tackle
on their own due to their own declining tax bases.
Even in Montgomery County, Maryland, right up the road,
we've not been immune to the housing crisis. Notice of
foreclosure sales in my county have increased from 68 during
the first quarter of 2007 to 918 during the first quarter of
2008, an increase of 1,250 percent--nothing like Mr. Kildee's
numbers, but nonetheless for us this is huge.
A total of 611 notices of mortgage loan default were issued
in the first quarter, compared with 103 in the first quarter of
2007, an increase of nearly 500 percent.
We're trying to deal with this by participating in the
Maryland HOPE Hotline for residents facing foreclosure. We've
been offering homeownership and foreclosure solution sessions
across the county. We've partnered with the State to provide
assistance to residents, and contributing money to nonprofits
to provide counseling to homeowners.
But we're also using our own money on matching State
contribution to develop a credit enhancement program to
encourage local banks to refinance loans for individuals
subject to foreclosure who might require special underwriting
criteria.
But like many local areas across the country, we're
grappling with budget shortfalls. When a local government is
faced with declining revenues, it's basically two choices:
increase tax rates or make cuts in services.
As many of your staff will tell you, Montgomery County is
looking at the increasing-the-taxes approach right now. And I'm
very concerned about how much farther we can go to provide the
services our residents need and deserve.
The neighborhoods are, indeed, innocent bystanders in the
subprime mortgage chaos. It will take more than a local or
State remedy to curb the decline. The funding provided by H.R.
5818 is timely, targeted and temporary.
We'll work closely with members of the conference committee
as they reconcile the House and Senate bills.
The Senate version provides an emergency appropriation of
$4 billion in Community Development Block Grant funds to be
allocated based on a formula to be developed within 60 days of
enactment. We'll be urging the conferrees to, one, utilize the
CDBG program as the program to deliver assistance, as in the
Senate bill, with 70 percent of the funds to entitlement cities
in urban counties. CDBG grantees are intimately familiar with
that program. The funds made available under the bill are for
the very types of activities that they carry out on a regular
basis.
No. 2, we'll work with you to provide that funding for
foreclosure relief and mitigate be in the form of grants for
ease of administration.
Three, we'll work with you to permit the funds to be used
to assist families with earnings up to 140 percent of median
income, with 25 percent of the funds to be used by households
at 50 percent of median.
We'll work with you to permit 5 percent of the funds to be
used for administrative costs. This is consistent with CDBG
funding made available to respond to Hurricanes Katrina and
Rita.
Thank you very much for your favorable consideration of our
views.
[The prepared statement of Ms. Floreen follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I thank the gentlelady for her testimony.
I would like to begin with asking Treasurer Kildee some
questions.
In some ways, you might be the ideal witness to answer this
question. Can you tell the committee what lessons may be drawn
from Genesee County's experience with both a vacant and
abandoned housing problem and a noninterventionist Federal
Government?
Mr. Kildee. The most significant lesson that we learned is
that economics really do matter when it comes to urban land.
And we cannot allow the governmental systems that are in place
to treat property that has significant value with a different
set of rules than we treat property that is essentially upside-
down in value.
The Genesee County Land Bank and our Michigan Land Bank
Act, along with our tax foreclosure reforms, address that issue
by not allowing the speculator market to pick and choose and
essentially disaggregate the inventory that is the subject of
our concern. In our case, initially, it was tax-foreclosed
properties. There are valuable properties that get lost through
foreclosure. That's why people make those odd infomercials. The
idea would be, though, to not allow the lenders to do the very
same thing.
Mr. Kucinich. You have a data base where you can literally
see who got into the subprimes, who has come out in the
secondary market here, who the speculators are, is that right?
Mr. Kildee. Right. And the issue, of course, for us is we
want to approach, with the support of the Federal Government,
with some strength, those lenders and say to them, ``Deal with
us with your entire inventory. Don't allow the system in place
to allow you to essentially liquidate the value that's in those
properties for which there may be a speculator market.''
Mr. Kucinich. What kind of Federal aid or Federal
assistance or tools would be required by local jurisdiction to
strengthen their position vis-a-vis the speculators, the banks
that are involved with these subprimes?
Mr. Kildee. No. 1 would be to have an efficient public
entity that can acquire and then manage and dispose the
properties. That's critical.
Second would be to target the Federal support and other
available support for acquisition of these properties in a
fashion that does allow us to approach the lenders with the
opportunity, if you want to call it that, for us to acquire
their entire inventory within our community.
I think to do this on a regional basis--and that's where I
think the counties do play an important role--takes advantage
of the more diverse real estate market within the region. And
so a city does not have to essentially get stuck with those
properties that are underwater in value and not be able to take
advantage of whatever retained equity may be out there on those
foreclosed assets that are in markets that might be more----
Mr. Kucinich. By stepping forward the way that you do, do
you think that you do a better job than traditionally private
sector or real estate tasks--that you can do a better job than
what the private sector is doing?
Mr. Kildee. I think so. But I would say, which private
sector? Because there's all sorts of markets for land.
And what I am concerned about is that the for-profit
investor market that really will put property into its best and
most productive use is the for-profit market that I want to
talk to. The problem is the systems that we had in place for
tax foreclosure and the worry that I have about mortgage-
foreclosed assets is that we're not talking about a system that
delivers these properties to that investor market but to the
speculative market, to the property flipper.
Mr. Kucinich. Right. So with the land bank, you have one
paradigm. Let's say you don't have a land bank. Can
jurisdictions without land banks adequately address significant
numbers of vacant properties? How do they do it?
Mr. Kildee. Well, I think it's up to the capacity of local
government or even to the nonprofit sector in a particular
community. I'm an advocate of public land bank authorities,
because I think it creates the permanent capacity in a single-
purpose entity whose job it is to deal with underutilized
vacant and abandoned property. It's too easy an issue for
somebody to avoid unless you have an entity specifically
designed for that purpose.
Mr. Kucinich. Thank you.
Councilmember Floreen, as you know, Congress passed a bill
to help neighborhoods in need. The bill has a veto threat
against it. While I would like to be optimistic about the
bill's future, will you tell the committee what happens to
neighborhoods if the bill is not enacted and if the market
alone, the market alone, is relied upon to deal with the
growing problem of vacant and abandoned properties?
Ms. Floreen. Thank you, Mr. Chairman.
Well, it's very evident that we have left it to the market.
Mr. Kucinich. That what?
Ms. Floreen. We have left it to the market already. And
we're seeing the effects of that. There is no question.
Mr. Kucinich. Could you elaborate?
Ms. Floreen. Well, the market that this has been left to is
a market that, in many cases, has preyed upon people who cannot
afford the situations in which they've been led.
It has particular impact on minority communities. In
Maryland, African American homeowners are three times more
likely than whites to receive a subprime loan and four times
more likely to refinance from a subprime lender. Latinos are
twice as likely as whites to receive a subprime loan and three
times more likely to refinance from a subprime lender. And
those are communities of interest that are particularly hit
hard by this.
There is no question that decisions have been made,
structures have been created that have led people into a
situation which we are collectively faced with having to
redefine and solve for the benefit of the communities around
those homes.
Mr. Kucinich. Thank you.
The Chair recognizes Mr. Turner for questions.
Mr. Turner. Thank you, Mr. Chairman.
And I want to thank both of you for what you're doing on a
local level, what you're doing in taking some of the best
practices and describing it to others and highlighting some of
the issues that you see that need to be resolved.
And one of the ones that I heard from you, as you were
talking, that I think bears some additional discussion is the
issue of when a property becomes a target for foreclosure and
that process of foreclosure and, oftentimes, the resulting
process of title problems that ensue and then the attempt to
return that property back to productive use.
When I served as mayor of Dayton, before even the
foreclosure crisis occurred, when we would have abandoned
properties in neighborhoods I would have people ask me, you
know, what is the biggest problem that you have with abandoned
properties? And the answer sounded boring and esoteric, but
it's the truth, and it's title. Tomorrow someone could not just
go, grab that property and fix it up and put it back to
productive use. There were usually highly complex title issues
and problems as a result of the financial transactions that
resulted in the property being abandoned and in foreclosure.
And now that we're seeing this massive foreclosure
incidence, it's just compounding itself. And as you mentioned,
Mr. Kildee, a lot of these properties being upside-down, when
the lien values are greater than the property value itself, it
causes even greater concern.
I saw there were many properties in our community that,
when they were going in the process of foreclosure--sometimes
even the family has left, perhaps even it's gone to sheriff's
sale and no one has purchased it, perhaps it's gone to
sheriff's sale and the bank itself has purchased it--that the
lack of attention by the lender to the property or maintaining
the value of the property had a huge negative impact on the
neighborhood and, really, the future success of that property.
The lender's obligation, largely contractual, to the
individual that they had the loan, they would have either lower
increased liability to the lender based upon the lender having
preserved the asset, but beyond that there was no obligation,
other than just housing code and normal issues of condemnation
if it became a threat.
Mr. Kildee, you mentioned the issue of Federal funding that
can assist in that process, but I would like your additional
thoughts on if there are things that we should be doing.
Obviously, the mortgage industry, a highly regulated
industry. The foreclosure process is really a government-run
process in order to sustain the financial transactions.
What are your thoughts on what you see of the failure of
lenders to step to the plate and some of the things that you
might know of that communities are doing that makes a
difference? Mr. Kildee.
Mr. Kildee. Well, lenders secure their financial interest
in a property with a mortgage, which, from our point of view,
and the way we modeled or created the Michigan law, is that
mortgage interest is an ownership interest. And the rights of
ownership come with significant responsibility.
I think you will probably hear some thoughts from some of
the subsequent panel members, certainly Alan Mallach from the
National Housing Institute--we were just talking about this
subject--that we do need a system that recognizes that if a
lender intends to secure its financial interest in property
with an ownership interest, with that ownership interest comes
the responsibility of being a property owner. That means that
building code violations should be the responsibility of that
property owner.
And I know we've seen, certainly in Cleveland with the
great work that Judge Pianka has done and certainly in New
York, other housing court judges that have been willing to hold
lenders responsible for that ownership interest. To me, that's
critical.
Second, the point that you made initially on title, it's
very important to create local authority to clarify title. And
this is one--I know I'm sort of a one-note Johnny on land
banks, but it's one of the things that land banks can do. The
Michigan Land Bank Act allows us to expedite a quiet title
procedure on any property that we have interest in in 90 days.
So, No. 1, identifying those owners of interest, holding
them responsible as owners; and then, second, being able to
take their interest away from them if they choose not to be
responsible property owners. Whether it's a mortgage lender or
the actual occupant of the property, the same standard ought to
apply.
Mr. Turner. Ms. Floreen.
Ms. Floreen. Yes, sir. I think one thing to recall, as
well, is when you have an abandoned property with code
enforcement issues because it's been left alone, even as a
chain of title or just a sale is being addressed, it sends a
message, it sends a message to every other property in that
community.
It sends a message to the community that, ``Well, you don't
need to try. If you're on the edge, why not do it too? And why
should we clean up that graffiti? And why should you cut your
grass? And why should you fix those broken steps? And why
should you respect your neighbor's need for noise control?''
