Ohio’s Foreclosure Crisis
...and one county’s successful intervention
BY JIM ROKAKIS
CUYAHOGA COUNTY TREASURER
Northeast Ohio is in the throes of the greatest housing crisis since the Great Depression. Ohio leads the nation in private mortgage foreclosures and, unfortunately, Cuyahoga County has the highest rate of foreclosures in the state. The statistics are sobering and the increases over the past ten years are best reflected by the following chart.
Ohio Foreclosure Filings (New Filings by Year)
Source: Ohio Supreme Court
Cuyahoga County Foreclosure Filings (New Filings by Year)
Source: Ohio Supreme Court
This is not only a Cleveland crisis. The problem has worked its way into the first ring suburbs of Cuyahoga County and beyond. In fact, the most recent foreclosure research, done by Policy Matters Ohio, has shown the greatest percentage increase in foreclosures in 2006 was in Delaware County, an affluent county north of Columbus, Ohio.
Many experts have said the effect of this crisis has been like Hurricane Katrina for some communities in Ohio. I agree. Thousands of Northeast Ohioans have lost their homes. Vacant homes have overwhelmed many Cleveland neighborhoods, plummeting property values (over 73,000 Cuyahoga County residents objected to their property valuation in the last reappraisal-many citing vacant properties in their neighborhood), and creating a flight out of Cleveland and Cuyahoga County. Indeed, over 50,000 residents have left Cuyahoga County in the past five years alone.
Most of these foreclosures are in the subprime market—loans at a higher interest rate offered to consumers with less than perfect credit. This sector now represents 20 percent of all loans in the country totaling more than 1.2 trillion dollars of outstanding mortgages.
When we hear talk of foreclosures, we often hear the term “predatory lending,” and people often ask me to define that term. Simply put, a predatory loan is a loan that a borrower cannot afford. Not all subprime loans are predatory. The interest rates on fair subprime loans are higher, but they are affordable and made to borrowers who demonstrate the ability to repay the loan. There is a place in the market for subprime loans, but the explosion in foreclosures in this country has been largely the result of predatory loans and questionable lending practices that should have been stopped by federal and state regulators a long time ago.
A MARKET GONE ASTRAY
To understand how we reached this crisis point requires an understanding of the profound changes in the real estate financing market, and how most home mortgages are financed today. The single most important factor was the invention in the 1980s by Lewis Ranieri, a Salomon Brothers executive, of the mortgage backed security, or the collateralized debt obligation (CDO). This device allowed home mortgages to be pooled and sold like bonds to investors. This opened up huge cash reserves for loans—over 8 trillion dollars are held in mortgage backed securities today—which gradually moved local financial institutions out of the home mortgage business.
Nothing demonstrates the changes in this market and the complexity of today’s financing of home mortgages more than the diagrams (on the next page) used at a congressional hearing in April. The first diagram (page 40) shows the old model which is a simple two part transaction between the borrower and the bank. The second model involves the borrower, the mortgage broker, the intermediate bank, the investment trust, the servicer, the rating agency, investors, trustees, and the credit enhancement provider. Think of how difficult it has become for local governments to unravel this chart and these relationships when looking for the responsible party of an abandoned and/or foreclosed home!
With the collapse of the internet market in 2000, Wall Street investors began to search for other less risky avenues for their investment dollars, and that money moved to real estate and mortgage backed securities. The demand for these mortgages, coupled with the patchwork quilt of regulators who were failing to regulate, led to practices unheard of in the past. These included the widespread use of ‘no-document’ loans-where borrowers aren’t required to verify their income (known in the industry as ‘liar loans’), no down payment loans, and loans that failed to escrow taxes and insurance so as to keep monthly payment low.
Most disturbing has been the almost 700 billion dollars worth of subprime adjustable rate mortgages (ARMs) made in 2004 and 2005 known as 2/28 or 3/27 loans. These offer an initial low ‘teaser’ rate which then converts to a much higher rate two years into the loan, and adjusts every six months thereafter, often doubling the size of the payment. Ohio has 24 billion dollars worth of these loans being reset over the next 18 months promising to take an unacceptably high rate of foreclosures even higher.
