The Washington Independent - U.S. news and politics - washingtonindependent.com: Stories by Mary Kane

It's the Optimism

Mary Kane — Fri, 14 Dec 2007 02:05:26 GMT

I’m Mary Kane, and you might be surprised to find someone like me here.

I started in journalism straight out of school, in 1983, at United Press International, where the antiquated message wire used to communicate among the bureaus was considered high technology. When UPI, perpetually strapped, closed down its Mississippi bureau, I moved on by working for afternoon newspapers with rapidly aging readerships; the papers soon whittled to nothing or closed down entirely. When The Cincinnati Post stops the presses soon, my record will be complete.

Still, I got a close-up view of the economics of the newspaper business, and, more importantly, I learned the basics of news reporting and writing. I wouldn’t trade those experiences for anything; they’re the foundation of what I do.

In Pittsburgh, I saw the aftermath of the steel industry’s collapse on the Monongahela Valley and chronicled people there trying to reinvent their lives. Later, when I came to Newhouse News Service here in Washington, I spent years covering fringe banking: Subprime mortgages and rogue mortgage brokers, back when no one knew much about them; high-rate credit cards, bankruptcy, payday lenders, and pawnshops. I also dealt regularly with the effect changes in the economy had on people’s lives.

I’ve continued to cover the mortgage mess and other stories as a freelancer, with my work appearing in Salon, The Washington Post, Southern Exposure Magazine and elsewhere. And I’ve never left behind the notion that nothing totally replaces old-fashioned, shoe-leather reporting.

So why would I end up here, especially considering, as a friend pointed out, that I once possessed the computer skills of a 90-year-old?

It’s the optimism. I’m not used to it anymore in journalism, and one of the first things you’ll pick up on this site is a sense of going forward, and of being excited about pursuing a way to combine the best of the new and the old, including the resources of the Internet and the basics of news reporting. We'll both cover stories and provide perspective on what they mean. It’s a model that might be the future of journalism and I’m thrilled to be a part of it.

I’m also looking forward to what I’ll write about: Middle class finance. It’s something that perfectly fits this site, in that I’ll combine coverage of policy decisions and economic developments with a look at how they play out in the real world, using the resources and the community of the Internet.

You’ll see from my blog postings that I won’t be recounting what I had for breakfast, or, God forbid, something my children just did. Much of what I'll draw from is my own long experience of interviewing people on the front lines. I’ll tackle the debate over the subprime mortgage rate freeze plan by showing the complexities of the market you’d find if you had shopped for a subprime loan. I’ll be looking at our obsession with credit and debt by telling you about a company that wants you to put your mortgage debt on their credit card. That’s some fine financial planning! And speaking of credit cards, why is it that Congress continues to insist it will tackle credit card reform – and doesn’t – while our interest rates keep arbitrarily going up?

I’d also like to hear from you. That’s the other thing that drew me to this site: The back and forth with online readers that just doesn’t happen under the old model.

I’m pretty lucky to have soaked up the best of journalism’s past, even if it was a bumpy ride sometimes, and I’m fortunate to be experimenting with its future. I hope you’re joining me; it doesn’t get any better than this.

'Toxic Titles' Haunt Cities in Mortgage Meltdown

Mary Kane — Wed, 16 Jan 2008 05:00:00 GMT

Photo Credit: Jo Guldi, Flickr CC

It was a small, shotgun-style, wooden frame house in a modest neighborhood on Cleveland’s East Side. It was home to the Maynards, a family with six children and their grandmother, for just a few years before health problems and job loss forced them to live on disability payments and $8,000-a-year part-time income. They couldn’t afford the high-rate subprime loan they used to buy the house. The mortgage holder sent a foreclosure notice and forced them out.

“The Maynards fell behind and were unable to get caught up, no matter what they tried,” Cleveland Housing Court files show. “The bank ordered them out of the property, insisting they had no rights to be there.” So they moved away, to rural Ohio. The house sat empty, and vandals almost immediately ransacked it—smashing the walls, ripping out wiring or copper pipes, breaking the windows, taking the furnace.

But the mortgage holder in question, Select Portfolio Servicing, had never gone through with the foreclosure. Instead, it just walked away, according to Cleveland Housing Court files.

With no one living in the home and no one taking care of it, the house soon fell into disrepair. It sat vacant—for almost five years. The city tore it down in November of last year.

Now it’s just another empty lot in a part of the country facing the abandonment of an unprecedented volume of properties by banks, mortgage companies, servicers and speculators. If you think things turned messy in the financial world of Wall Street as defaults on subprime mortgage loans spiked and investors fled the market for them, the Maynard house – or what’s left of it – represents the brick and mortar reality of the pain on Main Street.

Turns out the aftermath in cities and neighborhoods stuck with properties that Wall Street no longer wants is just as devastating as the meltdown investors and banks experienced to their bottom lines.

Banks and investors are still struggling to recover from the collapse of the subprime housing market, once the fastest-growing segment of the mortgage industry. Yesterday, Citigroup announced it lost a record $9.83 billion in the fourth quarter of last year, due to subprime mortgage-related problems and other bad loans.

Subprime lending involved high-rate mortgages made to borrowers with weak credit, and included products like mortgages with low teaser adjustable rates that soon reset to higher rates, loans for more than the value of the house, and loans with no documentation required for income or assets. Investors fueled the boom by buying securities backed by these mortgages, which carried higher returns. But a combination of falling home prices, fraud and lax underwriting caused the subprime market to implode beginning last spring, as borrowers began defaulting on loans. Investors and lenders have little use for many of the foreclosed homes left behind. Cleveland recently sued 21 major investment banks involved in subprime lending, seeking to recover money the city has had to spend cleaning up properties.

They’re just dumping their trash in the Midwest,” said Kermit Lind, a Cleveland law professor who specializes in housing cases.

That trash includes the walkaways, like the Maynard home. A mortgage holder usually walks away from a property when it decides the house has such little value that it’s not worth the money and effort required to keep it in good shape or even to foreclose on it—a common occurrence in neighborhoods already scarred by foreclosures. The borrower is gone, however, often unaware the house hasn’t been taken, Lind said. A property might sit vacant for months or even years, an easy target for vandals who strip it of plumbing fixtures, wiring, copper, or anything else of value.

Toxic Titles

Walkaways wind up with “toxic titles,’’ Lind says. The mortgage company retains a lien, or a charge, on the house, but the borrower still is considered the owner. The property sits in limbo, with the mortgage usually exceeding what it would sell for, because of its decline. If the city has to tear it down, it adds its own $8,000 to $10,000 demolition lien. Not surprisingly, potential buyers aren’t exactly lining up. Non-profit neighborhood groups that could fix up the property face long and expensive legal battles to claim it.

Even cases that aren’t walkaways add to the problem. Take 4111 Archwood, a house on the street where Cleveland blogger Bill Callahan lives. Curious about its ownership, he looked it up to find that, well, no one really owns it. Most subprime mortgages were transferred or packaged and sold to investors as securities. So just because a bank’s name might appear as the owner in official records, the actual loan owners may be someone else, like a group of unnamed investors, and they didn’t issue the loan to begin with. Some federal judges have held up foreclosures because it’s not clear who’s in charge. As Callahan pointed out, there are more than 900 other properties like the Archwood house in the Cleveland area. If you’ve got a foreclosed home on your block, good luck tracking down the out-of-town investor responsible for it

This all adds up to one big mess in Cleveland and in other parts of the Midwest, which have soft housing markets and lots of subprime loans gone bad. Ohio, Michigan, Indiana and Illinois ranked in the top 10 states for foreclosure filings in November, and they led most of the most of the country in 2006 as well. This region has been hit especially hard because home prices didn’t appreciate as much as on the East and West Coasts.