All the kinds of things, as you know, that make a huge
difference in the quality of life within a community. ``Why
should children listen to their parents?''
I don't mean to overextend the analogy, but the fact
remains that it sends a message to the whole community that we
don't matter, that my community doesn't matter. And that is a
very difficult thing to turn around.
As I said in my testimony, billions of Federal dollars have
been spent on neighborhood revitalization to combat that very
issue. And this just starts it all over again.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman.
I want to note that we've been joined by the Congressman
from Massachusetts who represents the city of Lynn, among other
areas.
Congressman Tierney, after Congresswoman Watson has a
chance to ask questions, we'll go to you and then Mr. Higgins,
if that would please the committee.
Congresswoman.
Ms. Watson. Thank you, Mr. Chairman.
This goes to the Honorable Nancy Floreen.
In your town, in the communities, what happens at the point
of contact with the consumer and the bank? I'm wondering how do
these people get these subprime loans when they might make
$1,500 a month and the loan is for a property that costs
$175,000? What happens at that point?
Ms. Floreen. Well, the issue of predatory lending is one
that we've been struggling with in Maryland for quite some
time. And, as you know, there is a tradeoff between the issue
of access to credit fairly and in a proper way and access to
credit that's designed to benefit the lender and, in many
cases, the broker and does not achieve a desired social good
and puts the purchaser in a position that they can really never
dig their way out of.
Many of these issues are cultural. Many of the brokers are
not regulated in the way that they should be.
And the big issue, as I think most people know, is the fact
that there's no local financial institution interest in the
property because of the way that these mortgages get bundled
and sold. And who knows if people from Saudi Arabia end up
holding the credit? It is an international market for items
that used to be a local service and the local banks that would
serve these folks.
Ms. Watson. You led right into my next question that I
wanted to know. And then also, Mr. Kildee, whose uncle is
usually my seat-mate on the floor, a person I really respect.
But, the two of you, have you seen an influx of foreign
investment into the housing market? And if you have, how
significant has that investment been, do you know? Either one.
Mr. Kildee. I'm in a community where there's disinvestment.
We don't have significant investment. What I have seen is
something perhaps not quite as insidious as foreign investment
but it's out-of-town investors. And, honestly, other than Ohio,
California, Massachusetts and New York, we don't really want
anybody investing in our properties. [Laughter.]
The issue for us has been this liquidation model that has
applied previously to tax foreclosures and now is being applied
to mortgage foreclosures, where the properties themselves are
not treated as part of somebody's landscape but they're treated
as security on some security that is bought and sold.
And so the concept behind this, sort of, liquidation
approach that we're very worried about ignores the fact that
the underlying asset sits next to some family and is a part of
the fabric of a community. And that's problematic.
And that's why the notion of having local authorities
making decisions about the actual disposition of the property,
that consider the interest of the residents of the local
community and the market conditions, I think is a better
approach.
Ms. Watson. I'm getting ready to hold a huge forum on this
issue. And we have bankers, and we have all aspects of the
consumer market and, as I said, the housing market. And I'm
trying to get my staff to build it up so we can get a thousand
people there, because this has been the No. 1 concern in areas
of my district.
And I see the prey is on the lower socioeconomic areas and
seniors. And people are losing their homes and calling my
office, ``What can I do?'' So we want to get the information
out there from the experts.
And we do have a set of bills going through that might
address, but probably we need to do more overseeing of the
regulators.
But that's why I ask you, Madam Councilwoman, what happens
at that point of contact where a person will sign on that line
and they have those balloon payments, you know, and they just
can't handle them, and there we are, foreclosed?
Ms. Floreen. If I might observe, as well, Congresswoman
Watson, consumer counseling is going to have to be an area
where we devote tremendous attention to, and in many languages,
and forcing people, really, to read the materials that they're
provided and to be able to make the right financial decisions
and understand the fiscal issues that they are getting
themselves into.
Ms. Watson. Just another comment, Mr. Chairman.
In California we have an Office of Consumer Affairs, and
I'm thinking now about getting someone within my legislature to
put in a bill that would require a division that will deal with
property ownership and so on under the Department of Consumer
Affairs. And we need that intermediate group where people can
be educated before they sign on that line. So thinking that
through, I think we'll have something that we can present.
Thank you, Mr. Chairman.
Thank you, witnesses.
Mr. Kucinich. And I would like to have an ongoing
discussion with the gentlelady about that. I think that we need
to look for more solutions and dealing with it at a local
level.
The Chair recognizes Congressman Tierney from
Massachusetts. Thank you.
Mr. Tierney. Thank you very much.
Thank you both for being here today. I think you give a
very good picture of what's going on out there.
Mr. Kildee, I probably don't have to but I want to add my
voice to the chorus of people that tell you how much your uncle
is respected and relied upon in this institution for his
knowledge and his work ethic.
Mr. Kildee. Thank you.
Mr. Tierney. So it's a pleasure to serve with him.
The legislation that we're talking about that may be
vetoed, in a nutshell it talks about voluntarily writing down
the value of the property and the mortgage on it in return for
a guaranteed value of the security on that.
What is your opinion, in your respective communities, about
whether or not lenders will, in fact, voluntarily participate
in that program, as opposed to needing probably the stick of
sorts of letting a bankruptcy judge have the same authority if
they don't voluntarily participate?
Mr. Kildee. Well, that's really the question that I think
we're all trying to get our arms around. If there is some way--
and this is obviously the legitimate role for a Federal, for
Federal intervention.
For us, as the community--and I speak for people in Flint,
and I speak for my land bank authority--if we can get these
properties without having to purchase them at a price that
essentially renders them useless to us, we want to get control
of these properties. We have the capacity to manage them, but
we can't take them by purchasing them for whatever the balance
might be on a particular mortgage, because, in almost all the
cases, the properties with significant value have mortgage
balances well above what our market will bear.
So, obviously, you put your finger on the problem.
Mr. Tierney. Do you have a feel for your community banking,
establish with your lenders out that way as to whether or not
they would voluntarily participate?
Mr. Kildee. Local lenders, for sure. And in the case, for
example, of Fannie Mae, I happen to chair the State land bank
authority, and I purchased 184 mortgage foreclosed properties
from Fannie Mae by proposing to them that we buy them for
$175,000 each and competed against, I'm sure, what were more
significant cash bids.
We were able to secure those properties because we have
something that other purchasers don't have: the ability to
manage that real estate, and to do it in a way that reduces the
likelihood that more property in the surrounding landscape is
going to see its values fall.
Any company that's going to be in business for more than
the next 12 months better be thinking about how the disposition
of their current assets is going to affect the remaining assets
against which they have mortgages. And if they fail to do that,
they do so at their own peril.
So thinking about these properties themselves as being the
only properties that matter and the cash return that they might
receive on those properties being the only number they need to
be concerned with is a foolish, pennywise but pound-foolish
approach. And that's what we're seeing some of them do.
In the case of Fannie Mae, they saw the light and were
willing to work with us.
Mr. Tierney. Thank you.
Ms. Floreen. Congressman, I think from the banking
perspective--of course the bankers can tell you--but I think it
would be my expectation. What I'm told regularly is it's about
time and it's about predictability.
Mr. Tierney. About time and what else?
Ms. Floreen. The time in which a property is not generating
revenue for them, and predictability of the process and if
there are clear guidelines, clear direction and the ability to
move properties, which is what we all want. We want those
properties back, occupied by families contributing to the
community, in the speediest time available. That benefits all
players.
Mr. Tierney. Well, thank you both.
Mr. Chairman, I yield back.
Mr. Kucinich. I want to thank the gentleman from
Massachusetts and thank the panelists.
The subcommittee will be in contact with you. And one of
the things that we're going to be looking at is to try to
quantify the transfer of wealth that's occurring here. Because
the underlying question--and to members of the subcommittee, to
my colleagues Ms. Watson, Mr. Tierney, Mr. Cummings--the
underlying question that we're moving toward here is that there
has been a massive transfer of wealth upwards in the hands of a
few, taking money away from people whose greatest investment is
their home, taking money away from communities. And, in some of
your remarks, Mr. Kildee you got into that.
I want to thank this panel. We're going to be looking at
that further, because this is bottom-line rock-bottom issue
here, this transfer of wealth that's going on. It's
extraordinary. Thank you--we will be in touch with you--Mr.
Kildee, Ms. Floreen, for your testimony, for your willingness
to answer questions.
We're going to move on to the next panel. And as we're
moving on to the next panel, I want to say how pleased we are
to be joined by the Congressman from Maryland, and particularly
Baltimore, Congressman Elijah Cummings, who has been a critical
part of the work of this subcommittee in looking at all issues
that relate to the economy of cities and to the issues that
relate to making sure that government is truly functioning for
people in the inner-city.
So, Mr. Cummings, thank you for joining us.
And we're now going to move to the next panel. We're
fortunate to have outstanding witnesses on our second panel.
I would ask that you be seated.
We have Ms. Vicki Been, who is a professor of law and
public policy at New York University School of Law. She's also
the director of the Furman Center for Real Estate and Urban
Policy. Her areas of research include affordable housing, land
use, and predatory lending.
Ms. Been's research has been published in numerous
journals, including a 2004 article in Cityscape entitled,
``Impact Fees and Housing Affordability.''
Next, Dr. Phyllis Betts. As Dr. Betts is moving to her
position at the witness table, Dr. Betts is the director of the
Center for Community Building and Neighborhood Action at the
University of Memphis. She has over 10 years of experience
working with community development organizations and agencies.
Her work evolves around sustaining neighborhood housing markets
and enhancing quality of life in low- to moderate-income
neighborhoods.
Mr. John Talmage. Mr. Talmage is the president and CEO of
Social Compact, Inc. Under his leadership, Social Compact
performs market research and analysis of inner-city
neighborhoods throughout the country. The goal of this effort
is to generate new tools and practices that will contribute to
innovation in the field of community development.
Prior to joining Social Compact, Mr. Talmage served as the
deputy director for economic development for the city of New
Orleans, where the focus of his work was business development.
I want to thank the witnesses for appearing before the
subcommittee today.
Just to let you know, it's our policy to swear in
witnesses. I would ask that you stand and raise your right
hands.
[Witnesses sworn.]
Mr. Kucinich. Let the record reflect that each witness
answered in the affirmative.
And I would ask, as in the previous panel, that each
witness give a statement 5 minutes or less in duration. Your
entire statement will be included in the record of the hearing.
I am grateful for your presence here.
And I would ask that we begin with Ms. Been. Please
proceed.
STATEMENTS OF VICKI BEEN, ELIHU ROOT PROFESSOR OF LAW AND
PROFESSOR OF PUBLIC POLICY, CO-DIRECTOR, FURMAN CENTER FOR REAL
ESTATE AND URBAN POLICY, NEW YORK UNIVERSITY SCHOOL OF LAW;
PHYLLIS G. BETTS, DIRECTOR, CENTER FOR COMMUNITY BUILDING AND
NEIGHBORHOOD ACTION, SCHOOL OF URBAN AFFAIRS AND PUBLIC POLICY,
UNIVERSITY OF MEMPHIS; AND JOHN TALMAGE, PRESIDENT AND CEO,
SOCIAL COMPACT
STATEMENT OF VICKI BEEN
Ms. Been. Chairman Kucinich and all the members of the
subcommittee, I am honored to be here today to share with you
findings from the Furman Center's research on the external
effects of mortgage foreclosures and vacant properties.