FORECLOSURE, PREVENTION, EFFORTS
Cuyahoga County established a Foreclosure Prevention Program in March of 2006. This program was established as a result of a meeting held in May of 2005 when over 100 concerned suburban public officials including mayors and council members, and other concerned citizens met, at the request of South Euclid Mayor Georgene Welo, to demand that the county take action on the backlog of foreclosures in their respective communities. Foreclosures were taking over three years to adjudicate by that point, creating eyesores and forcing suburbs to deal with maintenance issues and destabilizing these communities. The county took decisive action to speed up the process through a series of measures and has reduced the time required to process these foreclosures to under one year.
The enormity of this foreclosure problem convinced many of us at the county level that we had to do more. We had to deal with the root causes of foreclosure and prevent them early in the process through intervention and education and by lobbying State and Federal officials for needed legislative changes to reverse these disturbing trends. Through the leadership of County Commissioner Tim Hagan, over one million dollars was raised to create Ohio’s most active foreclosure prevention program.
HOW THE PROGRAM WORKS
All residents facing foreclosure are urged to call 211, the United Way administered help line where initial intake is done by trained counselors. These callers are referred to one of nine counseling agencies in Cuyahoga County where housing counselors conduct face to face interviews in attempt to do a mortgage work out. These agencies include:
1. Cleveland Housing Network
2. Community Housing Solutions
3. Consumer Credit Counseling
4. Consumer Protection Association
5. East Side Organizing Project
6. Housing Advocates
7. Legal Aid Society of Cleveland
8. Neighborhood Housing Services
9. Spanish American Committee
These agencies have had over 4000 county residents referred to them. Over 1500 face to face interviews have been held and over 600 foreclosures have been averted through loan workouts. While we have been encouraged by these efforts, we are sobered by the fact that for every homeowner we save through this program, 20 more foreclosures are filed with the Cuyahoga County Clerk of Courts.
Cuyahoga County has tried to influence as much of the counseling process as possible. Rather than just advise borrowers to seek help on their own, Cuyahoga County provides funding to the individual agencies, initiates marketing efforts, and evaluates agency effectiveness. Taking such an active role in the process, while a laborious and costly process, provides assistance to the borrowing public that can be as effective as possible.
We have learned here that there is NO substitute for early intervention, and it needs to be encouraged. If the buyers ask for help when they are many months into the foreclosure process, it is often too late. There is nothing more unsettling to us than getting a call for help that comes after the foreclosure has occurred and the bank has taken back the property. By then, there is nothing we can do.
Local officials must be at the forefront of the fight to help borrowers keep their homes. Borrowers are struggling for credible help with their home loan situations. The closer they are to defaulting on their mortgage payments, the more at-risk they are to falling prey to scam artists and charlatans who make their living taking advantage of desperate people.
Clearly this is an uphill battle that requires governmental and mortgage industry response. There is more advice for local leaders near the end of this article. But first, an explanation of the action taken by other governmental agencies is required.
STATE RESPONSE
The lack of response by State Government during the Taft Administration is one of the major factors that has led to Ohio having the highest foreclosure rate in the nation. Local communities frustrated by state inaction acted on their own to slow down this runaway train of foreclosures. In 2002 Cleveland, Toledo and Dayton passed their own anti-predatory lending laws that attempted to fashion a municipal response to the foreclosure crisis that had already started to grip the largest cities on Ohio.
Mortgage industry response was swift. Within 60 days the Ohio Legislature passed legislation preempting the right of local communities, citing among other reasons the inability of the banking community to deal with a patchwork quilt of local ordinances and the need for uniformity. The legislature promised to address the grievances of local governments, but didn’t act until 2006 when they passed S.B. 185, a tough bill that, for the first time, brought home mortgage transactions under the protections afforded Ohio’s consumers by the Consumer Sales Practices Act.
In addition, SB 185 created licensure requirements for appraisers, stricter professional requirements for individual loan officers and allowed for increased diligence by the Division of Financial Institutions in how it regulated individual loan officer behavior. SB 185, it seemed, represented the fact that the Ohio legislature recognized the insidious nature of predatory lending, the potential that it had to damage our economy and exactly what had to be done to provide a fix.
