To get to Pittsburgh, a historically black neighborhood south of downtown Atlanta, I drive past several boarded-up and burned-out homes. Turning onto McDaniel Street, I steer around a pile of clothes and toys spilling out into the road. "Lord, behold, a family's house foreclosed and their possessions just thrown out there," says LaShawn Hoffman, CEO of the Pittsburgh Community Improvement Association, from his storefront office down the block. This is one of the vastest foreclosure zones in the nation. On maps of bank sales, Hoffman observes, "you almost can't see the community because of all the red dots." His organization has counted them: It found six out of 10 homes in Pittsburgh are now vacant, casualties of foreclosure with wood planks and metal shields guarding their windows. Hoffman's group mows rangy lawns and bolts houses shut before squatters, prostitutes, or drug dealers settle in.
Hoffman would like his organization to step in and buy every vacant property it can. It has teamed up with the Annie E. Casey Foundation to form the Partnership for the Preservation of Pittsburgh, and together they've received a $2 million grant from the U.S. Department of Housing and Urban Development (HUD) to begin transforming Pittsburgh into a neighborhood where Atlantans will choose to settle. That's not as crazy as it may sound. Pittsburgh is just moments from downtown Atlanta. The Casey Foundation already controls a key development site in the neighborhood, a 31-acre former truck depot that sits alongside the Beltline, an unused rail track that rings Atlanta and is slated to become one of the nation's great urban parks. With an additional $2 million from Casey, the partnership plans to start by buying 100 derelict houses in strategic spots and turning them into affordable rentals. As Hoffman puts it, "We want gentrification, but with the people who've already lived here."
A little, graying, vinyl-sided house is just the sort of property Hoffman is looking to buy. It adjoins the zone that the project is targeting. But like many vacant houses here, it's off limits. In May a San Jose, California, company called Stonecrest Investments bought it from Litton Loan Servicing, a division of Goldman Sachs, for less than the price of a used car -- just $3,000.
Like other community leaders trying to save neighborhoods devastated by reckless lending, Hoffman is in a race against time. As soon as Pittsburgh foreclosures go on the market -- usually within two weeks of repossession -- buyers make cash offers, no strings attached. Many have never been to the neighborhood, or even to Atlanta. They are looking to exploit a phenomenal opportunity: Lenders are dumping foreclosed real estate onto the market at prices so low that it's worth buying empty houses in bulk, on the mere prospect that they may sell for more in the future. The cast of players has largely changed, but the new wave of speculation is bringing back a familiar disruptive frenzy. As Pittsburgh's foreclosures are plucked off one by one, Hoffman helplessly watches the wave of profiteering wash over his project to rebuild the neighborhood.
"Properties we think we can acquire today -- snap, snap, snap; they're already gone," he says.
Pittsburgh never had it easy, but until a few years ago it was a place where black families of modest means could buy a home and put down roots. "This neighborhood used to be nice," says Evelyn Campbell, who lives on Ira Street in a house her family has owned for 28 years. Campbell recently tried to help her granddaughter buy the empty house next door, but they couldn't figure out who owned it until it was too late -- CitiMortgage sold it to an investor last year for $9,800. It remains empty.
Sub-prime lending sent the fragile neighborhood into free fall in the mid-2000s. Pittsburgh became a playground for mortgage-fraud schemes that sold properties for many times more than they were really worth -- tiny two-bedroom homes were trading for as much as $250,000 each to straw buyers, borrowers who signed their names to loan papers in exchange for kickbacks. As those mortgages went into foreclosure en masse, tenants renting in the houses found themselves evicted. "It was like we had a toxic waste spill and everyone was gone," says Gail Hayes, manager of the Atlanta Civic Site for the Casey Foundation.
HUD's new Neighborhood Stabilization Program is Washington's answer to the swaths of decimation created by hundreds of thousands of repossessed, empty homes nationwide. Last year, as part of the emergency legislation authorizing the federal takeover of Fannie Mae and Freddie Mac, Congress devoted $3.92 billion to help more than 300 cities, states, and counties buy up vacant foreclosed homes and restore them as part of thriving neighborhoods. (This year's stimulus adds $2 billion more in grants that HUD will award competitively.) This spring, nonprofit developers and entrepreneurs competed for the first round of grants, administered by local and state governments under HUD's Community Development Block Grant program. The Pittsburgh project is one of 19 grantees sharing $12.3 million in funds from the city of Atlanta; county governments in the region are handing out $58 million more.
