Fixing The Foreclosure Crisis
Although residential mortgage foreclosures have wreaked havoc on many communities in metro Detroit and Michigan, efforts to stem the damage and boost property values are under way. But do the relief programs go far enough?
The first decade of the new millennium will go down as one of the most turbulent in the history of the housing market, both in Michigan and across the nation.
The subprime mortgage crisis, lax federal oversight, and a spike in energy prices, coupled with high unemployment — the “perfect storm” of the 2008 financial meltdown — created an epidemic of foreclosures that have devastated families, neighborhoods, businesses, and property values, and have sharply reduced the tax revenue needed to support public services and schools.
Although a turnaround won’t be immediate, there are many organizations — assisted by state and federal efforts — working to reverse the trend and put communities across the region and throughout Michigan back on solid footing.
From 2006 through 2010, Michigan racked up nearly 275,000 so-called REO (Real Estate Owned) residential properties — dwellings that revert back to a lender, government agency, or government loan insurer following an unsuccessful sale at a foreclosure auction. Of that amount, nearly 162,000 of the properties were in Wayne, Oakland, and Macomb counties. Michigan ranks seventh nationally for REOs, according to RealtyTrac.
Meanwhile, default notices and foreclosure actions were filed on tens of thousands of other properties. Because so many homes were abandoned, sold for far below market value, or were converted into rental properties, home values have dropped 32 percent in the region during the past five years, according to the Southeast Michigan Council of Governments (SEMCOG).
In addition, thousands of borrowers who purchased homes at the height of the housing bubble, or refinanced their mortgage to buy a boat or a cottage up north, are “underwater” and at a higher risk of foreclosure, given that their loan balances are greater than current market values. In June, SEMCOG reported that 36 percent of mortgage borrowers in Michigan are underwater, the fourth highest rate in the nation.
No ZIP code has been immune.
“Although it has not been equal in every city, when the foreclosure crisis hit, it impacted all of our neighborhoods across the region,” says Kevin Vettraino, a community economic development planner at SEMCOG. “We have seen vacant homes, declining maintenance of houses, and a significant drop in property values. With far less tax revenue, it has limited the ability of cities to provide services and (maintain) the desirability of their communities. That’s why we need to develop and implement programs to stabilize neighborhoods.”
Oakland County Treasurer Andy Meisner has not only seen the county’s taxable value drop to $54 billion from $64 billion since 2007, but the county seat of Pontiac has been struggling with 25 percent unemployment, a projected $12.5 million budget deficit, and a housing stock that is 70 percent rental.
As a result, whether it’s Pontiac, River Rouge, Ecorse, or Highland Park, budgets for city services will be squeezed for years. “With Proposition A and the Headlee Amendment, there are limits on revenue growth,” says Meisner, an attorney and former state representative. “Tax revenue cannot go up as quickly as it drops, so therefore it will take decades to recover that lost revenue.”
Meisner and others believe the solution to the foreclosure crisis ultimately comes down to increasing property values — and creating jobs. The turnaround effort includes foreclosure prevention programs, neighborhood stabilization programs, and foreclosure and appraisal reforms.
“To turn it around, we need to continue with very aggressive foreclosure prevention counseling by certified HUD counselors, the implementation of existing federal and state neighborhood stabilization programs, appraisal reform, the promotion of small businesses and economic development to address joblessness, and changes to the foreclosure process to yield better results,” says Meisner, who initiated a countywide foreclosure prevention program with United Way in 2008. Since that time, similar prevention programs have been set up throughout Michigan.
The primary federal response to the foreclosure crisis has included the implementation of the Hardest Hit Fund. Administered through individual states, the program provides cash subsidies to eligible hardship participants. In addition, HUD Neighborhood Stabilization Program grants allow local governments to rehabilitate and return foreclosed or abandoned properties to the housing stock on a more affordable basis, as a way to stabilize neighborhoods and increase fallen home values.
To be eligible for a grant, participants must be below federal income limits, be approved by a mortgage lender for a fixed-interest-rate home loan, and complete eight hours of homeowner counseling from an approved agency. Qualified buyers may also receive federally funded down-payment assistance.
So far, Michigan has received $498.6 million in funding for the Hardest Hit program, which is administered by the Michigan State Housing Development Authority through www.stepforwardmichigan.org. By 2014, the Authority expects to help nearly 39,000 households in Michigan that are at risk of foreclosure and have experienced a substantial reduction in income due to involuntary unemployment, underemployment, or a medical condition.
On a related front, a pilot program coordinated by the Michigan Association of Realtors had sales pending or had closed on 94 of 100 previously foreclosed or abandoned homes that had been renovated in Wayne, Oakland, and Macomb counties (as of August).