This victory for Ohio consumers was short-lived. The lame duck Ohio Legislature, in one of its final acts, passed S.B. 117 which effectively gutted S.B. 185, as well as the rest of the Consumer Sales Practices Act by altering the CSPA’s decades-old language on damages. The part of SB 117 that is relevant here added a provision to the CSPA that placed a limit on a consumer’s “non-economic damages” to $5,000.00. While this is not an insignificant amount of money, it harms Ohio’s CSPA in incalculable ways. Once a supplier (whether they are providing a mortgage loan, or some other consumer good) knows that even the most egregious case will not cost them any more than $5,000.00, the punitive damages (or big verdict) deterrent no longer exists.
Outgoing governor Bob Taft refused to sign the bill into law, because he objected to the alteration to Ohio’s Consumer Law. Instead, he forwarded the bill to the Secretary of State to be filed, believing that to be the end of the matter. Because the bill was passed late in the year, the 10 day period a bill must sit before becoming law without a governor’s signature spilled over into the first day of Governor Ted Strickland’s term of office. Governor Strickland’s first official act was to veto S.B. 117. The legislature promptly sued claiming the veto was illegal. As of the writing of this article, the Ohio Supreme Court has heard oral arguments on the mandamus action filed by the Ohio Legislature and has yet to rule.
Do you have questions or comments for the Statewide Foreclosure Prevention Task Force? Are there interesting circumstances in your community of which they should be aware as they make their decisions?
In Cuyahoga County, contact Treasurer Rokakis’s office at 216-443-7400 or
TREASCOMMENT@cuyahogacounty.us. All others, contact Director of Commerce
Kim Zurz, who is the chair of the task force, at webadmin@com.state.oh.us or
614-466-3636. There is more information available on the Department of Commerce website, at http://www.com.state.oh.us.
Governor Strickland, alarmed by the foreclosure statistics in Ohio, within 30 days of assuming office, convened a statewide taskforce to deal with the crisis and offer solutions. The taskforce is chaired by Director of Commerce Kimberly Zurz, and is comprised of over 20 members of government, the mortgage industry, and consumer groups. They are charged with the responsibility of devising a statewide strategy that will create a statewide network that will be available to all Ohioans to offer housing counseling, offer refinancing options to Ohioans facing foreclosure and attempt to negotiate workout terms with as many of the Wall Street trusts as possible. One of the most difficult challenges facing the task force is going to be to get the trusts to compromise their loans where the loans exceed market value, which is the case in a significant percentage of the loans.
The investment trusts that hold these troubled mortgages are also going to be asked to waive prepayment penalties, legal fees and other associated costs, in an effort to make these mortgages affordable. I have spoken to panels and organizations all over the region and have consistently made the following points:
1.) Wall Street made this mess by allowing these questionable loans to be made;
2.) Government can’t fix this problem. It is too large. (In the estimates of at least one economist Martin Hutchinson, it is a TRILLION dollar problem);
3.) There will be enormous losses as a result of this crisis but the investment trusts can lessen their ‘hit’ by agreeing to refinance these loans at a rate that is affordable and gives the homeowner a chance to make good on the loan.
What is the alternative? Foreclosure, abandonment and often a total loss on their investment.
One major program already announced has been the 100 million dollars in taxable bonds issued by the Ohio Housing Finance Agency (OHFA) to refinance homeowners in bad loans or facing foreclosure. OHFA Director Doug Garver hopes to grow this fund to 300 million dollars or more, depending on the demand for these loans. This is a good first step, but will only provide relief to approximately 3,000 borrowers at the 300 million dollar level, a far cry from the billions of dollars needed to refinance Ohioans in predatory lending. The Federal National Mortgage Association (FNMA), as well as the Federal Home Loan Mortgage Corporation (FMAC), has promised products that will also offer mortgage foreclosure assistance in the form of long term, lower interest mortgages at fixed rates. HUD and FHA have also promised to step into this breach and offer assistance, although the dollar amounts and the form of this assistance has yet to be determined.