Cleveland’s current problems provide a glimpse of what’s coming elsewhere, in markets where lenders and servicers are stuck with thousands of foreclosed or unwanted homes. It’s less a problem in places like California, Colorado, Nevada and Arizona, where banks and mortgage firms are more inclined to keep and maintain properties that could someday once again increase in value.

“Places like Cleveland have just been hit so hard,” said Alan Mallach, a senior fellow at the National Housing Institute and a visiting scholar at the Federal Reserve Bank in Philadelphia. “I shudder to think of the future of those neighborhoods.”

He’s not the only one. Cuyahoga County Treasurer Jim Rokakis so far has fielded calls from Litton Loan Servicing and Wells Fargo Bank, offering to donate hundreds of foreclosed properties. Rokakis and other Cleveland officials told Litton thanks, but we’ll need a check for a $1 million or so to cover the costs of demolishing about 80 percent of them; Litton withdrew the offer.

When Wells Fargo called in early January, Rokakis said thanks, but you don’t actually own some of these properties, you’re the servicer. That means Wells Fargo collects payments on the loans for investors, but isn’t the owner. Wells Fargo promised to figure things out and call back, Rokakis said, and he’s waiting to hear.

Banks Walk Away

Rokakis fully expects banks and mortgage companies this year to stop paying property taxes on the foreclosed homes they still own and move on—another sort of walkaway. “Eventually, it’s going to happen,” Rokakis said. “How long do you keep paying on property that’s dead?”

People have been walking away from individual properties for years, but not at this level. The Cleveland area experienced more than 14,000 foreclosures last year, and “all these walkways are just beneath the surface,” said Michael Schramm, an analyst at the Center on Urban Policy and Community Development at Case Western Reserve University.

The center is trying to compile total numbers of walkways. Lind, who works with neighborhood groups on toxic titles, is bracing for them to occur in the thousands, and to increase greatly in the first half of this year. “I’ve been expecting this for a while,” he said. “The walkway phenomenon will be something on a scale we’ve never seen before.” He thinks of toxic titles as akin to environmental racism, with neighborhoods blighted by abandoned homes.

Callahan, the Cleveland blogger a longtime community organizer, described the situation as “four times as bad as anything we’d ever seen in the 1970s.” At that time, many federal housing subsidies meant for inner city development were stolen or misused, leaving neighborhoods marked by vacant homes. And back then neighborhoods had only the U.S. Department of Housing and Development to deal with, not a long list of trustees, servicers, mortgage holders and investors, some of whom may or many not still be in business.

Questioned on walkaways, Deutsche Bank, which Callahan names as the most active forecloser in Cleveland, issued a statement explaining that the servicer makes decisions on foreclosures. But walkways involve properties that banks haven’t foreclosed on yet. Deutsche Bank spokesman John Gallagher responded, “In the event of a walkaway, the servicer is tasked with the decision to move ahead with a foreclosure.”

He referred questions to the servicer, Option One Mortgage Corp.

Option One’s spokesperson said that due to plans to sell the company, she couldn’t make any comments.

Select Portfolio Servicing, which is listed in court filings as the mortgage holder of the Maynard property, didn’t respond to a request for comment. The firm, based in Salt Lake City, recently reached a revised settlement with the FTC over its practices. Wells Fargo also couldn’t be reached. Litton declined to comment. The Maynards couldn’t be contacted at their last known address.

Communities Stung by Fannie Mae Sales to Speculators

Mary Kane — Wed, 16 Jan 2008 18:12:29 GMT

Photo Credit: W. Marsh, Flickr CC

Illustration by: Matt Mahurin

PART TWO of ‘TOXIC TITLES’

As the subprime crisis spreads, solutions seem to be in short supply.

Given the enormity of the problem – the mortgage crisis ranks right up there with the savings and loan debacle of the 1980s, when hundreds of thrifts failed because of high-risk real estate investments – some wonder why the response isn’t in any way proportional. No one in Washington seems to be talking about creating an entity like the Resolution Trust Corp., which Congress set up to seize failed S&L’s, noted Barry Zigas, a housing consultant and former head of the National Low Income Housing Institute. There’s no enthusiasm, in fact, for any kind of national effort to help deal with the foreclosed or abandoned properties, he said. Most of the focus so far has been on freezing adjustable rate mortgages.

“Why aren’t big institutions and Congress coming up with bigger kinds of solutions for this?” Zigas asked. “You’d think it would be in their self-interest and for the good of the communities where these properties are located.”

It would also preserve the gains made in those communities during the last 35 years. Neighborhood groups, corporations and governments poured in money and effort to revitalize urban communities, not just in the Midwest, but in places like Newark, N.J. They counseled people to prepare them for home ownership and rehabbed properties. In the 1990s, Cleveland enjoyed a comeback; later, Newark neighborhoods did as well. But one or two foreclosures on a block can lower property values FOR ALL and trigger a downward spiral, challenging the fragile improvement in places like Indianapolis, Pittsburgh, and Birmingham, Ala.

“Thanks to irresponsible lending, outright fraud, and avaricious real estate players, much of this progress is now threatened,” Zigas wrote on his housing blog.

Rokakis is pushing the idea of a land bank, a nonprofit entity that could purchase and manage foreclosed properties. But since it requires legislative approval, it’s not a tool he can use right now. With no support from Washington, the task of cleaning up the “trash” falls on nonprofit groups, municipal housing court judges, county treasurers and tax collectors. And they say they’re not even getting help from places where they might have expected it.

Most local officials in Cleveland reserve much of their ire for Fannie Mae, the government-sponsored enterprise that provides mortgage money. Fannie Mae delved into the subprime market and got stung by delinquencies. It also wants foreclosed properties off its books.

Neighborhood groups complain, however, that Fannie Mae, more so than other lenders, aggressively sells off its properties to out of town speculators. They expect more of Fannie Mae because its mission is to encourage home ownership. But it refuses to deal or bargain with community groups trying to reclaim properties, said Mark Seifert, executive director of the East Side Organizing Project. He and others cited a case involving a property Fannie would not sell to a nonprofit; it wound up with a speculator who walked away, leaving a toxic title.

The Fannie Mae manager of foreclosed properties in Cleveland is based in Texas and wasn’t available for comment, a spokesperson said.

In cities with soft markets, speculators tend to pull lease-purchase scams. They buy a house for $2,000 or $3,000, slap on a coat of paint, charge a tenant several hundred dollars extra each month that should go toward a downpayment to buy the house, and then take off with the money, Seifert explained. Or they just let the property sit to see if someone else will pay more for it, and if not, they leave it to be seized for taxes.

The city’s housing court can, and does, go after speculators and banks for housing code violations on foreclosed properties, but it can’t do much to the mortgage holder about a walkway, even when taxes go unpaid, since the issue of ownership remains in question.

Housing Court Judge Ray Pianka recalls once hauling a family of five in for code violations. They had left their home three years earlier, thinking it was taken by the bank.

“I don’t understand why lenders are in such a hurry to get people out,’‘said Pianka, who deals with walkway cases all day long and sees foreclosures in his own neighborhood, “and then they let the property sit there. It’s happening everywhere, in rural areas, and all around the country.

“It’s a calamity.”

In Washtenaw County in eastern Michigan, home to Ann Arbor and Ypsilanti, foreclosures dot suburban subdivisions, not urban neighborhoods. But even here, where foreclosures are announced by publication in the local legal newspaper, lenders aren’t always following through, said Treasurer Catherine McClary. Properties are just beginning to get trashed. “Banks and lenders are so large one hand doesn’t know what the other is doing,” she said. Her office advises people not to rush the process of leaving their homes.

In Cleveland, Tanya Wims received a foreclosure notice from Deutsche Bank on a two-family income property she’d purchased on the city’s East Side. So she moved her tenants out, and wrote off her experience to overpaying for a property with an inflated appraisal.

