the subcommittee on domestic policy of the committee on oversight and government reform will now come to order today's hearing will explore the costs to neighborhoods caused by concentrations of vacant and abandoned houses differences between strong housing markets and weaker ones strategies to mitigate the effects of and prevent vacancies and estimates of the size of the national problem without objection the chair and ranking minority member will have five minutes to make opening statements followed by opening statements not to exceed three minutes by any other member who seeks recognition and without objection members and witnesses may have five legislative days to submit a written statement or extraneous materials for the record i would like to remind everyone that under a previous unanimous consent agreement mr turner of ohio was allowed to sit as a member of the su subcommittee on issues related to state and local governments as the former mayor of dayton ohio we welcome him to these proceedings and of course the issue we're exploring today falls under the  categories previously described as chairman of the federalism subcommittee in the previous congress he has great knowledge on these issues and i want to say that we welcome his presence here today as do i welcome the presence of  my colleague from california ambassador watson thank you very much for being here and i would like to thank everyone for their attendance the domestic policy and sub subcommittee of government reform has held three hearings on the effects of foreclosures since two thousand and seven these include a six hour fifteen witness marathon hearing in march two thousand and seven as well as a field hearing in cleveland ohio one of the most foreclosure devastated areas in the country while awareness has grown that the meltdown of subprime lending has been a genuine tragedy for millions of individual borrowers and lenders today's and tomorrow's hearings are about a largely unrecognized deeply suffering and totally blameless victim neighborhoods some foreclosed properties find new buyers many do not when foreclosure leads to vacant and abandoned houses surrounding neighborhoods and local municipalities suffer significant consequences those effects include falling property values of surrounding houses loss of equity held by neighbors in these houses loss of rental units for renters loss of sales to neighborhood merchants rises an increase in crime rising municipal costs in police fire due to vandalism an arson increased demolition and building inspection caused increase legal expenses increased demand on city social service programs and a direct loss of property tax revenues academic researchers have found that the police cause for responding to criminal activity alone twenty seven dollars if the property is subject to arson the cost rises to thirty four thousand one hundred ninety nine dollars the collective cost to neighbors within one hundred fifty foot radius of a block in chicago with a large concentration of vaca properties amount of the two hundred twenty thousand dollars in terms of capital depreciation of their own properties to our knowledge there's no comprehensive cost estimate for the nation but it would surely have to be in the many billions are significant costs borne by people had nothing to do with the transactions that resulted in the subprime mortgage meltdown they weren't the lenders they weren't the investors they weren't the borrowers they were simply the neighbor's renters and taxpayers this carriage has taken a significant step to help the neighbors deal with the problem they're now facing two weeks ago the house passed h r fifty eight eighteen the neighborhood stabilization act of two thousand and eight this bill creates a new federal program to address the effects on neighborhoods caused by the foreclosure crisis the bill authorizes fifteen billion dollars in grants and loans to be spent by localities on a variety of strategies including vacant property acquisition building rehabilitation and to which i had offered clarifying that the purpose of the bill is to address the consequences for neighborhoods of a rise in the level of vacant and abandoned buildings and requiring local governments to target their spending accordingly unfortunately the president issued a veto threat i really can understand this i hope that today's and tomorrow's hearing might do something to change its mind for if we can help the totally innocent neighbors of these vacant properties and they are the innocent victims of the foreclosure crisis then whom should we help now fortunately we have some of the nation's leading experts with us today in tomorrow to help explain the problem the neighborhoods face and help guide a federal response and when i speak of these issues when i hear the witnesses i just want to add a personal note here i started my career in the city of cleveland over forty one years ago i started at the local level at the community level i served in a cleveland city council's many terms and serve the city as mayor i realize that a local level the kind of impact that this foreclosure crisis having when i was a councilman if there was a single house in the ward that was abandoned vacant or boarded up it was a cost to the whole community today in some communities there are hundreds and even maybe over and over thousand we're seeing and just imagine your senior citizens kept taking care of your property for your whole life and the neighborhood around you around you starts to change economically but you still take care of your property and then you get into the sub prime situation we have all these vacant properties all the sudden the equity that you have is your retirement security and it's disappearing this is  a very serious matter that merits the attention of the congress which is why we're having this hearing now but it also is it's good to know that we have members of the house who are going to be involved in  this not just from ohio and california but from new york and buffalo area with my colleague that just joined us congressman hagen so does the gentleman from ohio do you have