Few urban problems have been more vexing or more
threatening than the huge number of mortgage foreclosures
plaguing our communities. To understand better how and whether
the Government should intervene in this crisis, the Furman
Center has undertaken several studies to examine the external
costs that foreclosures impose.
Foreclosures obviously harm the homeowners who are
threatened with losing their homes, as well as their creditors.
But if foreclosures also harm third parties, such as neighbors,
the broader community and the renters of the properties that
are in foreclosure, the justification for Government
intervention in the crisis becomes all the more compelling.
To assess the external effects foreclosures have on
neighbors and the broader community, we examined the impact
that the filing of a foreclosure notice has on the sales prices
of nearby properties. And to assess the harms foreclosures
might impose on renters in buildings going into foreclosure, we
examined the characteristics of the buildings that were
entering foreclosure in 2007 in New York City and estimated how
many of those buildings housed tenants who would be dislocated
by the foreclosure.
I will briefly describe our findings on each of those
issues.
Our research shows that foreclosures depress the sales
prices of nearby properties. Properties near homes and
buildings that have entered the foreclosure process, on
average, sell at lower prices than comparable properties in the
same neighborhoods that are not near homes in foreclosures.
Foreclosures in New York City are highly concentrated in
specific neighborhoods. In order to assess the effects that
foreclosures had on the neighboring properties, we separated
New York City's neighborhoods into two groups: high-exposure
neighborhoods in which the median property sold was near 15
properties that were in the foreclosure process; versus low-
exposure neighborhoods in which the median home sale was near
only one property.
In the low-exposure neighborhoods, the sales prices of
homes within 500 feet of just one or two properties for which a
foreclosure notice had been filed in the prior 24 months was
almost 2 percent lower than the prices of similar properties in
the same neighborhood but not near a foreclosure.
Sales prices of homes within 5,000 feet of three to five
properties that were in foreclosure were almost 3 percent lower
than the prices of comparable properties that were not near a
foreclosure. In the high exposure neighborhoods, properties
again sold for less than comparable properties in the same
neighborhood but near fewer recent foreclosures. The discount
was higher for properties near larger numbers of foreclosures.
Our work accordingly provides strong evidence that
neighbors bear significant costs when a homeowner loses his or
her property to foreclosure. Local governments in turn lose tax
revenues. Efforts to help stem the tide of foreclosures and to
assist local governments in putting those foreclosed properties
back into the hands of responsible families accordingly may be
justified by the external effects that foreclosures have on
property values.
Our research also documents that foreclosures have an
impact on another group of collateral victims. Our data on
notices of foreclosure filed in 2007 in New York City reveals
that 60 percent of the properties going into foreclosure in
2007 were two- to four-family buildings or multifamily
buildings.
A conservative estimate is that those buildings house at
least 15,000 renter households. If those properties are sold at
auction, those households will face eviction and will bear the
cost and dislocation of finding a new home.
New York City isn't exceptional in this regard. Other
research has also documented that multifamily buildings make up
a significant portion of the foreclosures throughout the
northeast.
Our results show that foreclosures not only harm the
homeowners and creditors involved but also hurt neighboring
properties, the community itself, and the tenants in those
buildings. Whatever the outcome of the debate over the
desirability of assisting homeowners facing foreclosure or
their creditors therefore, there is justification for
intervening in the foreclosure crisis to protect those third
parties who our results reveal are bearing a significant part
of the cost of foreclosures.
Thank you.
[The prepared statement of Ms. Been follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you for that very significant
quantification. Appreciate it.
Ms. Betts, please proceed.
Ms. Betts. Yes. Thank you, Mr. Chairman.
Mr. Kucinich. Can you get a little bit closer to that mic?
And, staff, could you make sure that mic is on.
STATEMENT OF PHYLLIS G. BETTS
Ms. Betts. Thank you, Mr. Chairman, members of the
committee.
I'm coming from Memphis, TN. We're not New York City. We're
not southern California, Buffalo, Cleveland or Baltimore. To
begin my message, I want to say that all of our markets are
different.
House bill 5818 is a good bill, because it allows for that
flexibility. It may not be veto-proof. If it's not, we need
something similar.
And I want to share with you a little bit of our data from
Memphis to underscore the need for flexibility and also for a
funding formula that takes into account flexibility for market
to market.
I'll speak to two points. Everyone has underscored and I
think knows in their gut that the impact of foreclosures on
neighborhoods is debilitating. I'm going to show some examples.
Second, the data that we use to underscore a funding formula in
terms of what will go to States and how States will distribute
money within the States needs to be equitable in terms of
regions of the country, different kinds of cities, different
kinds of housing markets.
And I want to say just a couple of words about the apparent
data base of choice, First American, and I think that my
colleague, Mr. Talmage, will followup on that.
The debilitating impact of foreclosure, to point one. We're
one of those areas of the country that didn't just get hit. Our
foreclosure rate has been going up slowly since 2000. In 2007,
we had almost 12,000 foreclosure notifications for a total in
that 8-year period of over 61,000 foreclosure notifications.
This is the equivalent of 25 percent of our single housing
stock, our single-family housing stock, and that's where we are
hardest hit.
Mr. Kucinich. Excuse me, what was that percent again?
Ms. Betts. Twenty-five percent of our single-family housing
stock.
Mr. Kucinich. Thank you.
Ms. Betts. Our subprime lending escalated between 2004 and
2005, going up from 25 percent to 40 percent of all mortgage
loans in Shelby County, and that includes our suburban area.
And clearly, we're tracking subprime and foreclosures. And the
neighborhoods that are hardest hit are hit both by subprime
lending and by foreclosures.
Our hardest hit areas actually are those areas that we
would call middle class neighborhoods; middle class
neighborhoods with modest priced housing, where people moving
from lower income neighborhoods are looking for a higher
quality of life. These are the neighborhoods that are the most
heavily impacted, that are going to have the greatest impact on
our tax base in Memphis and Shelby County, and where this kind
of intervention can make a difference. If we take a triage
approach, this kind of bill can make a big difference in
Memphis neighborhoods.
I would like to put up map two, please, which is the other
map. The one on the bottom.
And if you could zoom in.
This is Memphis and Shelby County. I'm sometimes asked from
folks in the northeast if that's the Mississippi River, and so
I'm going to say, yes, that is, on the left of the map. Our
downtown and center city area is right there on the river.
And then radiating north from the river is north Memphis,
south is south Memphis. Those are our traditional low income
areas. Most of our foreclosure there is driven by high cost
refinance loans, often times second-generation folks who are
taking out equity when parents die. And that's a different kind
of situation that will require a different kind of remedy than
what we are seeing in what we call the areas of the horseshoe.
You can see the darker the teal is where our greater number
of foreclosures are. And in the north arc and the south arc in
that horseshoe, foreclosure driven by subprime lending, which
we can document, is moving out to our suburban area, in fact.
If you see the lighter teal color, that is a suburban area.
That is a different animal, but it is foreclosures none the
less and requires the kind of intervention that you're talking
about.
We're doing a neighbor-by-neighborhood survey and problem
property audit, and that will be the next map. We're looking at
the conditions of foreclosed properties and all of the other
properties in the neighborhood for comparison purposes. And it
has become quite clear that foreclosures are driving blight in
these middle class--and by middle class, we're talking about
$120,000 houses, which are actually quite nice in Memphis. So,
you know, this is a different market. And if markets go, then
so go Memphis and Shelby County.
This is Mendenhall Estates. In Mendenhall Estates, in 2007,
the red parcels are the foreclosed parcels in Mendenhall
Estates; 1,000 parcels, all single family, in this particular
neighborhood; 65 foreclosed parcels, 6.5 percent of the single
family housing stock. Fifteen percent of them were vacant when
we surveyed them in the last month. And in the neighborhood as
a whole, the other crosshatched parcels are showing signs of
neglect.
When we drilled down to look at other vacant properties in
this neighborhood, we found, for the 22 that we looked at that
were in the worse shape, they were virtually all foreclosures
from 2005 and 2006. Some of them had moved into the investor
market. Others had been vacant the whole time.
Neighborhood stabilization, a public problem. Foreclosure
mitigation, a private trouble. If the two are combined, we can
begin to move forward.
Just a final note on the First American CoreLogic data
base. When we have compared what is in that data base, which,
according to its own documentation, covers about 50 percent of
the subprime mortgages nationally, when we've compared the
number of mortgages by zip code from that data base with the
Home Mortgage Disclosure Act subprime mortgages, we're finding
that in these heavily hit neighborhoods, only about 25 percent
of the mortgages seem to be in the First American data base.
Our theory on that is that these are modest mortgages, modest
neighborhoods, and they don't appeal as much to investors in
terms of some of these securities instruments.
John will be looking at that. And if there's a difference
of say 5, 7, 10 percent, if we compare Memphis and Tennessee to
California or New York City, that's going to result in a major
flaw in the funding formula. We want to have to deal with that
flaw. That is we want this bill. We want this bill to be
implemented.
In conclusion, thanks for the opportunity to contribute to
this discussion, and I want to say that our neighborhoods in
Memphis, TN, depend on it.
And I'm going to speak for New York City, I think the same
is there as well.
Thank you.
[The prepared statement of Ms. Betts follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I thank the gentlelady.
Mr. Talmage, please continue with your testimony.
STATEMENT OF JOHN TALMAGE
Mr. Talmage. Thank you, Mr. Chairman, and thank you for
inviting me to participate in this hearing because I think what
it does----
Mr. Kucinich. Would you please bring that mic up a little
bit closer, so that we can all hear you clearly?
Mr. Cummings. Is it on?
Mr. Talmage. There we go. How about that?
Thank you for inviting me because I think this highlights
the problems that we have with understanding economic
conditions in inner city neighborhoods in the United States,
that our own work at Social Compact has found that in your own
city of Cleveland, when we worked there in 2002, we found
100,000 people not counted by the U.S. Census that lived in
Cleveland. In African-American neighborhoods in Miami, we're
finding 95 percent higher populations than have been documented
by the U.S. Census.
And I think there is very little attention or understanding
of the market conditions of inner city America. This has
impacts at the household level as well as the neighborhood
level. In recent work in Harlem, we found that 40 percent of
addresses don't have credit scores associated with them. In the
city of San Francisco, 33 percent don't. And so this lack or
absence--or this lack of information has created risk adversity
in the commercial lending sector but risk exuberance in the
residential lending sector, but it is based on the same lack of
documented information about communities.