To her surprise, Within weeks she was notified by the housing court that she needed to address code violations on the property. But as her painters got to work, she said, a property management company showed up, telling her the mortgage company, which was intending to foreclose, hired them. They told her to leave the property. So she did.

But the house just sits there. The bank still hasn’t foreclosed. In the meantime, the house is now only a shell, she said.

“If I thought they weren’t going to foreclose I would have hired a property management company,” said Wims, 47. She’s been a title examiner for 30 years and “personally, I’ve never seen anything like this.”

The Maynard house is gone, but for another walkway, on the city’s East Side, there might be a happier ending. Housing court officials say the mortgage servicer is working with a neighborhood group to clear the lien and donate the property, once owned by an elderly, deaf man who has since moved out.

It’s the only tactic that’s working so far, a house-by-house effort, and it isn’t enough to solve the problem. But as so often happens, ingenuity comes from the grass-roots level. Consider that homeless advocates have noted fewer people on the street as winter set in. Turns out, they’re staying in foreclosed and abandoned homes to keep warm.

More Ideas From Washington That Don't Make A Difference

Mary Kane — Thu, 17 Jan 2008 14:45:10 GMT

Cleveland blogger Bill Callahan follows another development in the foreclosure crisis hitting Cleveland and other cities in the Midwest. He illustrates the end result of something I wrote about yesterday, the increasing problem of banks and mortgage companies dumping their properties and walking away, leaving cities to clean up the mess. As homes move down the chain from the homeowner, to the bank, to the speculator, they wind up as little more than neighborhood blight. Note in Callahan’s post just how long this two-family house has been sitting vacant—two years.

So if you have to pass by something like this every day, I somehow doubt that the front-page news of Ben Bernanke’s support for a stimulus plan makes you think, hey, good times are just around the corner. Not on your corner, anyway.

How Much Scarier Can It Get?

Mary Kane — Thu, 17 Jan 2008 16:44:08 GMT

The new December numbers just out today showing a 16-year low in new home construction are the latest in a long string of truly terrible financial developments. There’s also this Wall Street Journal (sub. req.) story on a possible slump in commercial real estate. If that’s not unnerving enough, consider how Calculated Risk views it:

The strong investment in non-residential structures has been one of the keys to avoiding recession through Q3 2007. Now that commercial real estate appears to be slumping, it looks like non-residential investment will slump too – putting the economy into recession.

Yikes.

Actually my vote for scariest story recently goes to rising credit card defaults at American Express. Why? Because some people carry around American Express cards because it forces them to pay off their balances each month. So when they can’t come up with the money to cover their charges, it means they are genuinely , authentically stretched. They’re not going to be out shopping anytime soon. And we all know what that means – another scary economic story.

Debt Creeps Into Democratic Campaign

Mary Kane — Thu, 17 Jan 2008 16:57:08 GMT

The bankruptcy experts over at creditslips.org, while careful to shy away from actually going down that road, nonetheless picked apart the comments on bankruptcy that came up during the recent Democratic presidential debate. Bankruptcy reform, passed in 2005, made it harder for consumers to wipe away certain debts. Robert Lawless, a law professor and bankruptcy expert at the University of Illinois College of Law, summed things up this way: "It is only Sen. Obama who can claim he did the right thing."

How Low Can It Go?

Mary Kane — Tue, 22 Jan 2008 13:43:25 GMT

If you weren’t already a little nervous about where the economy is heading, today should give you plenty of reason to start worrying.

Stock markets in Asia and Europe already are reporting heavy selling over fears about the U.S. economy’s problems. There’s no telling what will happen on Wall Street today as a result, but investors are bracing for the worst. Over at blownmortgage.com, they’ve decided it’s going to be such a rocky ride that they’ll offer $5 to the person who guesses correctly the value of the Dow at the close of business today.

So much for the notion that Federal Reserve Chairman Ben Bernanke expressed last May. He said then that problems with subprime mortgages weren’t likely to spread to the rest of the economy.

Now, it seems, they’re spreading to the rest of the world.

Even Economists Have a Sense of Humor

Mary Kane — Tue, 22 Jan 2008 13:50:34 GMT

At The Big Picture, they’re making the best of what promises to be a scary ride on Wall Street today. Here’s a bit of their advice:

I assume that readers of this blog do not need to be told not to panic or do anything reckless. (Gee, where did those frothing uber-bull trolls in comments go?). If you want to gamble, use a tiny amount of cash to dabble in some long dated calls—but days like today are no reason to attempt any foolish heroics

More importantly, they’re linking to this rare note of levity. Take a look, take a deep breath, and try to hold off on panicking. Well, at least until you find out just how far the market might plunge….

It's Not Over Yet

Mary Kane — Tue, 22 Jan 2008 18:59:04 GMT

Spencer, to reply to your plaintive query, I’d say it’s clear the traders on Wall Street share your sense of confusion, based on the ups and downs of the markets today. And, of course, on days like this, it always bears repeating that we’re all supposed to be in the market for the long haul and we should ignore these spurts of volatility, no matter how global and unsettling. You can either spend the day frantically checking on market swings and blog analyses or go for the denial route and figure you’ll catch up on it when it’s over.

Only it’s not really going to be over. Even if the market settles down, there still are so many problems in the economy that have yet to fully play out that it’s almost hard to choose where to place your anxiety.

So, Spencer, I offer you this. Let others sweat out the meaning of the stock market’s swings, and ponder instead this looming crisis, explained by Robert Lawless, a University of Illinois law professor and credit expert:

I’m worried about the soundness of the credit card pools that have been sold to investors. It’s a very similar system to what we have for the mortgage loan pools, and we all saw how well that worked

I’m not sure I helped much, but maybe it takes your mind off the market for a while. In the meantime, maybe you should order Turbo Tax!?

Local Land Banks Fight Urban Decay

Mary Kane — Thu, 24 Jan 2008 13:31:47 GMT

As the mortgage crisis worsens and foreclosures grow, many cities now are facing the mounting challenge of cleaning up abandoned properties. They are looking for ways to fight back. Civic leaders are trying to gain control from lenders and speculators who abandoned their "investments," leaving neighborhoods littered with vacant homes, marked by boarded-up windows and overgrown yards, and empty lots filled with trash.

One tool they’re developing : Land banks.

Land banks allow a community to avoid lengthy legal delays and to quickly acquire abandoned and foreclosed properties, so they can be cleaned up and put to use.Since 2002, for example, the Genesee County Land Bank in Flint, Mich., has taken title to more than 6,300 properties; torn down more than 800 blighted structures; rehabbed 90 affordable rentals and 80 single family homes, and given 500 side yards away to the homeowners next door. These homeowners get a bigger yard; the neighborhood gets rid of an eyesore. Flint’s land bank has even redeveloped an abandoned downtown department store.

A handful of other cities and counties has established land banks as well. More are considering it as foreclosures increase, and as some lenders are trying to donate to communities hundreds of foreclosed properties that are so poorly maintained they’re not worth keeping.

In Cleveland, Cuyahoga County Treasurer Jim Rokakis is pushing to create a land bank in the next few months. Land banks give local governments an entity to wheel and deal with lenders—they take off the lenders’ hands properties that are only empty shells, but the land bank can bargain, in return, for higher-value properties. Profits from those properties can then can be used to demolish or rehab the shells. Some 10-15 percent of the properties the Genesee bank acquires each year have significant market value, said Dan Kildee, treasurer of Genesee County and chairman of its land bank.

Last year, the Genesee bank received the Innovations in Government Award (pdf) from Harvard University, which gave its program national recognition.

The land bank isn’t actually a new idea. Federal land banks appeared as early as 1916, when money was scarce in rural areas and farmers needed financing. During the Great Depression, land banks handled farm foreclosures and defaults.

