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REO & Vacant Properties Strategies for Neighborhood Stabilization September 2010 Features • REO markets and how they operate • Keeping properties occupied despite delinquencies • Stabilizing neighborhoods after foreclosures Research and Commentary from • Nonprofit and municipal practitioners • Federal Reserve, academic, and policy researchers • Private sector partners A Joint Publication of the Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board REO& Vacant Properties Strategies for Neighborhood Stabilization A Joint Publication of the Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board The views expressed here are those of the editors and individual authors and are not necessarily those of the Federal Reserve Banks, the Federal Reserve System, or the authors’ affiliated organizations. ©2010, all rights reserved. Table of Contents Introduction 4 Letter from Presidents Rosengren and Pianalto and Governor Duke 5 About the MORE Initiative 6 Foreword Section I: Research and Analysis The Scope and Nature of the REO Challenge 13 REO Properties, Housing Markets, and the Shadow Inventory by Alan Mallach, Brookings Institution 23 Shuttered Subdivisions: REOs and the Challenges of Neighborhood Stabilization in Suburban Cities by Carolina K. Reid, Federal Reserve Bank of San Francisco 33 Holding or Folding? Foreclosed Property Durations and Sales during the Mortgage Crisis by Dan Immergluck, Georgia Institute of Technology 47 REO and Beyond: The Aftermath of the Foreclosure Crisis in Cuyahoga County, Ohio by Claudia Coulton, Michael Schramm, and April Hirsh, Case Western Reserve University 55 Examining REO Sales and Price Discounts in Massachusetts by Kai-yan Lee, Federal Reserve Bank of Boston 65 Maximizing the Impact of Federal NSP Investments through the Strategic Use of Local Market Data by Ira Goldstein, The Reinvestment Fund 77 Servicing REO Properties: The Servicer’s Role and Incentives by Stergios Theologides, CoreLogic Section II: Solutions Strategies for Dealing with REO and Vacant Properties 89 Acquiring Property for Neighborhood Stabilization: Lessons Learned from the Front Lines by Craig Nickerson, National Community Stabilization Trust 95 REO Disposition and Neighborhood Stabilization: A Servicer’s View by Jay N. Ryan Jr., Fannie Mae 101 Acquiring Privately Held REO Properties with Public Funds: The Case of the Neighborhood Stabilization Program by Harriet Newburger, Federal Reserve Bank of Philadelphia 107 Nonprofit Strategies for Returning REO Properties to Effective Use by Daniel Fleischman 115 Purchasing Properties from REO and Reselling to Existing Occupants: Lessons from the Field on Keeping People in Place by Elyse D. Cherry, Boston Community Capital, and Patricia Hanratty, Aura Mortgage Advisors 123 The Community Asset Preservation Corporation: A New Approach to Community Revitalization by Harold Simon, National Housing Institute 131 Embracing Renting to Accelerate Neighborhood Recovery by Danilo Pelletiere, National Low Income Housing Coalition 141 Cleaning up after the Foreclosure Tsunami: Practices to Address REOs in Northeast Ohio by Frank Ford, Neighborhood Progress, Inc. 145 How Modern Land Banking Can Be Used to Solve REO Acquisition Problems by Thomas J. Fitzpatrick IV, Federal Reserve Bank of Cleveland 151 The Community Reinvestment Act and NSP: A Banker’s Perspective by Mike Griffin, KeyBank Project Team Project Directors and Content Editors Prabal Chakrabarti, Federal Reserve Bank of Boston Matthew Lambert, Federal Reserve Board Mary Helen Petrus, Federal Reserve Bank of Cleveland Managing Editor Anne O’Shaughnessy, Federal Reserve Bank of Cleveland Content Editor Lisa Nelson, Federal Reserve Bank of Cleveland Designer Julie Weinstein, Federal Reserve Bank of Boston Acknowledgments The project team would like to acknowledge the following individuals, whose expertise, insights, and support were critical to the completion of this report: Heidi Furse and Richard Walker of the Federal Reserve Bank of Boston; Ruth Clevenger, Amy Koehnen, and Michele Lachman of the Federal Reserve Bank of Cleveland; and Joseph Firschein and Theresa Stark of the Federal Reserve Board. The team would also like to thank Tammy Edwards, Scott Turner, and Alicia Williams of the Federal Reserve’s Mortgage Outreach and Research Efforts Committee. Cover image: iStockphoto Letter from Presidents Rosengren and Pianalto and Governor Duke Foreclosures are the hard reality of the housing crisis. In 2009 alone, roughly 2.5 million homes received a notice of foreclosure, according to the Mortgage Bankers Association. That represents a nearly 25 percent increase from already-elevated 2008 levels and is far higher than previous years. Given the magnitude of these