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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 The foreclosure crisis was apparent earlier in the Examining the growth and waning of REO Cleveland area than in many other parts of the property inventories can help communities country. Signs began appearing in the late 1990s understand the forces behind the movement of as foreclosure filings rose steeply, more than quad- REO properties from sheriff ’s sale out of REO; rupling between 1995 and 2007 and peaking it can also help communities strategize relation- above 14,000 in 2007, higher than any county ships with the most significant REO owners. in Ohio.1 Since 2006 alone, one in five homes has been foreclosed on in the hardest-hit areas, In our examination of REO properties and including neighborhoods on the northeast and in partnership with community development southeast sides of the City of Cleveland and in organizations, we use data in three ways: East Cleveland, a municipality bordering it. The growth of subprime lending played a major role • To test and create proxies where data are in the crisis: Studies by local researchers show scarce or unavailable. Data about the current that subprime home-purchase loans had an condition of a property are unavailable and 816 percent higher chance of going into foreclosure would be labor-intensive to create, but U.S. than other loans.2 Subprime lending and fore- Postal Service vacancy data and tax delin- closure did not fall evenly on everyone. In fact, quency data from the County Treasurer can African-Americans held subprime loans two to serve as indicators of the level of productive four times more often than their white coun- ownership of a property after foreclosure. terparts of similar income, leading to high rates • To present a picture of the current landscape of foreclosure and a disproportionate impact of foreclosure and REO properties. This pic- on neighborhoods with high proportions of ture helps community organizations strategize African-American residents.3 rehabilitation efforts and scarce resources around existing neighborhood assets. Timely This article focuses on properties in Cuyahoga data on the status of properties help commu- County, Ohio, home to the City of Cleveland, nities resolve housing issues early on. and uses administrative data from county • To encourage data-driven decision making. agencies to examine property transfers and Together, these data allow us to examine the property value after foreclosure. Though foreclosure and market processes involved our focus is on Cuyahoga County munici- with REO properties and to inform policies palities and Cleveland neighborhoods, some around foreclosures and other property issues. foreclosure-related processes and phenomena are also applicable to the greater Northeast Ohio The Growth of REO Properties region and other weak-market cities across the If a foreclosure does not get resolved by other United States. In addition, we provide examples means, most properties eventually end up at a of the ways that communities have partnered foreclosure sale (called a “sheriff ’s sale” in Ohio). with local researchers, using data to strategize Prior to the current crisis, foreclosed proper- and focus efforts on REO property remediation. ties in Cuyahoga County often went to private Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board 47 Properties leaving buyers (individual homeowners and investors) 10,133, a jump of nearly 600 percent. Figure 1 REO in 2009 on at foreclosure sales. In 2000, private buyers shows that this accumulation occurred initially Cleveland’s east made up 35 percent of the market at these sales. because of the rapid growth in properties enter- side were selling Since 2007, almost all properties coming out ing REO and the concomitant slowing of the for a mere of foreclosure sales enter real-estate-owned, or rate at which properties were sold out of REO. 13 percent of their REO, status. REOs are thus properties owned In fact, the median time that foreclosed proper- 4 estimated previous by banks and lenders as a result of foreclosures ties spent in REO doubled from 2000 to 2007. market value. that ended in unsuccessful attempts to sell them. Since its peak in 2008, the county’s REO inven- tory has declined gradually, probably because of REO properties can be problematic because a slowing of the number coming in from fore- they are often vacant and susceptible to van- closure sales and an increase in the number of dalism and devaluation. It can be difficult for properties leaving REO. Possible reasons for neighbors and others to determine who is these changes in the flow of properties into and responsible for care and maintenance of the out of REO are discussed later in this article. property, since REO owners frequently hire servicers to care for properties. Additionally, Figure 1 also shows the mix of REO inventory