Participating communities included Eastpointe, Ecorse, Ferndale, Hazel Park, Holly, Inkster, Keego Harbor, Lake Orion, Oak Park, Ortonville, Pontiac, Redford Township, River Rouge, Royal Oak Township, and Westland. The coalition contracted with Home Renewal Systems Inc. in Farmington Hills to either demolish, build, or refurbish the properties and then market and partner with local real estate agents to sell the homes.
“Our idea was that if we could support our struggling communities dealing with the devastating effects of foreclosures, we could also support the home values within those communities,” says Shannon Morgan, vice president of Home Renewal Systems. Tracey Katzen, daughter of longtime homebuilder Bernie Glieberman, started the effort in 2008. “This program addresses the blight of having unoccupied and deteriorating homes that lower home values and tax revenue, and would otherwise be the subject of speculative sales that turn into rentals, which can further hurt a community,” Morgan says.
In communities such as Detroit, Inkster, and Pontiac, hundreds of formerly foreclosed homes have been purchased at rock-bottom prices and turned into rental properties.
“With rentals you generally have minimal investment into the rehabilitation, (and) tenants often don’t take the time and effort that a homeowner would in contributing to the community,” Morgan adds.
SEMCOG’s Vettraino agrees. “In general, renters don’t have the same stake as a homeowner, the properties are not maintained as well, and the values are lower,” he says. “The problem is that many communities were designed for single-family, owner-occupied neighborhoods.”
Although the excess supply of homes on the market and weak demand brought on by double-digit unemployment, population flight, and a weak economy is largely to blame for the drop in values, many experts are finding that one of the biggest problems precluding a housing market recovery involves the appraisals banks frequently use when researching potential transactions.
The appraisals often are low — due, in part, to federal guidelines that were tightened in 2009. The result generally means that either the seller is forced to lower the sale price, or the buyer puts down extra cash. If either condition fails to occur, a sale usually can’t be consummated. For experts like Chris Mayer, senior vice dean and real estate professor at New York’s Columbia Business School, the stricter guidelines have exacerbated the housing problem.
According to SEMCOG, low appraisals further threaten underwater homeowners. As a result, they are at a higher risk of deferring maintenance, walking away from a home, undertaking a short sale, or converting the property to a rental. The phenomenon also affects homeowners who wish to borrow money to upgrade or expand their residences. The problem is that the value of the comparables, or comps, is dragged down by a nearby foreclosure.
“Our concern is that the appraisals are coming in lower than they should be, and we are seeing inconsistent appraisals on the same home,” says Vettraino, who is leading a SEMCOG discussion on whether to propose a “blended approach” to arrive at more fair and reasonable appraised values. The approach would include an appraisal by a qualified appraiser, a brokers’ price opinion, an automated valuation model, and the insurance cost or replacement value of the home.
“I often hear about the appraisal problem because we are seeing inconsistent and often ridiculously low appraisals that are causing sales to fall through,” says Claire Williams, president of the Michigan Association of Realtors in Lansing, and corporate manager and partner at Remerica Hometown One based in Plymouth Township.
Meanwhile, Morgan is working with industry advocates to pursue a proposal that would require that appraisers contact a central assessing department that understands the unique attribute of a local market. “When a bank decides to go with the lowest price point, which they always do, it ends up as a comparable that affects everyone else who is refinancing or buying,” she says. “At the end of the day, the entire way we evaluate real estate has to change.”
In the midst of the fallout from the foreclosure epidemic, the state Legislature and the appellate courts are now addressing practical solutions.
Michigan is one of several states that provide for nonjudicial foreclosure procedures in which the lender, or its servicer or agent, gives a notice of default and “foreclose by advertisement” through a power of sale provision that can result in the sale of the property at a sheriff’s auction. In states that use “judicial foreclosure,” a mortgagee is required to file an actual lawsuit to initiate the foreclosure.
In April, the Michigan Court of Appeals, in Residential Funding Co. v. Saurman, rendered a significant blow to nonjudicial foreclosure proceedings via a system called Mortgage Electronic Registration Systems, or MERS, which is often utilized by the mortgage industry. MERS simplifies the way mortgage ownership and servicing rights are originated, sold, and tracked. The system eliminated the need to prepare and record assignments when trading residential and commercial mortgage loans.
In a 2-1 decision, the court held that MERS did not have “an interest in the indebtedness secured by the mortgage,” and therefore could not foreclose by advertisement. As a result, foreclosure proceedings in many cases were set aside. The Michigan Supreme Court is reviewing the case, and a decision is expected by year’s end.
Lorray Brown, director of the Michigan Foreclosure Prevention Project and a co-managing attorney and a consumer law specialist for the Michigan Poverty Law Program, filed an Amicus brief in the case on behalf of her organization, as well as the Legal Services Association of Michigan, the National Consumer Law Center, and the State Bar of Michigan Consumer Law Section.