an opening statement thank you unfortunately it is a very negative picture what you are doing to highlight this issue and to look at solutions and what we can do with the home foreclosure crisis once associated with just ohio and michigan is now being felt across the rest of the country and is also rattling our international markets as these hearings hopefully will demonstrate problems associated with home foreclosures are felt by more than just the people whose homes are foreclosed the most part individual foreclosures  themselves are not a community wide issue it becomes an issue when it community faces multiple home foreclosures and a concentrated area under this scenario the problem if left untreated can turn once thriving neighborhoods into an area blight statistics show that this problem is in compassing both our inner city neighborhoods and suburban neighborhoods alike fixing this problem be easy although increased home foreclosures are a national problem a one size fits all solution is not the answer addressing the foreclosure problem  require a different solution than how we treat the same problem and perhaps another state if we are truly to assist in result in the foreclosure problem that a federal solution must be well thought out with the formula that recognizes that effected need affected areas need more help some than others many communities faced with high foreclosure rates will have an easier time recovering foreclosures in areas where real estate is considered highly marketable when need very little federal assistance on the contrary those with multiple foreclosures and difficulty in resale will see that the process of foreclosure frequently leads to abandonment mr chairman i appreciate your efforts to highlight these problems so she was home foreclosures i look forward to working with you and i have to to give one acknowledgement from my community as we go forward with this  when i served as mayor for the city of dayton commissioner dean lovelace on our commission brought forth the issue of predatory lending and sounded the alarm in our neighborhood what was happening to families that were being subject to foreclosure with a prediction of what would happen in our neighborhoods and ultimately  the prediction of what would happen nationwide and as we've seen failings in our food markets july two thousand and one he pushed forward a predatory lending ordinance which was intended to assist our community both ohio as a state and on the federal level we were very slow to act and i think this is a  real reason why we need to step forward in the many areas to provide assistance to both homeowners and today ber hoods to try to address some of the impacts of foreclosure and mr chairman i just thank you for bringing this forward and highlighting it so we can look at  hearing about the subprime market crisis the market crisis affecting our nation is one of the most pressing domestic issues of the new millennium in california my home state the number of homes that were lost to foreclosure during the first quarter of two thousand and eight surge three hundred and twenty seven percent from two thousand and seven levels in the terms of numbers it means that there were five hundred and seventeen foreclosures every three months if more it's not done to restrain the trend of rising foreclosures i believe congress will find that neighborhoods would significant increases in vacated or abandoned houses neighborhoods would lose value local governments would be overwhelmed with having to deal with increases in crime government infrastructure projects such as schools roads and public safety once the second quarter is finished and it is determined if the economy is in recession or not congress should determine immediately if the problem with the rise in foreclosures is limited to the subprime market or has the problems build into the mainstream home loan market hopefully that will not be the case but if it is we will find that more and more neighborhoods would be affected by concentration of abandon and vacant houses which is not in the best interest of our local communities our our nation as a whole i look forward to hearing the testimony mr chairman of our powerless today and working with my colleagues to help our nation we cover from the foreclosure crisis thank you the city of cleveland and the city council i represent the city of buffalo in the city council as well and much like a lot of areas of the urban northeast these areas were great economic centers through most of the twentieth century and over the past thirty years have declined significantly losing population not only to other areas of the country but also to the surrounding suburban areas the urban cores of the cities where once great they can be great again but fundamentally has to be addressed is the issue of a can in abandoned housing the city of buffalo in the city of buffalo it's a problem that's pervasive in growing the said ministration has withdrawn from its commitment to help urban areas and has an eye legation to retool its efforts to ensure that cities like cleveland cities like buffalo and the great urban centers of the american northeast are restored and that starts and ends with a healthy strong urban environment fundamental to that is the housing stock so i look forward to working with you mr chairman on this issue and i applaud your leadership in that regard i thank the  w who is about to be testifying mr daniel killed is the killed he is the treasurer of genesee county in michigan mr killed initiated the use of michigan's new tax foreclosure law as a tool for community development and neighborhood stabilization he founded the tennessee land bank that was michigan's first land bank and now serves as its chairman and chief executive officer mr killed is also president of the genesee institute a research and training program focusing on urban land reform smart growth and land banking and for those of you who are familiar with the name  kildee yes according to the information we have mr kill the nephew of congressman dale kildee who is one of the highly respected members of our united states congress