Despite interest in the updated version, land banks haven’t suddenly begun to sprout up. Creating a land bank isn’t simple or quick. It usually requires legislative approval. And many cities and counties have to fight to change the tax foreclosure process, to enable the land banks, instead of speculators, to control those revenues. That’s not always an easy sell.

Kildee, always enthusiastic about the land bank idea, sat down over coffee during a recent visit to Washington from Genesee County. He was eager to explain the thinking behind a land bank and to talk about its potential.

Q: Is the idea behind a land bank to allow a community to buy and manage abandoned or foreclosed properties instead of letting them fall into the hands of speculators?

A: Exactly. A land bank is sort of a community development corporation on steroids.

Q: What about walkaways?

A: We’ve acquired some buildings that continue to cycle in and out of the tax system, but were never foreclosed on because of speculators. We thought we could interrupt that process. Instead of waiting, we can go in and get it.

Q: How can a land bank move so quickly?

A: It really does require statutory authority. We wrote into the Michigan law a provision that allows me, as the treasurer for any property owned by the land bank, to petition the court for quiet title, which is the process of acquiring a marketable title. And the court, a state court, is obligated under the statute to a grant us a hearing within 90 days of our petition being filed. It’s very fast. The whole process takes maybe at the most 180 days.

Q: How does that compare to taking title without a land bank?

A: That can take a long time. The real problem is that each case stands on its own. There’s no precedent. In our case, not only can we go in with a specific statute, but it allows me to go to the court and file a bulk petition on a number of properties. So it’s a mirror image of the significant improvement we made in our tax foreclosure process. That other piece is really important.

Q: Can you explain that piece?

A: The reform of the tax collection and tax foreclosure process is absolutely critical. It’s faster, and it’s a different model on a number of different levels. The speed is important. But there really are three fundamental problems with most of the systems around most of the country, that we had with our system, and that we changed.

No. 1 was the time. In most states, there’s a bias in favor of giving lots and lots of time [before foreclosing.] The principle, which stemmed from the 19th century, was to give the farmer another season. Our law, which we changed in 1999, was written in ’93 – 1893. So it was a 106-year-old process.

The second most significant fix was not using the foreclosure process as a way to engage private investors– all the people who watch infomercials and buy properties on Ebay. We got rid of that. I foreclose as the treasurer and take title as the treasurer, to all the properties that go through tax foreclosure. I don’t advocate using the government’s authority to support speculators. That was another big thing

Q: What was the third problem that you fixed?

A: We reengineered the economics of tax foreclosures. This is one of those areas where it’s such an obscure government function that it doesn’t get a lot of attention. But I think a great big spotlight is starting to shine on it. If you don’t pay your taxes you’re going to lose your house. The way that most states handle that process is that in one form or another, they sell their receivables, the tax that is owed to them, They’re selling that right to collect that to private investors. In most states, county treasurers, when they get tired of not being able to collect $15 million in taxes, or five million or whatever the number is, they sell it to a private investor in exchange for some percentage of the collected tax. They sell the government’s right to foreclose on the property. The investors either get the property in some point in time by actually foreclosing on it, or they receive a return on their initial investment. That tax lien is like a security. It delivers to the holder a rate of return, so that if the taxpayer ultimately does pay the tax, they get typically in the range of a 12 to 18 percent annual rate of return. That’s a really nice investment for one of these tax lien speculators.

Q: Do they operate then like debt collectors?

A: Yes. If they decide to foreclose, the speculator has a personal financial interest in you losing your property, if it has value. If it doesn’t have value, and it’s just part of the market basket of properties for which they’ve acquired the liens, they may walk away.

Q: How did you get control of tax lien sales?

A: To get to what we did—which I think is a really important principle for any kind of reform—we took that investor opportunity, the tax lien investor opportunity, and we rewrote it. We decided we’re going to continue to have that principle applied, except we’re going to be the investor.

Instead of selling tax liens every year, I go to Wall Street and I borrow all the money equal to the amount of uncollected tax, for every government in my county. I buy the receivables. Last year I borrowed about $45 million, paid all the local governments and then I had full control of the tax liens.

Q: It’s like you’re a super speculator.

A: Right. So then we collect the tax, as it’s paid, and we also collect that rather high rate of interest, which for us in the first year of delinquency is about 16 percent, and in the second year it’s 18 percent. So if you think about the economics of this, I go to Wall Street and I borrow $45 million at 4 percent. So a big chunk of that spread is the money I use to operate the land bank authority.

So there’s a double bottom line we’re able to achieve. We achieve profitability, because we’re now the smartest and luckiest tax lien buyers. Our other bottom line, probably more significantly, is that we have different aspirations for the reuse of these properties.

Q: How does all this connect to the mortgage meltdown?

A: The mortgage foreclosures include a lot of these lower value properties that often were the subject of predatory structures on the loans. You’ve got that problem, which is not likely to deliver the property to reuse, and then you’ve got private investors who are fully within their rights, meaning a lender, they’re fully within their rights to walk away. Legally. There isn’t any law that says you have to hold this property forever. The only thing they’re really subject to is any contractual arrangement they have or the enforcement of the local building codes, as such. That then begs the question: Now we’re going to have all this new abandonment. How do we create a mechanism to manage that inventory, to deal with a problem that tries to prevent foreclosure but recognizes that in some cases, getting that property in our control, letting everybody off the hook, letting everybody walk away, might be the best thing we can do, because we give the community a chance to determine its own destiny?

Q: Have you been getting a lot of outside interest in land banks due to the crisis?

A: Yes. We concluded fairly early in our process that what we’re doing was significant and replicable. We got so many calls we created the Genesee Institute in response to the need. And the Institute is now one of the partner organizations that comprise the National Vacant Properties Campaign.

Q: But couldn’t the private market handle all this instead?

A: That’s really the fundamental question when any state is trying to deal with this in any form. That’s the pushback. Our Institute is doing a lot of work in New Orleans, and the question comes up, “Why not shotgun these properties out, take the chance the private sector will do something with them, and get out of the way” The way we characterize our work is to be very responsive to the for-profit market, but not be neutral on the kind of market we’re trying to engage. There isn’t thissort of single marketplace for property. There’s all different types of investment for real estate. What we want to make sure is that the type of investor we are attracting is an investor who wants to utilize the properties.

Q: What about house flippers and speculators? Don’t they have some useful role in taking foreclosed properties off lenders’ rolls?

A: The fact that those properties are privately owned does exactly what good? It does no one any good. It’s not like if you sell them to a private investor in Oklahoma they’ll take them and drive them on a flatbed truck to Oklahoma. They’re still sitting there in Cleveland. A lot of people who buy foreclosed properties buy the infomercial tapes, they saw the pictures on TV and on DVDs and they sell them on this idea that there’s a way to get property for very little money and make money on it right away. The issue is that there are those instances where someone does get a property and does very well. It’s that very small percentage that we get now, and we sell them, and that goes not to some guy sitting on a beach making an infomercial, It goes toward cleaning up other properties.

The age of digital information was really the first wave of speculators. The tax lien system until then was kind of a quaint, folksy little cottage industry. It has evolved into this really I think not so great speculator opportunity for institutional speculators and out of town speculators. Now this is the second wave.

Q: Who do you have on your side?

A: EPA is really an important partner for us. We deal with residential properties, as well as commercial and industrial sites. Blight is a contagious disease. It infects everything.

Q: With so many foreclosed properties, what about the possibility of a national landbank?

A: The National Vacant Properties Campaign has purposely adopted from a policy reform standpoint a state by state approach. Certainly, there’s not really a strong policy imperative in the current administration toward urban solutions. But so much of this really is the domain of state policy anyway. In a lot of our work we try to support individual communities seeking help, but simultaneously work to support state policy reform. Virtually everywhere we go, the biggest hurdle is the reform of the tax foreclosure system.

Q: Fixing the tax system isn’t simple.