And I just have to say before I talk about the foreclosure
issue that, while the scope of the hearing certainly
appropriately focused on the impact of foreclosures, the scale
of the problem extends, spills over to a broader community
development challenge around retail. There is emerging evidence
now that's beginning to correlate the correlations with obesity
and diabetes rates and the lack of access to full service
groceries. Those grocery stores are imperiled in underserved
markets. There is a group of evidence that is beginning to
emerge on the incidents of crime and the saturation of pawn
shops and payday lenders and whatnot. And those numbers will
continue to increase as our neighborhoods are imperiled.
So those same kind of conditions and these same kinds of
challenges that we as a community, whether it is the Urban
Institute or Social Compact or the NNIP Partnership, are all
trying to face everyday are now imperiled because of the lack
of understanding we have at the neighborhood level.
In our own work, we've had to create a tool that allows us
to understand the foreclosure impact, because just this week,
when we were out at the International Council of Shopping
Centers with a variety of cities discussing this work with
retailers, they were all interested in what is the foreclosure
impact in Detroit or in Cleveland or whatnot. So the 15,000
stores that they may be closing this year and certainly not
building will be drawn to these numbers as we begin to
propagate them. But by depending on national data sets, we're
not going to have the full understanding of what's going on in
Fruitvale, Oakland, or South Central LA or places like that.
We've had--so because of this, we've had to create a
response where we have partnered with a variety of private-
sector partners such as Property Advisors out of Cincinnati,
Ohio; First American CoreLogic; and University Partners to
begin to build out our own tools so that we can now assess the
market value of every home in the city of Detroit, the
foreclosure value of that same home, the abandon value of that
same home, the impact on adjacent properties, the impact on
city taxes and whatnot, and do that in a real time meaning,
because as the city of Detroit begins to address their own
foreclosure issues with their own foreclosure office and
whatnot, they have to have a dashboard to be able to understand
what the impact of this problem is.
And just to sort of put this in perspective, when you look
at the statistics that are being put out there about Wayne
County, which Detroit is located in, where the Center for
Responsible Lending estimates that the impact on every unit in
Wayne County, there's been a $1,700 impact. The fact of the
matter is, if you look at the foreclosure data itself it is a
$15,000 impact. This is not on a $200,000 home; this is on a
$60,000 home. So on the for--on average, the foreclosure impact
has been almost 25 percent.
The market conditions for market rate housing, the 65,000
transactions that have been conducted in the last 2 years, has
led to a depressed 10 percent impact across the board on every
single home. So that, to the extent--to the point that the
panel has made, that this is now spilling over greatly on the
adjacent properties, on other parts of the market. And I think
that, until we can create the tools that allow us to have the
skill to understand what the--the individual impact is on
households and on neighborhoods, that we can't create the level
playing field. And I have to stress that, in our own work,
having information to be a place where people, stakeholders can
come together to understand what the existing conditions are,
to agree at least on what that information is; it is
inefficient to try to find lots of other solutions without
having that common understanding of what neighborhood
conditions are.
And so I think that the kind of tools that we're talking
about, that Phyllis is talking about, that others are going to
talk about creates the existing conditions that we can all
agree on, and then we can build solutions from that.
Thank you, sir.
[The prepared statement of Mr. Talmage follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I thank the gentleman.
We're going to move to questions now to talk about the
appropriateness of Federal intervention.
And Professor Been, you've stated that there is
justification for intervening, I think you've said, directly to
protect neighbors, tenants and communities. As you may know,
however, there is opposition of Federal intervention on the
grounds that intervening creates a moral hazard. In your
opinion, does the specter of a moral hazard arise in a Federal
intervention to help neighbors? And if it does, what are your
thoughts about it?
Ms. Been. The problem of moral hazard----
Mr. Kucinich. Could you bring--make sure that's on and
bring it closer.
Ms. Been. Oh, I'm sorry.
The problem of moral hazard usually, you know, is
considered to be this situation where a decisionmaker is able
to escape the cost of some of their decisions and therefore may
take riskier actions. Right?
The neighbors of these properties, the tenants of these
properties and the community weren't involved in the decision
whether or not to take out this loan or whether or not to grant
this loan. Right? So they are suffering from external effects.
They are suffering from costs that they had nothing to do with.
Now I'm not saying that moral hazard won't in some way
affect the future decisions of those people. I mean, if a
neighbor sees, you know, one of their neighbors being rescued
in some sense, then they may make more risky decisions. But
you're trying to balance here the problem of these external
effects being imposed upon people who weren't part of the
decision, which is the classic reason that we always support
government intervention. Right? And you're trying to balance
that very real need to protect those third parties who weren't
part of the decision against, you know, the moral hazard that
may be involved down the road----
Mr. Kucinich. You said that----
Ms. Been [continuing]. Balancing test.
Mr. Kucinich. You said that foreclosure-driven blight will
not be reversed by a market correction, that foreclosure driven
blight is a public issue requiring public policy interventions.
As you know, the administration seems to be--strike that.
This is to Ms. Betts. You've said that, with respect to
foreclosure-driven blight, that it requires public policy
interventions. As you know the administration seems to be
taking a different view for the moment. What, in your view, is
the future of neighborhoods distressed by the subprime mortgage
meltdown if they have only the market to correct their problems
and no Federal intervention?
Ms. Betts. I think one of the witnesses earlier was talking
about how some properties can be reintegrated into the housing
stock by the market. And typically those are going to be the
more valuable properties.
I would like to connect that with the discussion here of
moral hazard in that the brokerage system of independent
mortgage brokers and independent mortgage companies, that part
of a dysfunctional mortgage market was highly fraught with
moral hazard. The absence of fiduciary responsibilities on the
part of brokers with their clients and so on, that form of
market failure is in fact what put us where we are at this
point in time, such that an intervention that can make a
difference in neighborhoods that are on the cusp, an
intervention that could help revitalize some neighborhoods that
are closer to the precipice, an intervention that can make a
difference in inner-ring suburbs. I think that the overall cost
of this hasn't adequately been calculated by those who would
say that this isn't a public policy issue.
Mr. Kucinich. I want to go back to Professor Been.
You have found that the amount of decrease in housing
values that can be attributed to the foreclosure of neighboring
property values, according to the concentration of--varies
according to the concentration of foreclosures. For the record
will you explain to this subcommittee the difference between
looking at the concentration of foreclosures on one hand versus
the number of foreclosures on the other?
Ms. Been. Well, you have to really look at both, because
obviously a neighborhood that's affected by tremendous
concentration of foreclosures is destroyed. Right? I mean, it's
very seriously impacted.
But in terms of figuring out the overall effect of
foreclosures, you also have to look at the number of properties
that are being affected. So think of it as, if you have 100
foreclosures all concentrated in one neighborhood versus 100
foreclosures spread out throughout the city; right? The 100
foreclosures that are spread out throughout the city might in
fact have a greater overall dollar cost because they are near
more properties. They are driving down the values of more
properties.
So you really have to look at both the question of
concentration and the total number affected by the
foreclosures.
Mr. Kucinich. Just a final followup question, here. The
research that you've been involved in shows that the depression
of housing values increases as the number of foreclosed
property in close proximity increases. Would it be typical that
in a given county or metropolitan statistical area or State,
you'd find certain neighborhoods that have higher
concentrations of foreclosures than others, or is it typical
that you would find foreclosures equally distributed over large
areas?
Ms. Been. No, foreclosures are very, very concentrated.
For example, in New York City, we have what we call 55
neighborhoods. In the last year, half of the foreclosures were
in just nine of those neighborhoods. They are very highly
concentrated. And the neighborhoods in which they are
concentrated are the ones that have high rates of subprime
lending; high rates of people of color, both blacks and
Hispanics; high rates of other kinds of risky lending. So they
are not evenly spread, they are very concentrated according to
race and geography.
Mr. Kucinich. Thank you very much.
I'm going to go to Congresswoman Watson.
Ms. Watson. Just real quickly. Thank you, Mr. Chairman. I
think you probably alluded to my questions.
What factors affect the likelihood that a property going
into foreclosure will end up vacant? And what factors affect
the duration that a property remains vacant? And let me send
this one over to Professor Been.
Ms. Been. The main factor that affects whether a property
goes--becomes vacant is the strength of the housing market.
Right?
Where you've got hot markets, strong--strong demand, then
the property will be purchased or rented out, you know, fairly
quickly. So the strength of the property market is really the
main determinant.
But other things that will come into play is, again, the
concentration. It is likely that the concentration of other
foreclosed properties will affect it because they add to the
housing supply. Right? They make many more houses be available
to the purchaser who is looking. So that may affect the
propensity of a property to actually go into vacancy.
In terms of how long they stay in vacancy, again, it's
going to be the strength of the property market, which is going
to depend upon things like the supply of the housing, what is
going on in the broader market. So it really depends very
strongly on the state of the market.
And of course, those things are related. The more
foreclosures, the more risk that the market is going to fall.
Ms. Watson. Mr. Chairman, thank you so very much for this
hearing.
We've got votes on the floor, so I'll yield back my time.
Mr. Kucinich. I thank the gentlelady.
We're going to take a recess since there are votes.
At the conclusion of votes, we'll come back, and I'm sure
that's true of the other Members who have been present.
Do we know how many votes there are?
Four?
I would say we're probably looking at at least a half hour,
maybe 40 minutes. So why don't we generally try to be back here
by 20 after 4, and then we'll proceed with another round of
questioning from the witnesses in a second panel, and then
we'll go to the next panel.
I just want you to think about this, though, on this break
that's coming up. Again, I want--I would like to have a further
discussion about this idea of the wealth accelerating upwards.
There is a massive transfer of wealth going on. Somebody is
making a lot of money here, has already made a lot of money.
You know, we could be looking all the way up to hedge funds,
and--but there are all kinds of other players. So I want to
talk to you a little bit about that when I come back.
Thank you.
This committee is in recess subject to the call of the
chair. See you right after the votes.
[Recess.]
Mr. Kucinich. The committee will come to order.
I would like to go back to Professor Been.
You've stated that there are differences between the
effects of foreclosures and vacant buildings in hot markets
versus cool markets. What are the important differences between
foreclosures in vacant properties occurring in one market or
the other? And in what ways should Federal intervention differ
in those so-called hot versus cool markets? And do you think
the amount of aid, say on a per capita basis, should be
different for a hot market versus a cool market?
And if we could start by defining terms here. Hot market.
Ms. Been. OK, a hot market is one in which property prices
are generally appreciating or at least staying stable. But
generally it is considered the property prices are
appreciating.
The difference between a hot market and a cold market in
terms of foreclosures is that if the market is hot, if you can
turn around and sell your property when you--when a borrower
goes into distress, can't afford the loan, has some, you know,
personal crisis that makes them unable to afford the loan, they
can usually sell the property and walk away without going into
foreclosure, risking their credit rating and that kind of
thing.
If it's a cold market and there's no market for the
property, then they don't have that option. And so they may
very well then end up in foreclosure because they can't sell
the property.
So the other difference between hot markets and cold
markets is that once property does go into foreclosure, in a
hot market, it's less likely to sit vacant for a long time,
because the bank is going to be able to sell it. There's going
to be a buyer at auction, or there's going to be what we call a
short sale.
Mr. Kucinich. Do you think there is any difference--should
those markets be treated differently in terms of providing any
kind of Federal aid or intervention?