numbers, the question then becomes how best to help communities, particularly low- and moderate-income communities, where foreclosed properties are concentrated. The purpose of this volume is to shed light on the problem of vacant and abandoned properties in the hands of lenders who have foreclosed but continue to hold them as real-estate-owned (REO) on their books. We have asked a variety of experts to address such questions as • What are the key challenges faced by communities as the REO inventory grows? • What do the data tell us about REO markets? • What incentives influence buyer and seller decision-making? • What strategies guide community, municipal, and nonprofit responses? This collection of work examines field-tested solutions for neighborhood stabilization, such as code enforcement, maintaining occupancy through tenants, and land banking. It reports on ongoing pro- grams such as the federal Neighborhood Stabilization Program and a national “first look” program for community-minded buyers. The volume also examines unintended consequences and proposes new solutions. We are pleased to present this volume as a joint effort of the Federal Reserve Banks of Boston and Cleveland and the Board of Governors that is part of a broader Federal Reserve initiative to address the impacts of foreclosures on individuals and neighborhoods. We hope you find the publication useful and pass on its lessons. Eric Rosengren Sandra Pianalto Elizabeth Duke President & CEO President & CEO Governor Federal Reserve Federal Reserve Federal Reserve Bank of Boston Bank of Cleveland Board of Governors 4 REO and Vacant Properties: Strategies for Neighborhood Stabilization About the MORE Initiative Since the start of the financial crisis, the Federal Reserve System has undertaken a series of unprecedented actions to help stabilize the mortgage and financial markets and promote economic recovery. What is less well known is that the Federal Reserve has also been working to respond to the foreclosure crisis on “Main Street,” leveraging the System’s research, community affairs, and super- vision and regulation functions to support innovative foreclosure prevention and neighborhood stabilization strategies at the local level. In the spring of 2009, the Federal Reserve’s Conference of Presidents embarked on a collaborative effort to bring to bear the substantial expertise and knowl- edge of mortgage markets across the Federal Reserve System. Under the auspices of MORE—the Mortgage Outreach and Research Efforts initiative—the 12 Federal Reserve Banks and the Board of Governors have worked together determinedly, leveraging the System’s expertise to inform and engage policymakers, community organizations, financial institutions, and the public. This publication, REO and Vacant Properties: Strategies for Neighborhood Stabilization, is one of numerous MORE-sponsored projects designed to promulgate best practices and innovative programs for local communities and individuals who are working to improve the conditions of neighborhoods that have been affected by high rates of foreclosure. Information on other MORE projects, including foreclosure toolkits and other valuable information for borrowers and commu- nity organizations, can be found at www.chicagofed.org and the Web sites of each of the Federal Reserve Banks. The MORE initiative demonstrates the Federal Reserve’s commitment to ending the foreclosure crisis and promoting neighborhood recovery. We will continue to use our resources to provide relevant data, research, and outreach in support of individuals and neighborhoods struggling to recover from the housing crisis and the resulting recession. Charles Evans President & CEO Federal Reserve Bank of Chicago Members of the MORE Committee Douglas Evanoff Co-Chair / Chicago Alicia Williams Co-Chair / Chicago Prabal Chakrabarti Boston Matthew Lambert Board of Governors Larry Cordell Philadelphia Andreas Lehnert Board of Governors Tammy Edwards Kansas City Nellie Liang Board of Governors Joseph Firschein Board of Governors Harriet Newburger Philadelphia Scott Frame Atlanta John Olsen San Francisco Frederick Furlong San Francisco Jeff Paul Atlanta Kristopher Gerardi Atlanta James Savage Cleveland Erica Groshen New York Theresa Stark Board of Governors Joy Hoffmann San Francisco Daniel Sullivan Chicago Jacqueline King Minneapolis Douglas Tillett Chicago John Krainer San Francisco Scott Turner San Francisco Richard Walker Boston Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board 5 Foreword Residents of Rust Belt cities harbor dark memories of past economic downturns. In cities like Lawrence, Massachusetts, and Cleveland, Ohio, economic shifts led to significant job losses and disinvestment, along with the related problems that frequently accompany