we welcome you mr kildee the next witness will be ms nancy fluorine for ina's testifying on behalf of the national association of counties the u s conference of mayors the national community development association and the national association of local housing finance agency ms fluorine is a county council member in montgomery county maryland she serves as a member of the council's planning housing and economic development committee previously she has served as the commissioner of maryland national capital park and planning commission she's a member of the montgomery county planning board and a member of the maryland citizen planners association i want to know mr kildee and miss loraine that i policy of the committee on oversight and government reform to swear in all witnesses before they testify i would ask that you rise and raise your right hand only swear to tell the truth the whole truth nothing but the truth thank you very much let the record reflect that the witnesses that each witness answered in the affirmative i would ask that each of the witnesses now give a brief summary of your testimony keep this summary under five minutes and duration keep in mind that your entire statement will be in the record of this hearing and will be available to all the members not only of this committee but in congress mr kildee you're going to be our first witness i want to thank you and i would ask that you proceed with your statement chairman and thank you for for your leadership on this issue you and other members of the committee obviously have helped to bring this this entire issue to the national stage and for those of us that are working in places like flint and dayton and buffalo and other communities across the country that experience significant population loss and decline we appreciate it in fact many of us have been working on this issue for quite some time it's only recently that this mortgage crisis has brought the issue of a can a band properties to a higher level of consciousness so it's it's first of all my hope that the current conversation taking place surrounding the mortgage crisis will lead to more fundamental reforms that value to place a higher value on the urban landscape generally i'm from flint michigan and as you know as the chairman said the home of seven thousand today it's about one hundred fifteen thousand people and so while we have a lot of anxiety about the five or six thousand mortgage foreclosures that are pending in our own community right now we've been dealing with bacon abandoned property for quite some time when we lost forty percent of our population over thirty years those people who left did not take their houses with them and they left behind a landscape that is seriously deteriorated the cost of that abandonment is what concerns us seventy percent of the fires that take place in flint michigan take  abandoned house our fire department in the city of flint has to be three or four times what it would be if that fuel were not out there in the neighborhoods this year we've seen an increase in tax delinquency all of this mortgage meltdown is resulting in higher rates of tax delinquency as well two years ago i had twenty nine million dollars of delinquent taxes in the county last year it was thirty seven million dollars of delinquent taxes and this year there are forty nine million dollars in unpaid taxes in genesee county all of it being exacerbated by the fact that literally thousands of properties held  y lenders or servicers are not paying their taxes in my community about five or six years ago we began the process of getting our arms around this problem by creating a land bank authority and reforming our tax foreclosure procedures we eliminated the somewhat antiquated procedure of selling tax liens to private investors because we saw with tax for closure how negative the liquidation model had become for the urban landscape that old tax lien system is a lot like how mortgage lenders are now disposing of mortgage for closed assets we reformed our process we now as the county treasurer get control of these properties and dispose of them in a way through our land bank authority that considers the long term interests of the neighborhoods of the urban landscape of the private equity that's already in place our fear of course is that while we have made great progress in flint in getting our arms around the problems associated with that first wave of abandonment for example we've taken title to seventy four hundred properties in the last six years into our land bank authority twelve percent of the parcels of land in the city of flint our fear is that while we've done all this work to reform our state and local systems to deal with abandonment this next wave of property is sitting out there heading our way the cost is enormous the costs to local government with the reduction of the tax base and the uncollected taxes that we that we're unable to use to provide basic services occurs at the same time that the conditions in these neighborhoods increase the demand for government services our water and sewer systems are built for a population of two hundred fifty thousand we've got one hundred fifty thousand users paying to maintain that system the stress on local government is enormous and the loss of private equity  those those homeowners in those neighborhoods as the chairman said who pay their mortgage they pay their taxes and they're having the equity that they've invested in that home robbed from them for something that they quite honestly had nothing to do with this is a problem interesting now that places like flint and dayton and buffalo and others cleveland for sure they've been associated with the problem of vacant abandoned property historically this is a problem now being experience in all sorts of cities the concern that i have as the federal response is being developed is that there be some recognition that the older particularly older industrial cities that have been dealing with abandonment for quite some time do not have the strength in the real estate market to absorb five in our case five six seven thousand new abandonments