Ms. Been. Well, I don't think so. I think you have to be
very careful there for a couple of reasons.
One is that you have impact from foreclosures on
neighboring properties even in hot markets, meaning the
research I reported was in New York City. New York City has
been, knock on wood, a very hot market up until now. But you
still see impacts of foreclosures, and that's because even
though a property isn't remaining vacant or going through the
entire foreclosure process, the maintenance is still often
lower, the stability of the neighborhood is lower.
Mr. Kucinich. Right.
Ms. Been. So it still has an--sends a message. Right?
Mr. Kucinich. Thank you.
Mr. Talmage, you've done a lot of work in Detroit,
Cleveland, St. Louis, among other places. These are long-
suffering locations where rising vacancies have been a problem.
Has the fact that these cities had preexisting vacancy
problems at all, has it insulated them at all from the effects
of the subprime mortgage meltdown?
Mr. Talmage. No, I don't think it's insulated it. In fact,
I think----
Mr. Kucinich. Exacerbated it?
Mr. Talmage. Exacerbated it. You know, in the case of
Detroit, where you've declined from a population of 2 million
to 1 million----
Mr. Kucinich. Could you make sure that mic is on?
Mr. Talmage. Yes, sir. I this better?
Mr. Kucinich. OK, that's good.
Mr. Talmage. In the case of Detroit where you--the
population has fallen from 2 million to 1 million in 50 years,
that you already had a blighted property situation to begin
with, whole tracts of the city are blighted; that by adding
another 35,000 foreclosures onto those rolls in the last 2
years, that the velocity of decrease has changed much more
rapidly than other places, such as cities along the East Coast.
Mr. Kucinich. How would foreclosures that occurred let's
say in say 2000 or, you know, a little later show up today in
neighborhoods? Would they be vacant? Would they be owner
occupied?
Mr. Talmage. Would they be vacant or owner-occupied? I
think that the foreclosures----
Mr. Kucinich. What was it like in 2000?
Mr. Talmage. In 2000, you had--you had new, I'll use
Detroit as my example. The city of Detroit had led the MSA in
the number of transactions for the last 5 years, meaning that
the number of home sales that were being transacted was the
highest rate then of any of their surrounding communities.
The number of new housing permits and rehabilitation
permits led that MSA as well for the same period. The
foreclosure rate, and you can see the velocity of the number of
homes that were provided high-cost loans increased from 2003 to
194, and then 195, and then 196. And that velocity has
increased more, you know, and at tremendous speed. So I think
that when there really--we're going to see 60,000 foreclosures
in the city of Detroit this year, that impact will have a much
higher impact on values of other community assets, whether it's
households or not, than anything we could have forecasted
today. So you see a velocity trend occurring that we haven't
seen the bottom yet.
Mr. Kucinich. Professor Been, I think I remember in your
discussion, and maybe Ms. Betts got into it as well, the
greatest amount of subprime loans went into areas that have
been--that are primarily minority, African-American, in many
cities, like in my city of Cleveland. We have seen other
counties similarly situated, perhaps in communities that you
talk about in Shelby County.
Ms. Been. Yes.
Mr. Kucinich. Let's go back a little bit, 30 years ago or a
little bit longer, President Carter saw the Community
Reinvestment Act come forward, affirmative obligation on the
part of lending institutions to lend money into communities
that had previously been denied credit or been red lighted. OK?
Is it in your--in your--in your estimation or anyone here, was
the--the lending institution certainly knew where they weren't
spending money. Is it possible that someone just--you know that
lending institutions looked at a map, in your estimation, and
determined, well, you know, we haven't loaned money here, and
we're not in compliance with the Community Reinvestment Act.
We'll package these subprime loans, send them out there, and
who cares if anybody can pay them off or not. Have any of you
thought about that at all.
Anyone want to try?
Ms. Betts. I've actually looked at that quite a bit. Our
local retail banks, which are the ones that were to be
scrutinized under the Community Reinvestment Act----
Mr. Kucinich. Talk closer to the mic, ok, bring the mic
closer.
Ms. Betts [continuing]. Our local retail banks are
responsible for less than 20 percent of the originations,
mortgage originations in Shelby County. The slack has been
taken up by the national independent mortgage companies, most
of which are not depository institutions, which are regulated
in a different way. The local retail banks have been able to
stick with the most lucrative business locally and basically
have not been held accountable for the kind of lending
neighborhood to neighborhood that was originally envisioned by
the Community Reinvestment Act. The breach was filled by this
other set of lenders. And some of us, in fact, talk about
predatory green lining. It was almost as though we drew a green
line around these particular neighborhoods and targeted them
for these particular kinds of loan products.
Mr. Kucinich. I would like--does anyone else have a
response to that?
Mr. Talmage. I would just echo that I think Phyllis is
absolutely right, that, in Cleveland, it wasn't the actions of
Key Bank, or in Detroit--I mean, by larger numbers than what
she was saying in Memphis, that the amount--the number of
loans, the percent of loans that were given by the unregulated
broker community far exceeded what national averages were. So I
think that if you were to look at, you know, a market in itself
or a census block in itself of where those loans originated
from, that you would come back and say it is clearly the
unregulated community.
Mr. Kucinich. I think it is really important for this
subcommittee to, as we get deeper into this issue of subprime,
to look at where the mortgages originated. They may vary
community by community, but clearly, at some point somewhere in
some market, somebody made a decision and said, if we can write
tens of millions of dollars in subprime loans, forget the
documentation. We can then sell those upstream, capitalize on
them, and who cares what happens afterwards. I mean, at some
point--somebody did that at some point, and we're going to keep
tracking that in this committee.
What I would like to do, and I'd like the members of panel,
if you find and area that you think is worth looking at in the
communities that you've worked with or that you studied, we'd
appreciate any kind of amendment to your testimony or addendum
that we could include in what you've already contributed, which
has been pretty significant.
Mr. Tierney, did you have a followup question?
Mr. Tierney. Just a couple of wrap-up questions.
Mr. Kucinich. Yes, please.
Mr. Tierney. Ms. Been, if we wanted to identify the
external effects of foreclosures, what would be the appropriate
unit of analysis? Would a zip code level be better than a
county? Would a census tract be better than a zip code, or
would a block be better than a census tract? What's the right
analysis of vehicle to use there for purposes of where we
should direct the Federal funds?
Ms. Been. Generally, in thinking about the external
effects, you want to think about the neighborhood. And the unit
that maps on, imperfectly, but maps on best is typically a
census tract. Now, you don't always have data by a census
tract. And then you tend to go up to a zip code and then to
county level, but you really want to start at the neighborhood.
I mean, neighborhoods across a city are very, very different.
So if you look at a city as a whole or a county as a whole,
you're going to miss a lot of variation in what it is that
those neighborhoods need.
Mr. Tierney. In keeping with that, I think we just ought to
put something on the record of what's simplistic to all of us.
And if we want to bring these things down to the--the values
right down to the label of neighborhood pocketbook on this, if
a neighbor had equity in a house that was about 28 percent of
value, and then his house lost that 28 percent of value because
the property next to it was vacant, they would essentially be
wiped out. They've lost all that savings. They've lost whatever
wealth they had in their house; right?
Ms. Been. They've lost--if they try to sell the house, they
certainly will not make as much as they would otherwise.
Mr. Tierney. Right. If that's all they had, they're
obviously in pretty dire straites. So I think that the record
can reflect that foreclosure crises, when you have a lot of
vacant properties, they robbed a number of neighbors of their
wealth on that?
Ms. Been. Yes.
Mr. Tierney. So the long-term consequences for a community
like that, what societal consequences of these neighbors losing
their equity in that way do you foresee?
Ms. Been. Well, I think the societal consequences are
several fold. One is, when we see what that looks like, it
looks like the Bronx in the 1970's, where you have
neighborhoods that are pockmarked by abandoned buildings. And
it is very hard to get that neighborhood back together.
The second major societal consequence is that these are
neighborhoods that, during the 1980's and the 1990's and this
decade, we poured massive amounts of city, State and Federal
investments in, and that's going to be lost. That's taxpayers'
money that, you know, is going to be lost. And it is not just
government money, but it's private investment, it's foundation
investment that's all being wiped out.
Mr. Kucinich. Would the gentleman yield?
Mr. Tierney. Yes.
Mr. Kucinich. You know, in connection with that, this is
very significant part of our discussion, because I can go back
to my own neighborhood, my own district in Cleveland, and for
example, there is an area call the Four City Park area. There
were several parks in the community, and you can see when
there's a decline in the residential housing stock, the
infrastructure, the public infrastructure, experiences a
similar decline. So there is lots of value. You can actually
see it. And that's something that when we talk about the
transfer of wealth, that's a transfer of wealth from the
public, away from the public.
So, Mr. Tierney, thank you. I yield.
Mr. Tierney. Ms. Betts, Mr. Talmage, do you want to add
anything to that or have we pretty much covered that ground?
Ms. Betts. I would just underscore that, in a lot of
markets, and I would look at medium-size cities in the South
and Midwest in particular, not so-called rust-belt cities,
where middle-income neighborhoods that didn't get actually a
lot of the Federal money and that have been a substantial
source of the tax base and the primary source of wealth-
building for all of those families in the middle, that if we
increasingly have upscale neighborhoods and downscale
neighborhoods, then the impact on the individual families will
be difficulty in wealth-building that can be passed from
generation to generation. And the impact on neighborhoods will
be that if you're not in an upscale neighborhood, then you're
going to be experiencing a lot of the issues that the
neighborhoods that Professor Been has talked about have
experienced for years. And I don't think that's where we want
to go with our cities.
Mr. Tierney. Mr. Talmage.
Mr. Talmage. I would--also I think that the unit of
analysis should always be at the block group level if not the
household level. I do think that the data exists. It is hard to
come by. It is not necessarily formatted for this use, but I
think that's something that can be addressed.
But on the social impact, I think one of the things that we
see in the cities that we're working with around the country is
that there is a tremendous amount of pressure on cities to
begin decommissioning neighborhoods, to remove public services
from entire communities. And you know, this is something that
the Bronx thought about back in the 1970's. And I think that
kind of public policy agenda, it could have a long-run
consequence that would accelerate some of the household wealth
impacts that we've seen--we've seen over the last decade by
for--not forcing but asking neighborhood communities or
individual households to relocate to other neighborhoods where
they are not connected to or whatnot. And I think that is the
law of unintended consequences that if we don't sort of grapple
with it now, understand what the impact is at the household
level and at the neighborhood level, that some of these very
bad public policy decisions will move forward.
Mr. Tierney. Thank you.
Mr. Chairman, may I ask one more closing question over my
time a little bit here.
Mr. Kucinich. Of course.
Mr. Tierney. Mr. Talmage, in your written testimony, you
thought that the value of the equity stripped in Detroit was
about a billion dollars.
Mr. Talmage. Yes, sir.
Mr. Tierney. Do you have an estimate of what you think it
is nationwide?
Mr. Talmage. No, but we have a methodology to get to that.
Mr. Tierney. I bet you do.
Thank you very much.
I yield back, Mr. Chairman.