“When MERS forecloses, the homeowner is dealing with a placeholder who has no legal interest and is without authority,” Brown says. “Clearly the homeowner doesn’t know who to negotiate with, which has been a stumbling block to negotiations that could avoid a foreclosure sale. Thankfully, the state Legislature and governor stepped up in 2009 to address the problem.”
Commonly known as the “Pre-foreclosure negotiation law,” and recently extended to January 2012, the legislation provides that before a foreclosure proceeding by advertisement occurs, a mortgage holder or servicer must comply with a 90-day informational campaign. The mortgage holder or servicer must serve a written notice informing the borrower of his or her rights and the opportunity to avoid foreclosure, and the notice must include a list of HUD/MSHDA certified housing counselors. Brown is part of a legislative work group that is addressing whether to let the statute expire or have it extended with some modifications.
Findings released through four independent research studies conducted by Harvard University, the Urban Land Institute, the Federal Reserve Board of Governors, and the National Council on Aging revealed, in part, that housing counseling consistently increases the likelihood that a homeowner will be granted a loan modification (200 percent higher probability), that counseled borrowers received more favorable terms on their loan modifications compared to uncounseled borrowers, and that counseling raises the probability of a homeowner receiving a loan modification that “cures” (restores the loan to good standing) a serious delinquency or foreclosure.
“From my perspective, a program that gets a borrower and a lender to sit down at the beginning stage of a foreclosure to determine whether a loan modification or other workout is feasible is a good policy,” says Jeffrey Weisserman, general counsel at Trott & Trott in Farmington Hills, among the largest law firms in Michigan specializing in residential mortgage foreclosures and default services for banks and lenders. “We have seen numerous meetings that resulted in loan modifications as a result of the statute,” he says.
In another attempt to keep homeowners in their homes, an overhaul of Michigan’s current foreclosure system may be on the horizon.
Earlier this year, State Rep. Jim Ananich, D-Flint, and State Sen. and Democratic Floor Leader Tupac Hunter, D-Detroit, introduced companion bills (HB 4651 and SB 0513) that would change Michigan’s foreclosure-by-advertisement system to one that would necessitate a lawsuit and judicial review.
“When homeowners see there is a fair system in place, when we can weed out the fraud, and when people are given due process, it brings more clarity and transparency to the system,” Ananich says. “It will help stabilize our housing market, protect our homeowners, and get our economy back on track.”
A study released by the National Bureau of Economic Research found that by using data on mortgage delinquencies, states with judicial foreclosure requirements had a much lower ratio of foreclosures to delinquent accounts.
“I think banks will object to the proposed legislation, but what we are doing isn’t working, and anything we can do to keep homeowners in their homes is better than what we have now,” says Hunter, who also introduced a bill addressing mortgage fraud that was recently passed in the Senate. “I think having a third-party mediator will be fairer.”
Not everyone sees a judicial foreclosure system as a panacea. “Certainly with judicial foreclosure it would take longer, require more legal work, and would need more judicial resources to handle the caseload,” Weisserman says. “It could cost the borrower and lender more money, and I would not be surprised if you saw an increase in interest rates on loans, or that loans may be more difficult to come by as a result. The amount necessary to reinstate a loan could also increase accordingly.”
Although the foreclosure crisis and depressed home values remain a serious problem, the latest evidence points to some stabilization. According to Daren Blomquist, a spokesman at RealtyTrac, a turning point may be occurring.
“Michigan, and especially the Detroit area, was hit earlier than the rest of the country by unemployment, so the hope is that it will be the first to get out of the mess,” he says. “Foreclosures (in 2011) are on a pace to be less than in 2010, and the market is close to reaching the bottom, if it hasn’t already. However, we have to be cautious about a possible second wave, because some banks have slowed down foreclosures” due to greater government scrutiny.
Dan Elsea, president of brokerage services at Real Estate One, the largest real estate brokerage firm in Michigan, believes housing values have bottomed out across metro Detroit and are starting to rise, albeit slowly.
“What we are seeing is that a home that is in good shape and is well-priced has multiple offers and sells in days. If it’s not, it can take months,” Elsea says. “I think we will look back next spring and see that the appreciation in the metro Detroit area began in the spring of 2011.”
But most of all, an increase in the number of jobs available is the factor that is looked upon by planners, legislators, and real estate experts as the most important criterion in solving the foreclosure crisis and improving property values. “First and foremost, our housing is directly correlated to our job market,” says Morgan, of Home Renewal Systems.
“We used to say here that the No. 1 thing in real estate was ‘location, location, location,’ but now that has changed to ‘jobs, jobs, jobs.’ That is really the No. 1 issue that needs to be addressed.” db