A: It takes a long time to figure out how these things work in the first place. I’ve held elective office for 31 years and I’m still trying to figure it out.

First, A Few Questions

Mary Kane — Fri, 25 Jan 2008 14:04:42 GMT

Illustration by: Matt Mahurin

Congress and the White House are getting kudos for acting so quickly on a stimulus package for the economy, even frm the Wall Street Journal (sub req.) in a front-page story:

It was a rare display of compromise and speed in a city known recently for partisan gridlock. Both parties were responding to middle-class economic fears, as election-year nerves are frayed by a seesawing stock market, a wave of home foreclosures and a credit crunch.

Before I join the chorus, I have a few questions:

Where was the “quick action” by the powerful in Washington when, as early as in 2006, a foreclosed home sat on every block in East St. Louis, Ill.? Where was Congress when the Legal Aid offices there were so crowded they had to turn away people about to lose their homes?

Where were the voices of the powerful last year, when, in Atlanta, a retired janitor showed up at Legal Aid offices with a loan application showing an annual income of $90,000, filled out by a mortgage broker who qualified him for a loan he couldn’t afford? Here’s the only voice I heard then: "What we see every day is so shocking and disgusting and wrong. It’s amoral." It came from William Brennan of Atlanta’s Legal Aid Society, who, beginning in the mid-1990s, arrived at his office each morning to find the hallways filled with anxious and elderly victims of predatory loans, seeking help.

And where was the news conference for a newly-arrived immigrant here in my neighborhood who is about to lose the home of his dreams after a mortgage broker sold him an interest-only loan that reset last month to a payment of over $4,000?

I guess those problems aren’t “middle class” enough to get a reaction from Washington. Instead, in an election year, the powerful pass a package that will do little or nothing for the economy. And they still aren’t listening to the voices they need to hear.

Keeping Score of How the Credit Industry Works

Mary Kane — Mon, 28 Jan 2008 15:52:43 GMT

Illustration by: Matt Mahurin

Have you ever been confused about your credit score, or tried to figure out exactly how your score was compiled?

You’re not alone. Apparently, mortgage brokers who deal with credit scores everyday can’t figure them out either.

Here’s a post that should disturb you, from blownmortgage.com, a site where mortgage brokers share their experiences. In this case, the broker worked with a client who had pretty decent credit already, but took a few steps to make it even better, by fixing errors in the report and paying down some debts.

What happened? Her score dropped even lower. As she improved her credit, it went down, instead of up.

Here’s the broker, recounting his difficult conversation with credit rating agency representative:

He tells me it might HELP her FICO scores to have recent late pays.
If anyone can make sense of FICO please let me know.

That snippet tells us more than just one person’s nightmare experience. It’s another example of how little we all know, consumers and professionals alike, about decisions lenders and credit agencies make on a regular basis. And those decisions that have huge effects on our personal finances and on the economy. That’s been one of the overriding problems with the mortgage mess. We don’t understand yet many important – and basic - pieces of the housing puzzle, including questions like who really owns a certain mortgage, who are the investors, and who is responsible for the property.

Trying to stop foreclosures or renegotiate mortgages are both short-term ways to deal with the mortgage crisis. But if we’re really going to tackle it, we need to first make sense of how the financial industry itself actually works.

State of the Union Liveblog

Tue, 29 Jan 2008 01:53:46 GMT

Washington Independent staff and friends are gathering around CSPAN's online stream in preparation for the State of the Union Address. Our Hill reporter Mike Lillis just told me the White House has not released the transcript for Bush's speech, but you can check out the 36-page outline here. (LM)

More to come.

9:07: Is that Bernard Kerik or Nouri al-Maliki? (SA)

9:09: Bad joke #1, about legacy: 45 seconds in. (SA)

9:11: One of our computers, where we're streaming C-SPAN, is frozen on a screencap of Bush. Does that mean I have to take continuous drink? (SA)

9:12: Bush calls his $600 check-plan a "robust" solution to our economic woes. (LM)

9:14: He's talking about the economy now and how we're all worried at our kitchen tables. Now he's pushing Congress to give out those incentive checks, sort of like giving candy to toddlers. (MK)

9:12: "Jobs are now growing at a slower pace." Really? (SA)

9:15: I thought shady brokers and lack of regulation played a hand in the subprime fallout -- nope, taxes. (LM)

9:17: Bush just dropped his "no more earmarks" card. (LM)

9:17: Earmarks under a Democratic Congress? No way, Jose! About those previous six, we'll call it even. (SA)

9:18: Anti-earmark executive order threat. The bombs leave the silos in 5 minutes! (SA)

9:18: First time he mentions foreclosure! He wants to reform Freddie Mac, Fannie Mae, and so on. This is supposed to help more people keep their homes. Somehow, I don't think someone with a subprime loan should wait by the phone...(MK)

9:19: The Washington Independent is looking for smart contributors who know about health care. (LM)

9:21: No Child Left Behind is "succeeding" because it is a "good law" (LM)

9:22: God, his speeches suck without Michael Gerson. (SA)

9:24: Liberate poor children trapped in failing schools! They will greet us with sweets and flowers! (SA)

9:25: Bush: I'm against duty-free. You pay tax on those airport cigarettes, Byung-Hun!

9:26: First reference to terror is about... Columbia. This man is off his game.

9:27: I'm pretty sure earlier this month Congress cut billions in federal funding to high-tech physiciss research. I'll report back. (LM)

9:28: Ah, so he's not serious about carbon emissions at all. Did I fool myself? (SA)

9:29: How can you get a patent on human life? (LM)

9:30: Bush just took a detour into promoting private health-care plans, "We must trust patients and doctors to make better decisions." It was interesting as a half-hearted effort to remind people that despite the Democratic Presidential debate talk of national health care, it is a foreign concept to Republicans. Indeed, For Bush, the most pressing health care industry problem sounds like lawsuits against doctors and HMO's. (MB)

9:30: Hey, dude, it's 9:30. Say SOMETHING about the wars already. You know, your legacy?

9:32: Volunteered in record numbers? Is that why your 2002 volunteerism initiative failed?

9:33: A Katrina reference! That happened? Bush must flash back to that moment -- when his presidency collapsed once and for all -- like if he was survived a Vietnam firefight. Which he did, I guess, by not going to Vietnam.

9:33 Fans of faith-based initiatives were looking forward to what Bush had to say about the program tonight, after failing to mention it last year. They were hoping for a little more than this: a plea to permanently extend Charitable Choice, which makes it easier for faith-based groups to compete for social service grants. One advantage: it's free. (HY)

9:34: Bush crows about charitable foundations, but actually the House Oversight committee has been investigating veterans charities and numerous other foundations for fraud. The investigation could result in these foundations having to itemize exactly how they're spending their money on IRS filings. (MB)

9:35: Bush just made a general call to find a balanced way to deal with immigrants here without documents. Any new ideas? No. (LR)

9:36: There we go. The Bush doctrine survives beyond the grave. "We trust people when given a chance will choose a path of freedom and peace." Yeah, what happened with that? (SA)

9:37: "There is one thing we and our enemies agree on." Torture? (SA)

9:38: Bush's examples of stirring liberty start with Georgia and Ukraine. The only stirring example of liberty mentioned in regard to Iraq is ink-stained fingers...have their been any other stirring examples of liberty in Iraq? (MB)

9:41: Have you notice that Bush only ever talks about Afghanistan at State of the Union addresses? (SA)

9:42: In Iraq, the surge solved everything. The end. (SA)

9:42: 30 minutes into the speech, and I'm wondering about one thing: did Condi and Spellings conspire to wear white? (HY)

9:43: Hey, he acknowledged that the Anbar Awakening happened before the surge! Ah, 80,000 Iraqis fighting the terrorists in the CLCs, the men we've armed and funded like we did the Afghan mujahideen in the 80s. Don't worry, this time it'll all turn out differently. (SA)

9:43: Attacks in Iraq are down! Except now that they're climbing back up. (SA)

9:44: Did someone just scream 'you rock!!', at the 2008 State of the Union? (LM)

9:44: Bush dares to mention Provincial Reconstruction Teams in Iraq, which veers close to the political reconciliation side of the surge. He wisely doesn't elaborate as it's not clear if these team have made any difference in providing electricity, water and safe roads to the neighborhoods the U.S. military has cleared. The teams are so far best known for their lack of Arab speakers. (MB)

9:46: Al-Qaeda is on the run in Iraq, like to Mosul, where they murdered five brave Americans today. Is it or isn't it progress that he no longer talks about victory, but about lowered violence? I'll bet that's what those five irreplaceable Americans wanted to die for. (SA)

9:46: The goal for 2008: to get U.S. troops back into a supporting role in Iraq. Remember when that was the goal in 2004 to 2006?