Mr. Kucinich. I thank my colleague.
Again continuing this discussion about infrastructure, I
mentioned a park and how that's deteriorated. But also think
about this in terms of neighborhoods because you have an
investment of a public infrastructure, a water system, a sewer
system, electricity, telecommunications; that's all there.
If people are--if no one's--if there's a substantial
decrease in the population of an area because of foreclosures,
there is a loss of revenue to those companies. And also the
infrastructure can deteriorate as well and which requires
greater repairs. You can see the damage when you go into some
of these communities. So it can be a public loss of revenue,
which actually can turn around and increase the cost to other
ratepayers if it is a utility, because you know what, you have
less ratepayers. And it can increase the cost of water and
sewer as well. So you have a cycle here of cost transfers that
just sometimes seems not to end.
I'm grateful for the panel's participation. We'll have some
followup questions from the committee staff after this hearing,
I can assure you. And the quantification that you bring to this
discussion is extremely important, and it is going to be very
useful as this committee continues to go further.
We are going to dismiss the second panel with the thanks of
the subcommittee and call the next panel forward. Thank you
very much.
As the third panel is taking its place, we're fortunate to
have outstanding witnesses on our third panel.
We have Mr. Alan Mallach, is the senior fellow at the
National Housing Institute. His work focuses on housing and
community development policy issues, including vacant and
abandoned property issues, housing investment strategies,
market-based urban regeneration. In 2006, Mr. Mallach published
a book on abandoned property strategies entitled, ``Bringing
Buildings Back: From Abandoned Properties Into Community
Assets.''
Mr. Doug Leeper is the code enforcement manager for the
city of Chula Vista, CA. He's owner of the Code Enforcement
Solutions consulting firm. Over the course of his career, Mr.
Leeper has supervised the enforcement of 30,000 cases; 1,100
warranted abatements; and 275 warranted demolitions.
Mr. Dean Baker is the cofounder and codirector for the
Center for Economic Policy Research. He has previously worked
as a senior economist at the Economic Policy Institute and
assistant professor as Bucknell University. Dr. Baker has
authored numerous books and articles, including his recent
publication entitled, ``The United States Since 1980.'' Dr.
Baker earned his Ph.D. in economics from University of
Michigan.
I want to thank the witnesses for appearing in front of the
subcommittee today. It's the policy of the Committee on
Oversight and Government Reform to swear in all witnesses
before they testify. Please rise and raise your right hands.
[Witnesses sworn.]
Mr. Kucinich. Thank you very much, gentlemen.
Let the record reflect that the witnesses have answered in
the affirmative.
And I would ask, as in previous panels, that each witness
give an oral testimony, a summary of your testimony, keep the
summary under 5 minutes in duration.
Please keep in mind that your complete written statement
will be included in the hearing record, so we won't miss a word
of what you have to tell us.
Mr. Mallach, if you'd like to start.
STATEMENTS OF ALAN MALLACH, SENIOR FELLOW, NATIONAL HOUSING
INSTITUTE; DOUG LEEPER, CODE OF ENFORCEMENT MANAGER, CITY OF
CHULA VISTA, CA; AND DEAN BAKER, CO-DIRECTOR, CENTER FOR
ECONOMIC POLICY RESEARCH
STATEMENT OF ALAN MALLACH
Mr. Mallach. Thank you Mr. Chairman and members of the
committee.
Mr. Kucinich. And please pull that microphone closer, so we
can hear you.
And if staff would assist Mr. Mallach in making sure that
the microphone is on.
Please proceed.
Mr. Mallach. First, I want to commend the committee for
tackling this issue and also for focusing on the neighborhood
and property aspects of these issues, which are so often
overlooked.
I would like to suggest that tackling this issue really
requires two separate types of action. One is to enable capable
local governments and nonprofits to get control of properties,
so they can be properly maintained and properly reused. But the
other part is actions to minimize the harm that vacant
properties do while they are vacant and before they can be re-
used.
I would like to touch on both of these very quickly. Every
city, town, county in this country has the ability to minimize
harm from vacant properties through its code enforcement and
nuisance abatement resources. And every State gives communities
power in these areas, but many communities don't do this for a
number of reasons. One, they lack the resources for effective
code enforcement. Second, their programs are poorly organized
or ineffective. Third, for financial or other reasons, they are
unwilling to use their powers, particularly to step in where
the owners won't maintain their properties.
And the foreclosure issue has added a fourth problem, which
I think a previous speaker alluded to, which is this extended
period of limbo where nobody is responsible. And while I know
Chula Vista has attacked this issue, in most parts of the
country, it is not being addressed because there is no law, no
body of law that clearly makes lenders who have initiated
foreclosures take on the responsibility for properties if the
borrower has vacated the property. And without this, in many
States which have judiciary foreclosure processes, the process
can take anything from 9 months to over 2 years, from the point
where the foreclosure starts to the point where title actually
passes. And during this period, these properties typically fall
in limbo. They are abandoned. They deteriorate. And by the time
that title passes--if it ever does pass, which in many cases is
not the case, because in some communities, and I know this
happens in Cleveland, lenders will initiate the foreclosure,
but may not aggressively pursue it, and the property will sit
in limbo essentially forever.
So cities need help in developing the ability to enforce
their codes to undertake nuisance abatements, to go after the
people who are responsible and hold them accountable. And this
is something where the Federal Government is not going to be
able to do it, but a very small amount of money directed at
building local capacity and helping them in this area could
reap enormous dividends in terms of helping to mitigate harm.
The second area is the question of controlling the
properties. And here I would differ from a previous speaker
with respect to the weak market versus strong market or hot
versus cold issues. In hot markets, first, if a property goes
into foreclosure in Palo Alto or Scarsdale, New York, the
lender is going to make sure that it maintains its value, and
once title passes, the odds are that it will go very quickly
into the hands of a responsible buyer. There really is less
need for money to acquire properties on the part of the public
sector or the nonprofit sector where there is a strong market
environment.
In Cleveland, in Detroit, in Buffalo, the lenders are not
doing that. The properties are going into limbo and money is
needed, resources are needed to acquire those properties if
they are not going to continue to harm the community. So I
think there is a significant difference in that respect between
hot markets and cold markets.
But I think the other issue is that money is not the only
issue. Yes, local governments, nonprofits need money to acquire
properties, but at this point, in many cities, the capacity,
both to acquire, maintain, manage and dispose of properties
responsibly, simply does not exist. If you gave money in many
cities, they would not be able to spend it responsibly.
A second or a third issue, rather, which is equally
important is getting the people who control these properties to
the table. To my knowledge, at this point, while there have
been a few transactions around the country where lenders or
servicers have sold small bundles of properties after they've
taken title to nonprofits or local governments like the
Michigan State Land Bank. I don't think there's been a single
case where a local government or a nonprofit has successfully
negotiated the sale of paper, the mortgages prior to
foreclosure with a lender. And yet if you wait to the point
where it is an REO, a real estate owned property, and then,
only then start negotiating, the odds are that the property
will have significantly deteriorated.
A recent national survey of realtors found that over 50
percent of the REO properties that got into the hands of
realtors had already suffered significant property damage. And
this is a cross section, of not just the Clevelands and
Detroits, but of the Las Vegases and the Palo Altos and the San
Diegos.
So unless we can figure out a way--or to put it
differently, Congress can figure out a way--to motivate
lenders, servicers, the people in the financial industry to
negotiate seriously and responsibly with people who will take
the paper and take responsibility for these properties, we will
see this problem continue to mushroom.
And again, and this goes also to the question of how
resources are allocated. This is--this is not an issue that is
even for all foreclosures. All foreclosures are bad, but
foreclosures in Las Vegas ultimately will be resolved by the
economic growth and the job growth in the Las Vegas area.
Foreclosures in Dayton or Buffalo will not be.
So, again, thank you for your attention, and I hope that
this is useful.
[The prepared statement of Mr. Mallach follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you very much, Mr. Mallach.
Mr. Leeper, please proceed.
STATEMENT OF DOUG LEEPER
Mr. Leeper. Thank you, Mr. Chairman. It's an honor to be
here, and it's an honor to represent the code enforcement
profession throughout the United States.
In anticipation of the record number of potential
foreclosures on the horizon, the city of Chula Vista drafted
and passed an abandoned residential properties ordinance.
Vacant property registration ordinances are nothing new and
have been existing in some cities for decades. The Chula Vista
ordinance had a slightly different reason and focus: the black
hole or the limbo we've spoke of before between default and
foreclosure sale. When in many cases the home sits empty, the
borrowers are gone, and the lender won't take responsibility
for it, this is the period of time when a great deal of damage
and deterioration can occur.
Although the lenders claim they have no rights to the
property prior to the actual foreclosure sale, we found the
opposite to be true. This truth came in the way of a standard
clause within the mortgage contract, commonly referred to as
the abandonment and waste clause. Simply put, the clause allows
lenders to secure and maintain property against vandalism,
theft and waste. The borrower stops making payments and moves
out. In short, they abandon the property.
Lenders don't like to exercise this right, and in many
cases won't admit that it exists. The Chula Vista ordinance,
nicknamed the ``good neighbor ordinance,'' simply requires the
lenders to secure and maintain their investment, which in turn
helps stabilize the surrounding neighborhood; in short, be a
good neighbor. After all, what would they want done if it was
across the street from their house or next door to their
child's school? They would want it maintained to the
neighborhood standard. That's what our ordinance requires:
security and maintenance to the neighborhood standard.
As the committee is aware, a law without consequence is
merely words on paper. The consequences for violation of the
Chula Vista ordinance range from criminal prosecution, not
feasible in most cases, fines or abatement.
Chula Vista did not budget for becoming the gardener and
property manager for the 2,000-plus vacant abandoned properties
we have now, and with the downturn in the economy, whatever
we're calling it, we don't have the means to do it now. Our
single best option: to gain the attention of the lenders with
monetary fines and penalties.
As a code enforcement manager, my bottom line is people,
quality of life, neighborhood livability. The lenders' bottom
line is dollars. So until it became more expensive for them to
ignore us than to properly maintain their properties, they
continued to ignore us.
Early on we were informed by the lending industry that we
couldn't pass such a law and that they wouldn't adhere to it.
Registrations were slow at first, but with the first round of
penalties ranging from $3,000 to $10,000 per property, lenders
soon acknowledged that the city of Chula Vista meant business.
Currently there are approximately 450 properties registered
in Chula Vista. Most are in compliance with the neighborhood
standard and are posted. We require posting of a name and phone
number of a local contractor responsible for the upkeep of the
property so neighbors don't have to rely on the city to call,
they can call directly to the responsible party if there's a
problem with the property.
Unfortunately the rate of foreclosures and vacant
properties has accelerated past six a day, but our staffing
remains the same. I was forced to realign resources and suspend
enforcement on other important issues to address the disgrace
of abandoned properties. And if it continues at this rate, I'll
have to do it again, leaving other issues unaddressed.
One of the reasons these are difficult to deal with is the
research required to track down the current beneficiary of the
mortgage. These notes rarely stay with the party of issuance.