i mean every community that's dealing with mortgage foreclosures obviously are going to have a difficult time the problems in a place like flint where we already have an oversupply in a very weak demand market of a low value housing commodity the problems associated with five thousand new abandonments or five thousand distressed sales coming into our marketplace are frightening what we have to avoid i think in our community as a nation is a situation that could lead to mortgage lenders and servicers essentially privatizing the profit by liquidating the properties that have value and socializing the loss by passing them on to us i just foreclosed on march thirty first through the tax foreclosure system on eleven hundred ninety four proper over three hundred of them had mortgages on them and they're upside down in value those lenders have passed that problem onto us we're willing to accept it but we'd like to accept it with the ability to also go to those same servicers and lenders and say you know there are other assets that you own in our community and we'd like to talk to you about that as well this is a problem that obviously i care deeply about it's a problem that's affecting flint michigan in my own neighborhood and it's one that i look forward to  providing assistance with as you deliberate on this very important subject thank you and i thank the gentleman for a very fluid and comprehensive statement about the underlying economic crises  in urban communities and in cities and of course in your own county genesee with respect to the common effects of the subprime mortgage fiasco i look forward to the testimony of the next witness  i would ask that you proceed and please keep your statement to five minutes or less thank you thank you mr chairman the chairman and members of the subcommittee thank you very much for the opportunity to appear before you today to address the impact of the mortgage crisis on neighborhoods it's a special honor for me to be with former a local elected officials who've been elevated to this position because as you know at the local level that is where the rubber hits the road local officials across the country are pleased that the house of representatives recently passed the neighborhood stabilization act of two thousand and eight providing fifteen billion in urgently needed and grants to help cities urban counties and states deal with the foreclosure crisis that's overtaking the nation this really does recognize the severity of the problem nationally cities and he's a be able to use this funding for the purchase and rehab a can in for close toms it would help stabilize communities by reselling the homes for occupancy as soon as possible we really need this legislation to address the crisis you've heard from mr kill certainly the chairman's comment at the beginning there's very little to add but across the united states this this problem threatens the billions of federal dollars invested in neighborhood revitalization over the years it is a fact that foreclosed homes drive down the value of surrounding properties and the sooner that we solve this problem the less collateral damage will have a depreciating home values this cuts directly to what's the mainstay of local government government revenues property taxes we cannot adequately fund schools and other essential public services if we have a prolonged decline in property values some estimates put the number of foreclosed properties at six hundred thousand or more and the problem is simply too great for counties and cities to tackle on their own due to their own declining tax bases even my camry county maryland right up the road we've not been immune to the housing crisis notice of for closure sales in my county have increase from sixty eight during the first quarter of two thousand and seven to nine hundred eighteen during the first quarter of two thousand and eight increase of twelve hundred fifty percent nothing like mr killed these numbers but nonetheless for us this is huge a total of six hundred eleven notices of mortgage car loan default were issued in our the first quarter compared with one hundred three in the first quarter of two thousand and seven an increase of nearly five hundred percent we're trying to deal with this by participating in the marilyn hope hotline for residents basing foreclosure we've been offering homeownership and foreclosure solutions sessions across the county partnered with the state to provide assistance to residents and contributing money to non profits to provide counseling to homeowners but we're also using our own money matching state contribution to develop a credit enhanced m program to encourage local banks to refund refinance loans for individuals subject to foreclosure who might require special underwriting criteria but like many are local areas across the country  budget shortfalls when a local government is faced with declining revenues it's basically two choices increase tax rates or make cuts in services as many of your staff will tell you a monk army county is looking at the increasing the taxes approach right now and i'm very concerned about how much farther we can go to provide the services our residents need and deserve the neighborhoods are indeed innocent bystanders in the subprime mortgage chaos take more than a local or state remedy to curb the decline the funding provided by h r fifty eight eighteen is timely targeted and temporary will work closely with members of the conference committee as they reconcile the house and senate bills the senate version provides an emergency appropriation of four billion community development block grant funds to be allocated based on a formula to do be developed within sixty days of a nachman will be urging the conferees to one utilize a c d b d program is the program to deliver assistance as in the senate bill with seventy percent of the funds to entitlement cities and urban counties c b d grantees are intimately familiar with that program the funds made available under the bill for the very types of activities that they carry out on a regular basis number two will work with you to provide the funding