9:47: There is a standing ovation when Bush announces 20,000 troops are coming home. There is a standing ovation when Bush gives Army commanders a "solemn pledge" that he'll give them what they need in Iraq. What if they say it turns out they need 160,000 troops to keep fatalities down? (MB)

9:49: "Sunni, Shia and Kurds are beginning to come together." Lie. The parliament passed "a de-Baathification law." Yeah, and the Sunnis hate it. "Reconciliation is taking place." Lie.

9:51: Failure in Iraq will "embolden the extremists." No, that wasn't an apology. And how much bolder can they get? They're extremists! (SA)

9:52: It looks like Speaker Pelosi is too engrossed in a book (or the new budget) to give her eyes and ears to the SOTU. (MB)

9:52: I'm just the economics gal here, but when he starts mentioning Iran, am I supposed to get nervous? (MK)

9:54: Wasn't that airplane in LA thing crap? (LM)

9:55: OK, now he's lying about thwarted terrorist attacks. (SA)

9:56: Warrantless domestic surveillance! Forever! It turns out the all-seeing eye of the powerful might be another thing we "share with our enemies." (SA)

9:56: Bush is above giving rational why telecoms deserve "liability protection." You need more a specific reason, I think, why Sprint should not be sued beyond protecting against the dangers of the new century. (MB)

9:57: We aren't doing anything in Sudan, though...(LM)

9:57: "America opposes genocide in Sudan." So there. Genocide stopped. Over 400,000 Darfuris suddenly rise from the dead. (SA)

9:57: I don't think America is leading the fight against global poverty and hunger and disease. That would be Bill Gates. (MK)

10:00: New hiring preferences for military spouses?? (HY)

10:02: As it turns out our "liveblog" might be a bit delayed. We're watching a stream on CSPAN. (LM)

10:02: "Our greatness lies not in our government." Certainly not now. (SA)

10:03: Is that it? (LM)

10:03: That's it? Where are the ordinary heroes in the bleachers the presidents always point to? I really miss that. (MK)

10:15: Gripping post-debate analysis: Where are the flights of fancy? Exploring Mars by 2016? Bush didn't seem to be having fun. The only pet issue discussed seemed to be a fleeting reference to tort reform. (MB)

Unpaid Property Taxes A Boon For Florio

Mary Kane — Fri, 01 Feb 2008 14:20:49 GMT

Illustration by: Matt Mahurin

For former New Jersey Gov. James Florio, vacant lots and foreclosed properties turned into a lucrative business venture that have made him the kingpin of collecting unpaid property tax liens for struggling cities and towns.

But now, with the mortgage crisis hitting communities hard with blight and abandoned homes, Florio and others who have profited from tax liens are coming under fire.

The business of collecting unpaid tax liens, once an obscure government function that few paid much attention to, is gaining a higher profile.

The Washington Independent last week wrote about Dan Kildee, the treasurer of Genesee County, Mich. and chairman of its Flint land bank. Kildee travels around the country pushing the notion that cities and towns can create land banks to buy and manage foreclosed properties and empty lots. He extolls the idea that local governments - not private investors or firms like the one Florio founded -- should take control of tax foreclosures and delinquent tax liens, so they or their land banks can benefit from the money brought in.

There’s a lot of stake -- despite the bureaucratic-sounding nature of this debate. Beginning in the 1990s, cities in dire financial straits began selling off their delinquent liens to private firms and investors, in return for a quick cash infusion. Florio, a one-term Democratic governor who left office in 1994, jumped into the business in 2000, founding Xspand, a Morristown, N.J., based firm that buys, finances and collects real estate tax liens. Xspand grew quickly into a $200-million firm, signing up cities, towns and school districts from New York to Los Angeles. It established itself as an industry leader and captured Wall Street’s attention as it packaged and sold liens to investors. Bear Stearns, a global investment bank, bought the firm in April 2006.

Kildee calls the firms “government-supported speculators” who take advantage of desperate cities.

While Florio and private firms like his prospered, not all cities fared as well with these transactions. Sometimes, city properties were so deteriorated the firms couldn’t collect on the liens, so houses or lots sat in limbo, creating even more civic blight. Or towns discounted the liens too much, and the firms cashed in on market-rate properties that could have turned profits for the cities. In other cases, investors demanded high prices for properties that cities needed for redevelopment. Kildee calls the firms “government-supported speculators” who take advantage of desperate cities. With more foreclosures on the way, he says that controlling tax liens will become a more contentious issue.

Florio – fairly or not, since he sold his company – has become the public face of the private sector’s role in tax liens, due to his high-profile success. This week, he talked with The Washington Independent about the tax lien business, saying he still believes that private firms are helping communities -- not taking advantage of them -- by doing a better job collecting the unpaid liens. Florio discounts any charges that he cashed in on his government service and contacts to build the business, and he remains unapologetic about his accomplishments.

Neither he nor Bear Stearns disclosed Xspand’s sale price at the time, and Florio still won’t discuss how much he made from the sale. “We were very successful," he said yesterday, "and it worked out well for everybody. I sold it because it was a great offer." He said with a laugh, "It’s helping to get my mortgage paid.”

Florio emphasized that he’s now just an informal consultant to his old firm, Still, he follows the industry and doesn’t think critics of the private sector have much merit.

“Towns have a hard enough time as it is collecting taxes,” Florio said. “Tax offices close at 4 p.m. generally. They’re not able to do a lot more. But if you sell to the private sector you get an advance on the money. And there are fairly sophisticated new ways of providing for securitization. Plus there are ways nonprofits and cities can make sure they control some of the revenue and some of the liens. It doesn't have to be either-or.”

Alan Mallach, a visiting scholar at the Federal Reserve in Philadelphia and a senior fellow at the National Housing Institute, isn’t as convinced. Cities, on the whole, he said, come up short on these tax lien arrangements.

“The city gets a quick financial hit," Mallach said, "but it’s often less than it ought to be. The cities are not getting these great deals. The financial infusion into the city’s treasury is fast, but the problems take a while to show up.”

“Basically, when people want my opinion, I say, “Don’t bundle them, don’t sell them in bulk, don’t discount them significantly.

Mallach, who has known Florio for some time, said he believes that Florio is genuine when he says he believes private firms can help towns in trouble. Florio often says he assists towns in improving their tax collections. But Mallach still doesn’t agree with his approach.

“I think he feels he’s doing God’s work," Mallach said, "and that he’s doing something that’s basically in the interest of the communities. I think if you do this, you can rationalize you’re doing a service for the community. But, ultimately, I don’t think it’s positive. It’s sort of like being an enabler. Some of these cities are desperate.”

Others are more critical.

As this story from the Asbury Park Press explains, Florio’s firm had no clients until the New Jersey assembly passed a bill in 2001 allowing private companies to collect taxes for distressed municipalities. Florio had lobbied two administrations for the bill. It ultimately was sponsored by Joseph Roberts, D-Camden, a former congressional aide to Florio.