municipalities have a hard time discerning who holders. National lenders account for the largest should be held accountable when the property proportion of REO inventory throughout the is in violation of housing codes. study period; their inventories rose more sharply in 2006 and 2007 and dropped more quickly in Cuyahoga County’s inventory of REO prop- 2008 and 2009 than GSEs’ or local banks’ invento- erties has grown rapidly (see figure 1). From ries. National lenders, local lenders, and GSEs all 2004 to 2008, REOs increased from 1,449 to experienced a sharp decline in properties entering Figure 1 Properties Entering and Leaving REO Cuyahoga County Number of properties 12000 Local lenders 10000 Government–sponsored entities National lenders Properties entering REO Properties leaving REO 8000 6000 4000 2000 0 2004 2005 2006 2007 2008 2009 Year (in quarters) Prepared by: Center on Urban Poverty and Community Development, Mandel School of Applied Social Sciences, Case Western Reserve University. Source: NEO CANDO (http://neocando.case.edu), Tabulation of Cuyahoga County Auditor data. 48 REO and Vacant Properties: Strategies for Neighborhood Stabilization Figure 2 Median Percent of Property Value Remaining after Sheriff's Sale Percent of median value remaining 90 80 Suburbs West Side of Cleveland 70 Cuyahoga County City of Cleveland 60 East Side of Cleveland 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 Prepared by: Center on Urban Poverty and Community Development, Mandel School of Applied Social Sciences, Case Western Reserve University. Source: NEO CANDO (http://neocando.case.edu), Tabulation of Cuyahoga County Auditor data. REO from the fourth quarter of 2008 until the But by 2007, post-REO sales prices hit a low second quarter of 2009. GSEs rebounded sharply point relative to their previous estimated mar- in the third and fourth quarters of 2009, while ket value. By 2009, prices had rebounded, national and local lenders’ properties entering but only slightly. Properties leaving REO in REO leveled off. All three types of lenders have 2009 on Cleveland’s east side were selling for seen a decrease in properties leaving REO since a mere 13 percent of their estimated previ- the fourth quarter of 2008. ous market value. In Cuyahoga County and suburban Cleveland, properties selling out of Sales of Distressed REOs REO in 2009 fetched sales prices of 28 per- Dominate Some Areas cent and 37 percent of their estimated market The Cleveland region has numerous areas inun- value, respectively. Though housing prices also dated with vacant, for-sale REO properties. How dropped during this period, this change in itself is their presence affecting housing values? One does not account for all of the value lost after measure compares the selling prices of properties a sheriff ’s sale. Consider that from 2004 to coming out of REO with their estimated market 2009, housing prices in the Cleveland metro- 5 value prior to foreclosure (see figure 2). politan region fell only 11 percent; taking into account the already-low housing prices and the Not surprisingly, properties sold out of REO sheer number of transactions, these post-REO in Cuyahoga County, within the City of sales price figures have disastrous effects on the Cleveland, and in Cleveland’s suburbs are values of neighboring properties not in fore- selling for less than their previous estimated closure and on the tax bases of neighborhoods market value. What is notable now is how much and communities. less than their previous value these properties are selling for. In 2000, properties sold out of REO properties in Cuyahoga County are also REO were purchased for up to 76 percent of increasingly being sold at extremely distressed their pre-foreclosure estimated market value. prices—defined as $10,000 or less—mainly to Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board 49 Figure 3 Percentage of all REO Properties Sold at Extremely Distressed Prices* Cuyahoga County, 2004–2009 Percent of properties 90 80 East side of Cleveland City of Cleveland 70 Cuyahoga County West side of Cleveland 60 East inner suburb Outer suburb 50 West inner suburb 40 30 20 10 0 2004 2005 2006 2007 2008 2009 * An extremely distressed price is $10,000 or less. Prepared by: Center on Urban Poverty and Community Development, Mandel School of Applied Social Sciences, Case Western Reserve University. Source: NEO CANDO (http://neocando.case.edu), Tabulation of Cuyahoga County Auditor data. out-of-state corporations and individuals look- A small number of sellers account for most ing for bargains. As figure 3 shows, 2.6 percent of these distressed sales. An examination of of REO properties were sold at extremely dis- the owners of record for thousands of houses tressed prices in 2004, a share that increased that were sold for $10,000 or less in Cuyahoga 17-fold before peaking in 2008.

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