Ohio Attorney General, Marc Dann, has also put together a state-wide task force to enforce SB185 through civil and criminal prosecutions. The civil prosecutions will target brokers, appraisers and loan officers who scam victims regarding the terms and conditions of loans. Additionally, the Attorney General will take action against lenders who fail to consider a borrower’s ability to repay the loan and the refinancing of mortgage loans without a net tangible benefit to the borrower. Attorney General Dann’s office is also targeting the practice of coercing or compensating appraisers in order to influence them to inflate their appraisals. Actions in partnership with the Ohio Department of Commerce against brokers, appraisers, and/or loan officers who operate without registration and/or license by the State are also likely.
The Attorney General has also announced that criminal prosecutions in cooperation with local task forces will be undertaken using SB 185 and companion charges of mortgage fraud, theft, tampering with records, and falsification. Charges pursuant to RC 2932.32 (the Ohio RICO Law) which targets an enterprise that engages in a pattern of corrupt activity will also be pursued. Early investigations have uncovered a pattern of organized activity involving appraisers, brokers, title companies and lenders that may be illegal. Mr. Dann’s office will use the resources of its own Bureau of Criminal Investigations (BCI) along with those of county and municipal governments to aggressively prosecute wrongdoers. Joint efforts with Federal Law Enforcement agencies are also being explored.
U.S. Senator Sherrod Brown has co-sponsored, along with Senator Charles Schumer, a bill in the U.S. Senate known as the Borrower’s Protection Act of 2007 which seeks to regulate brokers and loan originators by establishing on behalf of consumers a fiduciary duty and other standards of care. The bill outlines standards for brokers and originators to assess a borrower’s ability to repay a mortgage and holds lenders accountable for brokers and appraisers. This bill is critical since mortgage brokers are involved in more than 70 per cent of all residential real estate transactions, and have largely escaped responsibility for this mortgage meltdown. Similar bills are being considered in the U.S. House.
WHERE DO WE GO FROM HERE?
This is going to be an extremely difficult 24-36 months as the foreclosure rate peaks and we here in Northeast Ohio are left to deal with the fallout of this reckless and irresponsible behavior in the mortgage industry.
First, we must take steps to ensure that the practices that led to this mortgage meltdown are outlawed. If we don’t, greed and corrupt behavior will win out and we will find ourselves in this same predicament again.
Second, the Wall Street finance industry will have to accept its huge losses and urge government and borrowers to save as many homeowners as possible. Our experience is that only a third of those in these risky loans, at best, can be saved. The others represent loans to flippers, con-men and individuals who should have never have qualified for a loan in the first place.
Third, FAA, HUD, FNMA, FMAC, OHFA and others interested in making responsible home ownership possible must continue to seek ways to finance housing for low and moderate income housing. Home ownership may be part of the “American Dream,” but putting people into homes they cannot afford is no dream – it is an illusion.
Lastly, this crisis will flood cities like Cleveland with thousands of vacant properties – many of which will need to be demolished. Cities must find a way to inventory these properties, save those that are worth saving and move quickly on demolition of the rest. Cleveland will spend nine million dollars on demolition this year, but that doesn’t come close to the final bill. Federal and state governments that failed to regulate the abusive practices that led to these vacancies must step into the breach and help fund these demolitions. Failure to do so would only exacerbate an already tragic situation.
OUR LOCAL COMMUNITIES MUST ACT!
Local officials must plan to be involved, even after the State Foreclosure Task Force makes its recommendation to Governor Strickland. The credibility that local government lends to the process that evolves from borrower distress cannot be duplicated. In addition, the more local the fight, the more successful it is likely to be.
On the short list for leaders interested in taking action, must be:
1. Take stock of various counseling agencies that exist in your community and plan to support them.
2. Publish preventative materials that warn borrowers of the pitfalls of improvident borrowing.
3. Devise a system that can warn borrowers as early as possible, such as mailing information to borrowers when the purchase deed is filed, and at preset intervals to warn of refinancing traps.
4. Ramp up efforts to inhibit the various types of fraud that are rampant through out the area, such as home improvement fraud, foreclosure rescue scams, and elder abuse, that indirectly cause rising foreclosures.
5. Develop a deeper understanding of the actual causes of foreclosures in your particular community, and set out to fight each separate cause.
We all must work to avert this crisis for our citizens in Ohio. NEO