They are bought, sold and traded like baseball cards. Rarely,
if ever, does the new beneficiary, be it a lender, a mortgage
company, a trust or a security, record their newfound interest
in the property. This leaves the local jurisdictions grasping
at straws in an attempt to locate someone, anyone that will
admit to holding an interest in the property.
One of our first problem properties came by way of a
$30,000 fine for noncompliance while the initiator, the
originator of the loan, argued with the entity they sold it
with as to who was responsible. The property sat vacant and
vandalized for 3 months before they finally decided. They then
spent $16,000 to bring the property in compliance and asked
that I waive their fines and penalties. I did not.
Due in part to its new focus, Chula Vista's ordinance
received some press and attention from other cities, almost 200
cities throughout the Nation. The California State Assembly is
considering passing legislation based on Chula Vista's
ordinance. The cost to local jurisdictions from this
foreclosure fallout is near incalculable: HOA dues, homeowners'
dues, go unpaid and services go undone; delinquent taxes;
reduced property taxes; increased calls for service through
theft, vandalism, fraud and arson; increased insurance rates
for neighbors; reduction in other city services; and displaced
renters.
I was recently contacted by a young lady by the name of
Esther who was in a panic. There was a default notice on her
door. She was very upset because her husband is currently
deployed with the U.S. Navy, and she didn't know what to do. We
were able to get her in touch with the lender who holds the
note, but all the while the landlord has been cashing their
checks.
The U.S. Conference of Mayors, Department of Housing and
Urban Development and the Mortgage Bankers Association all
agree that one of these vacant, abandoned, unmaintained homes
can have a negative financial impact for other homes within an
eighth of a mile. What will the impact of 2 be, of 10, of 30?
These impacts are not only financial, but are also
emotional as the American dream turns into a neighborhood
nightmare, as brand new neighborhoods slip into blighted ghost
towns, as other existing neighborhoods that saw redevelopment
as a light at the end of the tunnel find that light is now the
train of foreclosures and abandoned properties.
I can't tell you the cost of my city, not yet anyway. I do
know the problem is beyond my sleepy little San Diego suburb.
It's national; red States and blue. I've heard estimates that
we as a Nation may see as many as 2 million to 3 million
foreclosures. That's equal to every single family home in the
State of Missouri. Or at a rate of 3.75 people per home, that's
the entire population of Georgia.
By all means, the best answer is to keep as many
borrowers--better stated homeowners--who occupy the homes in
their homes as possible. Short of that it will be left to the
local jurisdictions to fight the war against vacant, abandoned
properties; and as any battle requires weapons, like Chula
Vista and troops on the ground, which none of us, at least none
of the cities I've talked to, are prepared for. Thank you.
Mr. Kucinich. I thank the gentleman for his testimony.
[The prepared statement of Mr. Leeper follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Mr. Baker, thank you.
STATEMENT OF DEAN BAKER
Mr. Baker. Thank you, Chairman Kucinich. I appreciate the
opportunity to address the committee.
I'm going to take a little different attack than I think
most of the other witnesses have in the sense that what I want
to talk about is a concrete measure that I think would directly
affect the amount of foreclosures and number of foreclosures
we're seeing by simply changing the rules on foreclosure. And
the essence of this is--actually I call this an own-to-rent
concept that we give people facing foreclosure the option to
stay in their home as a long-term tenant. And a version of this
was actually introduced just today by Representative Grijalva
in the form of a Saving Family Homes Act of 2008. And I would
argue that this is, in effect, the most effective way available
to Congress to stem the looming foreclosure crisis.
The basic concept is very simple. We simply put in a clause
that at least temporarily changes the foreclosure laws so that
we set a date, I believe in the law it's July of last year,
July 2007, that mortgages issued prior to July 2007, if they go
into foreclosure, the homeowner would have the option to stay
in their home as a tenant paying the fair market rent. And this
would be very carefully targeted. It would only apply to
occupants of homes that sold for less than the median price in
the area at the time the home was purchased, and it also only
applied to owner-occupied homes.
And one of the nice aspects of this is that owner-occupied
clause, we know this is frequently exploited. Very often people
are not always honest in claiming that they are owner/
occupants. In this case that really will not do you any good.
You are only going to benefit if you actually are, in fact, an
owner/occupant, otherwise the right to stay there as a tenant
is not really worth anything. So in that sense it's a very
nicely targeted measure.
The other aspects of it, it requires an appraisal of the
fair market rent. This also is easily done. We have a well-
developed appraisal system. For sale prices you would simply do
the same determining what the market rent for a house would be,
and that would in turn be adjusted by the Consumer Price Index,
which is readily available each year from the Bureau of Labor
Statistics.
It also has a very nice feature. It requires no tax
dollars. We don't have to go running around trying to take
money from programs for low-income tenants. It requires no tax
dollars; it doesn't require any government money to fund it. It
requires no new bureaucracy. Everything is already in place.
It's simply part of the foreclosure structure. We don't have to
set up a new bureaucracy. And that also means that it can be
implemented without delay. We don't have to put this in place
and then wait for 3 months, 6 months to make sure that we have
the administrative apparatus to deal with it. As soon as
Congress were to pass the law, it could immediately take
effect.
Now, the benefits, I think, are very direct and very clear.
First and foremost, obviously it assures housing security, that
in the event you have a homeowner that likes their home, they
like the schools, they like the neighborhood, they have the
option to stay there as a tenant. It also means that the house
doesn't go vacant, obviously, if they're staying there, so we
don't have the problem of vacant property being stripped, being
vandalized, being used as a crack house, etc., the issues that
have already being raised. We don't have that problem.
Also, and I think this is very important, perhaps the most
important part of it, is I actually think it will secure home
ownership, because the point here is you make foreclosure a
much less attractive option for the lender. They can't simply
throw the person out on the street. They're stuck with the
tenant for a very long period of time. Recognizing that this is
a much less attractive option, the lender is far more likely to
sit down and try to negotiate terms with the homeowner that
will keep them in the house as a homeowner, which I think is
everyone's first best solution. And this in effect puts some
muscle behind the exhortations that President Bush and others
have made urging lenders to do just that. So I argue that in
many ways this would accomplish exactly what we want as a very
well-targeted and costly measure.
Let me answer one objection, because I've discussed this
with many economists, and the objection that most often has
been raised--and I'll mention one economist in particular that
raised it a few weeks ago when we were testifying together.
Larry Summers, the former Treasury Secretary, complained that
he thought it was good, this would be the best way to keep
people in their home, but he objected because he felt this
would interfere with the sanctity of contract.
And what I would just say on that is that I view the
sanctity of contract also as being very important, but I will
note that there are certainly times where Congress has felt it
was appropriate to override concerns about sanctity of
contract. And the most obvious case that I can mention in the
recent past was that when they recently changed the bankruptcy
law, they chose to apply that retroactively to debt that was
incurred under preexisting bankruptcy law. So in that
particular case, in the case where we changed the law in a way
that was adverse to debtors, Congress apparently was not
concerned about the sanctity of contract. So I would say that
need not be, you know, an overriding concern; an important
concern, but need not be an overriding concern.
Last, just in commenting on this, I have talked about this
around Washington and around the country a fair bit, and I
point out that this is actually an idea that has attracted a
lot of bipartisan support. Some of the strongest proponents are
actually fairly conservative Republicans. I will mention
Desmond Lachman, who is a fellow at the American Enterprise
Institute, who has been a very strong proponent of this
proposal. Another person of some prominence, Andrew Samwick,
who was a top economist in President Bush's administration,
again was a very strong proponent. We, in fact, coauthored a
column on it advocating this sort of solution.
So just to sum up, I think that in principle we can do
something here that offers us a very quick, very costless, very
bureaucracy-free way of dealing with the most immediate and
worst effects of this problem.
So I'll conclude my testimony. I just do want to add I
would very much welcome the opportunity to address the question
you raised with other witnesses about moral hazard. I think
that's an interesting--some things you may find interesting on
that topic.
Mr. Kucinich. Thank you very much, Dr. Baker.
[The prepared statement of Mr. Baker follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Lets go to questions of the panel. I would
like to begin the discussion with Mr. Leeper about property
maintenance. Your city is holding the lenders responsible for
upkeep of vacant properties. I think people on this
subcommittee would be interested to know how does the city of
Chula Vista hold Wells Fargo, for example, a $48 billion
company, number 41 on the Fortune 500, how do you hold them
accountable?
Mr. Leeper. My father told me that money talks. All mine
says is good-bye.
Mr. Kucinich. There's another part of that equation then.
Mr. Leeper. That's true. And we don't walk. I have contacts
in Wells Fargo now that I can call directly. When we find a
property, the hardest part is finding who owns the note now.
But once we find that Wells Fargo Home Mortgage holds this
note, I have an e-mail address and a direct phone number now to
someone in Des Moines, Iowa, where their problem property
division is, that has shown such interest that they've actually
flown out to Chula Vista to look at our city and see what the
impacts are.
Mr. Kucinich. Do you issue fines to scofflaws?
Mr. Leeper. Yes, we do.
Mr. Kucinich. And have you sued to enforce your ordinance?
Mr. Leeper. We have liened properties. Our liens are going
as a special assessment on the property taxes, and they are
paid.
Mr. Kucinich. And are you keeping up with the problem with
this ordinance?
Mr. Leeper. We were initially. It has gone to where I have
to add staff now, take them off of other items that are as
important, but----
Mr. Kucinich. Do municipalities need additional funding for
code enforcement?
Mr. Leeper. In a word, yes.
Mr. Kucinich. This is one of those issues that relates to
HUD. And in the past we had a general revenue sharing that
cities could then draw from and determine what their needs were
and be able to apply money accordingly. But would you agree
that if cities are going to be empowered to deal effectively
with the effects of the subprime scandal, that housing
enforcement is where it begins?
Mr. Leeper. Yes. Code enforcement is a very----
Mr. Kucinich. Code enforcement.
Mr. Leeper. Code enforcement is a very integral cog in the
wheel.
Mr. Kucinich. Mr. Mallach, did you want to get in on that?
Mr. Mallach. If I could add to that, first I agree 100
percent. I think they do need additional resources, but they
also--and I think this is particularly the case in the older
cities in the Midwest and the Northeast--they also need
significant help building their capacity to do it right, using
technology so they can operate efficiently.
Mr. Kucinich. What capacity needs to be built?
Mr. Mallach. Well, the skills, the skills of the
inspectors; the ability of the code enforcement departments to
organize their work so they are not complaint-driven, but
systematic; their ability to use the kind of technology that
increases their efficiency and gets away from creating
mountains of paper that typically get lost.
Mr. Kucinich. Does the Federal Government have any role in
that at all?
Mr. Mallach. Well, I'll say two things. One, certainly
financial help could be done. The other thing, and I know the
Federal Government has done this in the past in other areas, is
condition other assistance on getting your local house in
order, so that you have to have a properly functioning code
enforcement and nuisance abatement operation in order, say, to
be eligible for property acquisition or demolition money.
Mr. Kucinich. What about incentives required in dealing
with the real estate industry?
Mr. Mallach. Pardon?