But the neighborhood-rescue effort by HUD and philanthropies is confounded by the death spasms of a failed mortgage market. Most of Pittsburgh's mortgages were long ago sold off to investment banks that pooled them into mortgage-backed securities, which the banks then sliced up and sold to investors. Each mortgage pool has two caretakers: a trustee that is its legal representative, and a mortgage servicer, a company under contract to collect payments from borrowers and pass them on to bondholders. Servicers also usually have authority to sell off real estate once it goes into foreclosure.
They sell those foreclosures off at prices so puny that speculators are purchasing them by the hundreds, sight unseen. Stonecrest has bought up 86 Atlanta homes, almost all for less than $10,000. Across the country, the company has acquired more than 1,800 foreclosed homes, or REO -- "real-estate owned" -- purchased as is from mortgage servicers, using cash pooled from small investors. Some of Stonecrest's houses end up occupied by un- or underemployed families relocating to inexpensive Atlanta from hostile economies up north, with contracts that promise them deeds at the end of 10 years of monthly on-time payments. It's akin to the Rent-A-Center business model, in which customers end up spending $3,000 in monthly installment payments to eventually own a $500 couch. In the meantime, the prospective owners are responsible for maintaining fragile old structures to which they don't even hold the deeds. Other Stonecrest holdings are destined to remain vacant -- "dump property," in the company's lingo. As Stonecrest advises its investors: "It's best to purchase REO properties in bulk. The potential profits on the sellable properties should easily cover investor losses on the worthless ones."
Another California company, Stone Equity Group, likewise smelled opportunity in Pittsburgh. It buys foreclosed properties for four figures and holds seminars to recruit individual investors, encouraging them to use their retirement funds to buy the houses for around $20,000 apiece. ("Erase retirement poverty" is a company slogan.) Those investors in turn expect to find tenants to live in the houses and ultimately own them, paying $500 down and $500 a month on installment plans.
Lorelei Kolegue, an accountant from Boston, learned about Stone Equity at her real-estate club. This spring she tapped her retirement funds, which had been withering in the stock market, to buy a 647-square-foot taupe cinderblock two-bedroom across the street from the Campbell residence for $19,900. Its lawn is so overgrown there's no path to the front door. A water heater sits in the middle of the kitchen floor -- a sure target for vandals if this place doesn't find an occupant soon. Kolegue has never set foot there. She has entrusted Stone Equity to fix up the house and find a contract buyer on her behalf.
Stone Equity says its contribution is a positive one. After all, the people signing up for its rent-to-own contracts can no longer get mortgages, now that sub-prime lending has vanished. "It's not about making money," says CEO Joshua Host, "but about rebuilding communities to help hard-working families own a home, get out of the foreclosure crisis, help build a middle class."
But buying the tiny house on Ira Street isn't likely to vault a future tenant into the middle class. If a purchaser materializes and diligently makes on-time payments every month for 15 years, the deed will be his or hers for $90,000 -- to a house Stone Equity bought from a Goldman Sachs mortgage pool for $6,900.
Mortgage servicers didn't set out to destroy neighborhoods. Their job description appears innocuous: For a modest fee (roughly a quarter of a percent of the take), they collect monthly payments from mortgage borrowers and pass them along to investors. But a wrecked financial industry has left servicers hungry for cash, as they have to squeeze money where there isn't much left to extract. They're charged with collecting payments from borrowers who can't make them, on property that isn't worth the amount loaned against it, on behalf of lenders who no longer exist. "They have a complete lack of capacity to manage the crisis," says George McCarthy of the Ford Foundation, which has been working on strategies to help neighborhoods weather foreclosures. "Their revenue sources are cut off."
The five biggest mortgage servicers are now run by banks that have received bailouts under the government's Troubled Asset Relief Program, including Wells Fargo, Chase, and Bank of America. But while TARP participants must agree to offer loan modifications to borrowers who can't pay their bills, the institutions have no obligations or even guidance when it comes to real estate that is foreclosed and empty. Servicers are bound only by their contracts with the mortgage-backed securities trusts, which are committed to maximizing returns to investors.
Neighborhood Stabilization Program grant recipients, such as the Pittsburgh partnership, are ill-equipped to compete with cash buyers. Congress ordered them to buy property at a discount from market prices. Yet a servicer that agreed to such a deal could be vulnerable to lawsuits from investors. Groups also have to find sellers who are willing to let them cherry-pick properties in their permitted target areas and to wait for HUD?mandated environmental reviews.