That’s how it works in Trenton. You leave government and cash in on your service. It’s like a revolving door.

After the bill passed, Xspand won a no-bid contract worth potentially up to $2 million from the city of Camden, one of the poorest in the nation, to collect $103 million in back taxes. Xspand collected more than it anticipated, and Camden officials noted last year that the firm’s contract was eventually worth nearly $5 million.

Florio calls the Camden experience an example of his firm’s overwhelming success. But Assemblyman Richard Merkt, R-Morris, doesn’t see it that way. He opposed the bill that opened the door to Florio’s firm -- and he still believes it was wrong.

“It felt, smelled and sounded like an inside job," Merkt said, "and that’s what it was. That’s how it works in Trenton. You leave government and cash in on your service. It’s like a revolving door.”

Referring to Florio’s business accomplishments, Merkt said, “I think the whole thing is obscene.”

Florio, however, discounts any suggestion he cashed in. “I started a business and I was successful," he said. "I don’t know how anyone can say I cashed in. I wasn’t the mayor of one of these towns.”

There’s a bit of irony to Florio being involved in another controversy over taxes.

Florio, 70, lost a re-election battle for the governorship to Republican Christine Todd Whitman after a huge tax hike he approved in office sparked a grass-roots revolt. In 2000, he lost an expensive Senate primary race to investment banker Jon Corzine. Currently, Florio works as a lawyer and lobbyist and sits on the board of directors of Trump Entertainment Resorts.

His executive biography at Hoovers.com, a business information service, describes Florio as having more than 30 years of public experience, and adds, “Governor Florio understands the budget pressures that governments face and created Xspand to generate revenue from delinquent property tax liens.”

As far as using his government background to procure business while at Xspand, Florio counters with this:

“Nobody forces anybody to invest in the liens. It’s a contract. Local municipalities agree to the terms, and set the terms. Nobody’s forcing anybody to do this.”

Pressed further on whether he felt he had profited from both his public service and from cities in dire straights, Florio said, “I don’t respond to criticism.”

There is one thing he and Kildee might agree on: With more foreclosures coming, cities and towns are going to face more problems. But to Florio, it represents an opportunity for the private sector, and he predicts the tax lien collection business will only grow.

“It’s going to get more complicated,” Florio said. “With more economic difficulties will come more tax liens, and less revenues. And cities will be looking for ways to maximize those revenues any way they can.”

Clinton Claims Better Housing Plan

Mary Kane — Fri, 01 Feb 2008 14:34:13 GMT

Both Hillary Clinton and Barack Obama have some notions about how to address the nation’s housing crisis. At the debate last night, Clinton contended she’s got a more significant plan, including a proposed five-year freeze on mortgage interest rates.

Whether she’s right or not – her ideas aren’t actually drawing a lot of fans in the business world – may be irrelevant.

Check out this post from the Financial Times. It’s the most insightful piece I’ve seen on what we’re beginning to understand about the housing market. A rate freeze, it points out, won’t do much to counter the growing tendency of borrowers to walk away from their houses, even those who can still pay on their loans. If their mortgage costs more than the value of their house, they’re choosing not to keep it, but to pay instead on their credit cards or autos first.

That’s a huge change from the past, when homeowners would lose everything else in bankruptcy while clinging to any last chance to keep their homes. But mortgages were different then. This is a development that a rate freeze or other proposals out there doesn’t address.

Before any of the candidates begin crowing that they can tackle the housing market's problems, keep in mind we're just beginning to figure out what they really are.

Is It OK To Walk Away?

Mary Kane — Fri, 01 Feb 2008 15:01:20 GMT

As I mentioned in an earlier post, the Financial Times has a great piece noting the tendency of borrowers now to walk away from their homes, even if they could still pay on the mortgages. It's particularly true in cases where borrowers owe more than their homes are worth.

This of course raises the question: Is it ever morally acceptable to walk away from a debt ? Has it become socially acceptable?

In California, there's also the phenomenon of international foreclosures, where borrowers over their heads on their own loans deliberately stop paying in order to buy a cheaper forcelosed house on the market.

This debate already is well underway on the blogosphere, here, here and elsewhere.

SIDEBAR: How Cities Handle Property Liens

Mary Kane — Fri, 01 Feb 2008 18:12:16 GMT

Return to story

With foreclosures looming and the mortgage crisis showing no signs of easing, cities and towns are scrambling, in different ways, to deal with the problem of unpaid tax liens and foreclosed homes.

Some are trying to buy back their liens from private firms, tired of being stuck with vacant land. Others are wrangling with speculators. Some still want to sell them off. The clash is likely to continue, since out-of-town investors and private tax lien collection firms often have different goals for the properties than the cities do.

“They’re trying to take this debt that is tied to local governments and to make money off of it,” said Joseph Schilling, a professor at Virginia Tech’s school of Planning and Urban Affairs.“Our system allows for this trading of property like stocks and bonds, but there are real impacts to the community and to the neighborhood. The primary purpose of these firms is not to consider the community impact, as to who will be the next owner, who will live in the property, and what kind of neighborhood it will be.”

Here’s a typical dilemma: A city sells off a tax lien to a private firm on a house worth $25,000. The owners walk away, rather than paying. The property deteriorates, and the city has to tear it down, with its ownership in question. That leaves an empty lot left, worth about $3,000, but with tax liens and a demolition lien. The city or a redevelopment group tries to buy the lot for redevelopment, but the out-of-town firm won’t accept less than $30,000 or so -- to cover the liens and other costs.

Remember, the city sold the lien to this firm, at maybe 10 cents on the dollar, for the privilege of being stuck in this position. The lot just sits, and the blight grows.

“One thing that’s always true is that they don’t budge,” said Rick Belloli, executive director of Pittsburgh’s South Side Local Development Co., which recently spent $100,000 more than it planned to buy a property from a tax lien speculator. “It’s truly an impediment to redevelopment.”

In one city neighborhood, a small lot necessary for development of an affordable housing project worth about $9,000 carried $45,000 worth of liens, putting it out of reach for the nonprofit that needed it.

In Toledo, Lucas County Treasurer Wade Kapszukiewicz vowed to collect unpaid taxes and hired Xspand, the firm founded by former New Jersey Governor James Florio, three years ago. He has no complaints about Xspand in particular, and said the company did its job. But he now calls tax-lien sales to private firms “a thing of the past" and said he’s pushing to emulate the Flint land bank model,

“It’s dawned on me that this is no longer cutting edge,” he told Governing Magazine recently.

In Buffalo, a state agency acquired the city’s liens in 2003 and tried to securitize them, by pooling them and selling to investors. But it didn’t work, because the 18 percent return on paper that delinquent tax liens are supposed to provide didn’t materialize; too many properties were either too far gone or too overpriced for the liens to be redeemed. Neighbors complained the empty houses and lots sitting in limbo attracted drug dealers, blight, and trash. Last year, the state stepped in and returned the liens to the city

In Pittsburgh, the city also faces a complicated problem. Last year, the city bought back liens it sold a decade ago to a company called Capital Asset Research Corp. “We all thought,

‘Here come the floodgates of new development,''' said Steve Shivak, executive director of the Pittsburgh Community Reinvestment Group.

Not so fast.

The county also sold liens on the same properties, but to a different firm called GLS Capital Inc. and was sued by the firm, which complained the properties were in worse shape than expected. The county says is trying to buy some liens back, but for now the the titles aren’t free and clear, as expected. "Neighborhood groups are ready to redevelop $80,000 in properties," Shivak said, "but we can’t move on them.”

Even cities that aren’t losing population are having problems. Paterson N.J. – for reasons that still aren’t clear - sold off its liens a few years ago at a discount, when property values were on the upswing. Speculators quickly gobbled up the land and they, not the city, are profiting. Organizations that used to buy up land at tax liens sales are frozen out.