Mr. Kucinich. What about incentives that may be required in
dealing with the real estate industry? Are you concerned about
creating a moral hazard, and would you characterize any aspect
of what we're talking about as being a bailout?
Mr. Mallach. I am very concerned about a moral hazard issue
there. And I find myself very much torn, because I think
unless--and this has to be done, I think, at the national
level.
Mr. Kucinich. Would you define for people who may have just
joined us what you mean by ``moral hazard?''
Mr. Mallach. A moral hazard is essentially where you bail
out somebody who has misbehaved and thereby give the rest of
the universe encouragement to similarly misbehave in
anticipation that they, too, will be bailed out.
Mr. Kucinich. Give us an example.
Mr. Mallach. Well, again, suppose if--and this is an
extreme case--suppose the Federal Government offered to buy out
people's--these mortgages that are now under water at 100 cents
on the dollar. That would send a message to everybody involved
in the financial world that they could conduct their business
the way the subprime industry has done so for the past 8 or 10
years, and the Federal Government would bail them out.
Mr. Kucinich. Thank you.
I want to ask Mr. Baker here before I go to Mr. Tierney, as
an economist what would you say to the objection raised by the
administration that the bill that Congress just passed, H.R.
5818, creates a moral hazard and constitutes a bailout; what
would you say?
Mr. Baker. I think there can be some issues of moral
hazard, but that's going to be true in almost anything the
government does, that there's always some issues. I think in
this case they're relatively limited.
I would just point out it's ironic that this administration
would get upset about the moral hazard in that case, but
they've been completely unconcerned about the moral hazard
involved in the Federal Reserve Board's recent actions vis-a-
vis the investment banks, because this really goes very much to
the heart of the housing crisis we're seeing.
What Ben Bernanke, the Chair of the Federal Reserve Board,
said is that he's going to come to the aid the investment banks
in the sense that he will back them up if they get into
trouble. This does two things. On the one hand, it gives the
investment banks a free ride in having been very heavily
overleveraged. They're paying no price for that. They're
shareholders, they're top executives. They made enormous
fortunes from overleveraging themselves, something I think
almost everyone agrees on. And Ben Bernanke said that the Fed,
the agent of the government, the central bank, is going to hold
them harmless.
Second, the investors, we talk about the international
investment flows, these people obviously didn't know what they
were doing. What the market is supposed to say is, well, then,
you lose your shirt. But what Ben Bernanke said is, no, the
Federal Government through its central bank is going to come in
and guarantee your bad debts.
So that's a huge aspect of moral hazard that's really very
much at the center of this problem, because if they didn't
mindlessly provide that money, and if the investment banks
didn't become so overleveraged, we wouldn't have seen the sort
of run-up in housing prices, the sort of explosion of subprime
lending. That couldn't have happened. So that's a moral hazard
very much at the heart of the story, and to the best of my
knowledge, the Bush administration has been very silent on it.
Mr. Kucinich. Thank you, Mr. Baker.
Mr. Tierney.
Mr. Tierney. Thank you.
Just so you will know, people in my district didn't miss
that. When I go around to community meetings, they get that
right away.
Mr. Baker. That's good.
Mr. Tierney. What about the Bear Stearns clients all got
bailed out, and here we are worried about an individual
homeowner, and what's the difference on that?
Mr. Baker, I'm interested in your proposal. You mentioned
you target only those houses that have a value less than the
median price of the market in that area; is that what you said?
Mr. Baker. That's correct.
Mr. Tierney. Explain to me why that is.
Mr. Baker. Again, this is something obviously in actual
passage you would decide who you want to benefit from it. But
my idea in tying it to the median home price in the area, and I
believe Representative Grijalva stuck to that in his bill, is
that you want to help the people who are sort of least able to
deal with the problems themselves.
Now, if you envision going to higher-priced homes, we might
say that those people bear more responsibility for their own
actions. Now, whether the median price is the best place to cut
that off, that's, you know, a judgment call. Maybe you would
want to have that be higher. But I think at some point--and if
we're talking about million-dollars homes, we might sort of
bristle at the idea that these people aren't able to take care
of themselves.
Mr. Tierney. It just seemed a little arbitrary for me,
because at some point if somebody is just over the edge, and I
didn't know if there was some other rationale for that. I think
we may want to look at how we measure that, because certainly
some people might pay a little more than median value but still
be in just as much trouble in sort of an equivalent fault issue
on that. But thank you for the answer on that.
So it seems to me with that sense of a situation where the
lender is not getting paid back on their loan, but they
foreclosed, they can't get the people out of the house, if they
don't foreclosure and the person rents it, their fair market
value of the rent may not equal what they were getting on their
loan, and how does that not become a confiscation of their
property?
Mr. Baker. Well, it's certainly a loss for the lender. They
are going to be taking a loss on the property. And the issue
here is, you know, what sort of enforcement mechanisms is the
government prepared to make available to the lender? And in
this case, again, I would make the analogy to what happened
with the reform of the bankruptcy law a few years back, that
there you had people who took out debt under one set of
bankruptcy rules, which were comparatively lenient, and then
the government changed that. And to my knowledge at least--now,
maybe there's a court case I'm not familiar with, but to my
knowledge at least, that's not been contested at all in court.
They said the government was free to change the enforcement
rules after the fact.
So there certainly is an aspect here that the lenders will
take a loss, because obviously they're not getting their
preferred course of enforcement, so they are taking a loss, but
they are being compensated. But, you know, again, I'm not a
lawyer here.
Mr. Tierney. I was going to ask you if you happened to have
some lawyers look at that in terms of the constitutional
implications of taking on that. If they basically have somebody
paying less than their value, there's not really sort of an
enforcement mechanism. It's actually you've disallowed them the
use of their property and stopped them from enforcing their
mortgage to them and giving them less in return.
Mr. Baker. The lawyers I have spoken to on that, I've
spoken to a number of lawyers, in their view they thought it
would be upheld in the courts since they are getting
compensation. So it's not a question that they are getting
nothing. They are getting compensation. They aren't getting as
much compensation as they would like, but they are getting
compensated.
Mr. Tierney. Let me just ask each of the other gentlemen
what your thoughts are on that proposal.
Mr. Mallach. First, I think it's basically a very good
idea. And, in fact, I should mention that I've been working
with a coalition in New Jersey, and we have recently gotten a
bill introduced in both houses of the New Jersey State
Legislature which, among other things, would enact a similar
provision.
But I think there's one difference, and which I think
responds to your issue, which the way it's written under the
New Jersey bill--and this hasn't been law yet, clearly--is that
the owner would be allowed to remain in the property as a
tenant and pay the fair market rent, except if the lender who
had taken title to it subsequently sells it to a party who
wants to use it for their own domicile, then the owner would be
given 60 days notice, which is the requirement under the State
antieviction law, and then would be required to vacate in order
that the new buyer could move in. So in that case the lender
has no loss whatsoever, because at the point when the lender is
ready to have the property actually be utilized, the former
owner has to vacate. But the principle is still the same. The
owner should be allowed to remain in the property as a tenant
as long as they can.
Mr. Tierney. Mr. Leeper.
Mr. Leeper. I've had conversations with some of the folks
in the lending industry that are actually, at least in Chula
Vista, considering leaving those people in the property,
because then it's not vacant and subject to our ordinance,
which I'm all for. Occupied properties fall victim to theft and
vandalism far fewer, at a lesser rate than unoccupied
properties. They're generally more maintained, and they don't
become the rotting tooth in the smile of the neighborhood. So
anything that they can do to continue to keep the neighborhood
as stable as possible, be it an own-to-rent or even leaving
good solid renters in, you know, while the property is being
marketed to somebody who wants to use that residence as an
owner-occupied would be a good thing.
Mr. Tierney. Mr. Baker, what do you say to Mr. Mallach in
New Jersey's adjustment to your proposal?
Mr. Baker. Obviously a lot would depend on what's on the
table and what's politically feasible, and you're the better
one to answer that than me. But I think that would be certainly
a very big improvement over current law. Now, it gives less
security to the homeowner who is facing foreclosure, so I would
prefer something that gives them the option to stay there as a
long-term tenant. But certainly that would be much better than
the situation as it is now, because in many cases they will be
able to stay there for a substantial period of time, and it
does certainly address the problem that we won't have the
property going vacant, so it does get us much of the way there.
Mr. Leeper. According to the real estate industry, occupied
properties are more marketable as well, so it maintains the
value and helps retain the value of the entire neighborhood.
Mr. Tierney. Mr. Chairman, I have to leave, but I want to
tell you I want to thank you for having this hearing and for
the excellent witnesses that you presented, and thank all of
them. You really help us think through this issue and bring it
down to the neighborhood level where it affects us all. And so
thank you for your time. Thank you for your patience in waiting
through the votes that unfortunately interrupt us in these
afternoon hearings, but I want to congratulate you. And thank
you on the hearing, Mr. Chairman.
Mr. Kucinich. Well, Mr. Tierney, as always your
participation helps make a difference in a hearing. Thank you
for being here.
Before we wrap this up, I just have one question I want to
direct to Mr. Baker. We're talking about moral hazard, and it
seems that the administration or the discussion of H.R. 5818
are concerned about the moral hazard of benefiting the so-
called actors in maybe bad faith who would somehow benefit from
a bill that would make someone not whole, but return someone's
financial position. Does the concept of moral hazard seem to
apply to Wall Street in this case?
Mr. Baker. Well, obviously they're not concerned about the
aspect of moral hazard applying to Wall Street. You know,
again, there has been, I think, fairly explicit on the part of
the Federal Reserve Board and Chairman Bernanke an attempt to
minimize the harm that Wall Street has suffered in this crisis,
which arguably has some positive aspects to it. I mean, none of
us want to see a financial collapse, so arguably that's a
positive aspect. But at the same time one could easily talk
about putting in place policies that prevent a financial
collapse while at the same time extracting some toll on the bad
actors.
Mr. Kucinich. If the buyer is to be aware, is the lender to
be prudent?
Mr. Baker. Absolutely. I mean, that's exactly the point
here. The lenders are not being asked to suffer. We've stepped
in to prevent the lenders from suffering. And again, if the
lenders had acted with good sense, we wouldn't have half the
problem we have today.
Mr. Kucinich. Thank you very much.
I'm Dennis Kucinich, Chairman of the Domestic Policy
Subcommittee of Oversight and Government Reform. Today's
hearing has been entitled, ``Neighborhoods: The Blameless
Victims of the Subprime Mortgage Crisis.'' This has been one of
a series of hearings, this subcommittee examining the impact of
the subprime mortgage fiasco on the neighborhoods of our
Nation. This subcommittee is going to continue to probe this
matter deeply, as well as to, as we have had, recommend
legislative changes and legislative improvements that will
somehow provide some remedy, as some of you have worked out in
your respective communities.
I want to thank all of the witnesses for their testimony,
for their patience today in what has been a very long hearing.
And I want to let you know the subcommittee will continue to be
in touch with you and your staff as we continue our work to see
the residential vitality restored to many of our communities.
This committee stands adjourned. Thank you.
[Whereupon, at 5:25 p.m., the subcommittee was adjourned.]