[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]




                               before the


                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                              MAY 21, 2008


                           Serial No. 110-166


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                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
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
    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
------ ------

                     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
                    Jaron R. Bourke, Staff Director

                            C O N T E N T S

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



                        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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 



    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 
    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 
    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 
    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 
    Thank you.
    [The prepared statement of Mr. Kildee follows:]

    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. 
    I would ask that you proceed, and please keep your 
statement to 5 minutes or less. Thank you.


    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 
    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 
    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 
    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 
    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 
    Thank you very much for your favorable consideration of our 
    [The prepared statement of Ms. Floreen follows:]

    Mr. Kucinich. I thank the gentlelady for her testimony.
    I would like to begin with asking Treasurer Kildee some 
    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    [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 

                         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 
    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 
    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 
    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:]

    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.


    Ms. Betts. Thank you, Mr. Chairman, members of the 
    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 
    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 
    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 
    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 
    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 
    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:]

    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:]

    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 
    So you really have to look at both the question of 
concentration and the total number affected by the 
    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 
    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. 
    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 
    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?
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    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.

                    ECONOMIC POLICY RESEARCH

                   STATEMENT OF ALAN MALLACH

    Mr. Mallach. Thank you Mr. Chairman and members of the 
    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 
    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-
    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 
    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 
    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:]

    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 
    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 
    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:]

    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 
    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 
    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:]

    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.]