“For most of us in affordable housing, free or cheap land from the municipality is less and less likely,” said Barbara Dunn, executive director of Paterson’s Habitat for Humanity. “The land is a hot commodity and private developers bought it all through the tax lien process.”

Despite these controversies, communities continue to sell their liens to private firms, including Erie County, where Buffalo is located, and more are considering it.

Mortgage Crisis Solution Missing From Presidential Race

Mary Kane — Tue, 05 Feb 2008 13:25:49 GMT

Illustration by: Matt Mahurin

Voters are heading to the polls today in a Super Tuesday contest that includes states hit hard by the nation’s mortgage crisis, including California, Colorado, Illinois, Minnesota and Missouri.

As that crisis has intensified, candidates on the Democratic side have ratcheted up the profiles of their plans to address it, debating the mortgage mess last week in Los Angeles and including it prominently in campaign speeches. The new emphasis comes as both Sen. Hillary Rodham Clinton (D-N.Y.) and Sen. Barack Obama (D-Ill.) try to attract supporters of former rival John Edwards, who made foreclosures a top issue and spoke about the problems of troubled borrowers with passion and intensity.

Clinton, in particular, has tried to emulate the Edwards approach, saying last month in Las Vegas that she wanted to discuss foreclosures "in very real and personal terms."

But not everyone’s inspired.

To some economists and housing activists, none of the candidates are exactly stepping up to the plate to take ownership of the foreclosure crisis and to put forth innovate proposals to address it -- like calling for a ban on adjustable rate mortgages or giving borrowers facing foreclosure the option of remaining in their homes as renters. None of the candidates is seeking any sort of coordinated and comprehensive national response, despite some two million homeowners facing foreclosures in the near future. None has conveyed the sense of urgency that usually accompanies a crisis. Nor have they promoted a major overhaul of the financial services industry, in the same why they’re pushing for health care reform.

“I don’t think they’ve really thought it through very well,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal Washington think tank. “They’re just doing enough to show that they’ve come up with something. I think it’s a matter of just being cautious. There’s little incentive for anyone to stick their neck out on this.”

Wading into the foreclosure mess can be tricky politically, as Baker points out. Go after banks and lenders and you run the risk of alienating the powerful financial services industry, a major campaign contributor to both parties. Propose a foreclosure moratorium, then try to explain in practical terms how it would work; merely announcing the intention of such a freeze would most likely prompt a rush of foreclosures before Congress could even pass the proposal.

Push for loan forgiveness or a widespread mortgage rate freeze, and you might put off people who paid their mortgages on time and don’t want a bailout for house flippers and investors. What plays well in the Midwest, where longtime homeowners can’t pay their mortgages, might not go over quite as big in markets like California, where rising home prices during a housing bubble resulted in some borrowers buying homes they couldn’t afford, and walking away.

“It’s really a tale of two cities,” said Joseph Schilling, a Virginia Tech professor and urban expert. "In the fast growth areas they're getting a lot of foreclosed properties in relatively new subdivisions. There's a market-driven, speculative cause to these foreclosures. When you're in a weak market like Flint, or Cleveland, or Buffalo, the foreclosure issues are different."

On the Democratic side, at least, the candidates offer a contrast to their approaches.

Clinton has called for a wide-ranging freeze on mortgage rates for five years and a 90-day moratorium on foreclosures. She also supports sending $30 billion to the states to help borrowers obtain lower cost fixed-rate mortgages.

Obama supports a $10 billion foreclosure prevention fund, with the same goal as Clinton's. But he opposes Clinton's mortgage freeze plan, saying during the debate that mortgage rates would go up across the board and borrowers trying to get a mortgage would have a more difficult time.

The freeze is the biggest point of contention between them. Otherwise, they both also support tougher regulations for the lending industry.

In a scathing piece, Fortune Magazine writer Jon Birger called Clinton’s rate freeze plan “perhaps the dumbest solution to the current mortgage mess I've heard from a top presidential contender," saying it would end up raising interest rates for new borrowers.

But Prentiss Cox, a University of Minnesota law professor, said Clinton deserves praise for at least proposing something. Obama’s failure to push for a rate freeze lets Wall Street off the hook, he believes. Cox supported Edwards and said his seven-year freeze was the best proposed solution.

Whatever you think of any of the Democratic plans, they amount to significantly more than what's on the table from from the Republican side, where the response has been essentially non-existent.

Sen. John McCain (R-Ariz.) and Mitt Romney have talked generally about their sympathy for homeowners facing foreclosures. They also have have spoken in complimentary terms about a voluntary agreement the Bush administration hammered out with the mortgage industry in December, that would increase loan modifications and freeze interest rates for five years, but only for a limited group of subprime borrowers. Clinton's rate freeze would apply to many more borrowers, including some who are late on their payments.

Mike Huckabee has talked a bit tougher on the mortgage crisis, blaming greedy borrowers and lenders alike. Still, he mostly supports Bush's voluntary plan and opposes any bailout or government intervention.

But beyond that, the Republican hopefuls have had little to say, noted Peter Dreier, a political science professor at Occidental College in Los Angeles, Calif, and a board member of the National Housing Institute. He's scoured proposals on the Republican side and come up with nothing. “The Republicans are basically off the reservation on this one,” he said.

Republican candidates don't want to alienate their Wall Street backers anymore than the Democrats do, he said. And ideologically, Republicans believe in allowing the market to correct its own mistakes.

Still, what's notable is what the Republicans aren't saying, he and others pointed out. None of the Republican candidates is going out of his way to defend the mortgage industry or to stand up for Wall Street investment banks that profited from subprime loans. “I think it's obvious to everyone that the mortgage industry blew it," Cox said.

Dreier said he’s surprised McCain hasn’t jumped into the fray, at least to distance himself from any controversy, considering his background as a member of the Keating Five during the savings and loan scandal of the 1980s. McCain was among a group of senators accused of accepting campaign contributions in return for aiding the owner of a failed thrift under investigation.

By treading so carefully on the foreclosure issue, candidates are missing the opportunity to call for much-needed reforms of the mortgage business, many of which are included in a bill proposed by Sen. Christopher Dodd (D-Conn.), a former presidential candidate and chairman of the Senate banking committee. Dodd's bill would, among other things, hold Wall Street banks accountable for buying abusive subprime loans and would more closely regulate mortgage brokers and lending industry tactics.

“It's not enough just to help people out now," said Dreier, "if you don't solve this problem for the future."

With the mortgage crisis - and the economy as a whole - expected to only worsen, candidates sooner or later are going to have to address the foreclosure problem in a more substantive way, both he and Cox said.

"There’s not a state or congressional district that hasn’t been affected by the mortgage crisis,” Dreier said. “Everybody loses when home prices are going down because of foreclosures. It’s a long-term problem.”

The Price is Right?

Mary Kane — Wed, 06 Feb 2008 15:36:52 GMT

Now that California voters are recovering from last night's primary and all the campaigning beforehand, they can move on today to pondering this little economic nugget:

You need $191,106 in income to buy a typical home in Orange County, Calif., real estate blogger Jon Lansner notes. And that total assumes you can come up with a 10 percent downpayment.

Just a little reminder that while the housing market's collapse is pulling down home prices nationwide, it doesn't mean that homes in traditionally expensive markets are going to be that much easier to buy.

You can find out what salary you'd need to buy the average home in your metro area here, at the Center for Housing Policy.

Moody and the Meltdown

Mary Kane — Wed, 06 Feb 2008 15:56:14 GMT

Here's an entirely disrespectful, irreverent and off-the-wall analysis of Moody's rating agency and its role in the mortgage meltdown. Courtesy of "Animal House" and monkeybusinessblog.com
It proves the mortgage crisis and all those securitized pools aren't as dull and technical as most of us financial writers make them seem. It's all in how you explain it.