Some TARP institutions have started working with local groups looking to buy foreclosures, seeking to overcome such obstacles. The banks have a stake in making sure real-estate markets recover -- the value of their troubled assets depends on it. But about half of Pittsburgh's real estate is controlled by a distinct breed of servicers specializing in sub-prime mortgages. Litton Loan Servicing handles transactions on mortgages originated by defunct operations such as Fremont, SouthStar, Ownit, and Decision One. At the end of 2008, Litton serviced more than 360,000 mortgages. Florida-based Ocwen manages more than 304,000 sub-prime loans, nearly 56,000 of which are in or near foreclosure. American Home Mortgage Servicing, Inc., picked up the pieces of Option One, Ameriquest, and Argent, totaling 575,000 mortgages.
Sub-prime servicers have long been the target of complaints about excessive fees for late payments -- a major source of revenue. But once a property is in foreclosure, it goes from yielding income to costing a servicer dearly. Servicers must not only hire caretakers to mow lawns and guard houses from vandals, they also have to advance principal and interest payments to investors that the borrower long ago stopped making. A sub-prime pool stocked with unpaid mortgages can cost a servicer millions each month; according to its financial reports, Ocwen's foreclosure-carrying costs jumped by more than two-thirds in the past year, to $174 million.
With their rosters full of junk loans securitized by Wall Street, most such servicers have a strong incentive to get rid of foreclosed real estate as quickly as possible. By selling the properties to speculators in bulk, servicers turn crushing liabilities into instant cash. "The Wall Street assets are just being dumped," says Rob Grossinger, Bank of America's point person for groups buying foreclosures through the Neighborhood Stabilization Program. "Their execution strategy is 'Take what you can get.'"
American Home Mortgage Servicing uses auctions to sell dozens of foreclosures at a time, largely to real-estate speculators operating in multiple cities. Says spokesperson Christine Sullivan, "Sales of REO properties through an auction process have the added benefit of addressing the problem of community blight by getting properties that otherwise may not sell into the possession of owners who are motivated to fix them up and sell them for a profit." Yet such motivation isn't apparent in Pittsburgh, where American Home Mortgage sold a house with smashed windows and a sagging roof to National Asset Management Group, a Las Vegas-based speculator that specializes in flipping properties to other speculators. The house, one of at least 148 the Vegas group has bought from the servicer, sits across the street from Last Chance Church.
"The speculators are back, flipping property," says Mtamanika Youngblood, who's coordinating the Pittsburgh partnership. "Meanwhile, we can't get asset managers to return our calls." The Pittsburgh group will have to engage in some speculation of its own -- quickly buying up properties to get them out of a destructive cycle of selling and reselling. The real revitalization -- repairing and renting the homes -- will have to wait.
Since the federal grants only begin to cover the costs groups will confront as they renovate and repopulate blighted houses, and bank loans can be astoundingly expensive when they're available at all, Youngblood will be getting help from the National Community Stabilization Trust, a collaboration between several national community-development nonprofits. The Ford and MacArthur foundations have put up a combined $53 million to underwrite a loan fund for foreclosure-reclamation efforts. Most pivotally, the trust is brokering access to the mortgage servicers that control the fate of foreclosed real estate. It has worked out standardized agreements that give local nonprofit affiliates first crack at purchasing foreclosures for sale. Servicers can defend these deals to mortgage-securities investors; while they may get less money by selling houses this way, they'll ultimately save much more by not paying for months of maintenance.
The TARP servicers, Fannie Mae, and Freddie Mac have all agreed to offer foreclosures for sale to participating groups. But most sub-prime servicers have not. "That's now a threat for the cities trying to fix up neighborhoods," says Craig Nickerson, president of the National Community Stabilization Trust. "Many of the investors are not fully renovating the property. They're taking key strategic inventory out of the plan" -- that is, the same homes nonprofits need for their block-by-block revitalization efforts. As servicers cut their losses, it's costing neighborhoods dearly.
For all its difficulties, Pittsburgh is one of the fortunate neighborhoods. Tina Arnold wanted to see a Neighborhood Stabilization Program grant come to Lakewood, her neighborhood in southwest Atlanta. She and other neighbors dutifully participated in public reviews as the city developed plans for its federal dollars, and Arnold recently established a group called Sustainable Lakewood to clean up her increasingly derelict neighborhood. But the government money won't be coming here. Like too many communities now besieged with foreclosures, Lakewood has no organization with the necessary real-estate experience, and no outside group has taken an interest.
With a neat hedge out front and handcrafted furniture on the curtained porch, Arnold's blue house looks like a mirage -- a hint of Martha Stewart amid the apocalypse. On her short block of 10 homes, eight are vacant, and the skeletal structures have become targets for abuse. Dumping, arson, drug deals, break-ins -- they're all part of life on Gould Street.
Week after week, this freelance interior decorator cajoles those who still live in Lakewood to grab a garbage bag and start cleaning up what the city of Atlanta has failed to. Arnold's latest vision is an art contest for the most creative sign made of discarded tires -- a way to publicly scold those who would dare to dump here. But she reserves her choicest condemnations for the real-estate speculators who have bought her entire block, like the one who paid HUD $6,600 for a house that now has broken windows and unfastened doors. "Do you live next to an open and vacant house?" she asks, as if the owner is in the room. "What makes you think I want to?!"
Her neighborhood is a monument to property dumping by mortgage servicers. The house just around the bend is the product of a May 2008 fire whose wreckage has never been cleared -- melted siding encloses charred timber and ashes, garnished with fresh garbage. Earlier this year Ocwen sold the property to a Utah investor, in its present state, for $1,000. For a while, a sign out front advertised it for sale by a South Carolina foreclosure investment firm, and Arnold has thought seriously about mailing pictures to the company president's neighbors, with a note: "You know the bad neighborhoods you hear about? He's one of the people who caused it."
If there's any hope for Arnold's forsaken neighborhood, it may have just moved in next door to Ocwen's pyre. Diana Cooper and her son signed an installment-plan contract to buy the small frame home from Stonecrest, loaded their possessions into a van, and drove down from Chicago. Stonecrest bought the house from American Home Mortgage Servicing for $5,576; if Cooper and her son make monthly payments on time for 10 years, the house will be theirs for about $24,000. A retired hospital worker, Cooper used to live in the Ida B. Wells and Cabrini-Green housing projects, which have given way to new private development. "Now people can't afford it," she complains. "It's part of the plan." The Atlanta house seemed like a great deal for two self-employed people looking for new digs. Cooper and her son will have to make whatever repairs are necessary. Because servicers don't have to prove that properties sold at foreclosure auctions comply with building codes, Cooper has no idea what's in store.
But at least the house is occupied. For a place without Neighborhood Stabilization Program money, that's progress. Even areas that did get federal grants are receiving just a fraction of what it would cost to buy, restore, and rent or sell even a modest number of empty properties. Some cities, including Cleveland, Flint, and Youngstown, have so much vacant real estate that they're planning to use much of their federal funding for demolition.
For better or worse, investment companies like Stonecrest, with their relatively deep pockets, may have to become part of the solution to neighborhood blight. "Do not demonize investors," suggests Alan Mallach, a senior fellow at the Brookings Metropolitan Policy Program who has been advising federal grantees around the country. "In most cases it's not a choice between them and a homeowner -- it's a choice between them and long-term vacancy and abandonment."
The federal program isn't just limited by funding inadequate to the scope of the crisis. Some veterans of community development worry that financial institutions are offloading their problems onto groups not equipped for the monumental task. The law obligates grantees to include housing for very low-income people -- a great idea until someone has to finance and manage it. Congress' insistence that homes must sell for less than the cost of their purchase and renovation is also a deterrent to attracting private dollars. And in many stricken areas, there's no clear demand for new housing for rent or for sale, so projects could just shift demand from one distressed neighborhood to another.
HUD is set to award $2 billion more in Neighborhood Stabilization Program grants this winter. But for the federal spending to have an impact, the nonprofits need the same thing the nation's homeowners do: a reliable and deep source of credit. The National Community Stabilization Trust is looking to attract up to $300 million from social investors, yet that's just a fraction of the dollars now flooding into the lucrative speculative market from private loan pools and banks. Even though the servicing divisions of TARP banks agree to unload their foreclosed houses to nonprofits, the banks are not lending funds to nonprofits to fix up the homes -- and likely won't unless their federal overseers make them.
"Even with good leverage, $3.92 billion would do about 90,000 properties nationwide," notes Nickerson of the National Community Stabilization Trust. "Every month in America right now, 90,000 properties go into foreclosure."