for closure relief a mitigation be in the form of hants administration three will work with you to permit the funds to be used to assist families with their earnings up to one hundred forty percent of median income with twenty five percent of the funds to be used by households at fifty percent of median we work with you to permit five percent of the funds to be used for the ministry of costs this is consistent with c b d funding made available to respond to hurricanes katrina and rita thank you very much for your favor i thank the general a for testimony i'd like to begin with asking treasurer kill the some questions in some ways you might be the ideal witness to answer this learned is that economics really do matter when it comes to urban land and we cannot allow the governmental systems that are in place to treat property that has significant value with a different set of rules than we treat property that has that  essentially upside down in value the genesee county land bank and our michigan land bank act along with our tax foreclosure reforms address that issue by not allowing the speculator market to pick and choose in this century dis aggregate the inventory that is the subject of our concern in our case and usually it was tax foreclosed properties there are valuable properties that get lost through foreclosure who's come out in the secondary market here with the speculators are is that right right the issue of course for us is we want to approach with the support of the federal government with some strength those lenders and say to them deal with us with your entire inventory don't don't allow the system in place to allow you to essentially liquidate the value that's in those properties for which there may be a speculator market what kind of what kind of  federal or federal assistance or tools would be required by local jurisdiction to strengthen their position the speculators the banks that are involved in the sub prime number one would be to have  efficient public entity that can acquire and then manage and dispose the properties that's critical secondly would be to target the federal support and other available support for acquisition of these properties in a fashion that does allow us to approach the lenders with the opportunity if you want to call it that for us to acquire their entire inventory within our community i think to do this on a regional basis and that's where i think the counties do plays an important role takes advantage of the more diverse real estate market within the region and so the city does not have to centrally get stuck with those properties that are that are underwater in value and not be able to take advantage of whatever retained equity may be out there on those foreclosed assets that are in markets that might be more fight by stepping for the way that you do do you think you can do a better job than traditionally private sector real estate in that you can do a better job with the private sector is doing i think but i i would i would say which private sector because there's all sorts of markets f land and what i am concerned about is that the for profit investor market that really will put property into its best and most productive use is the for profit market that i want to talk to the problem is the systems that we had in place for tax foreclosure in the worry that i have about mortgage foreclosed assets is that we're not talking about a system that delivers these properties to that investor market but to the speculative market the to the capacity of local government or even to the nonprofit sector in a particular community i'm an advocate of public land bank authorities because i think it creates the permanent capacity in a single purpose entity whose job it is to deal with underutilized vacant and abandoned property easy an issue for somebody to avoid unless you have an entity specifically designed for that purpose council member thank you council member florian as you know elaborate well the market that that this has been left to is a market that is many many cases has preyed upon people who cannot afford  situations in which they've been led his particular impact on minority communities in maryland african american homeowners are three times more likely than whites to receive a subprime loan and four times more likely to refinance from a subprime lender are twice as likely as whites to receive a subprime loan and three times more likely to refinance from a subprime lender and those are those are communities of interest that are particularly hit  level what you're doing and taking some of the best practices describing it to others and highlight highlighting some of the issues that you see that need to be resolved and one of the ones that i heard from you as you're talking about i think is that there are some additional discussion is the issue of property becomes a target for foreclosure and that process of foreclosure and oftentimes the resulting property and fix it up and put it back to productive use they were usually highly complex title issues and problems as a result of the financial transactions that resulted in the property being abandoned and in foreclosure and now that we're seeing this massive foreclosure  incident it's just compounding itself and as you mentioned mr kildee a lot of these properties being upside down with the lien values are greater than the property value itself it causes even greater concern i saw there were many properties in our community that when they were going in the process of foreclosure sometimes even the family has left perhaps even going to sale and no one has purchased it perhaps it's gone to share of sale in the bank itself has purchased it but the lack of attention by the lender to the property or maintaining the value of the property had a huge negative impact on the neighborhood and really the future success of that property the lenders obligation largely contractual to the individual that they they had the loan they would have  a lower increase liability to the lender based upon the lender having preserved the asset but beyond that there was no obligation other than just housing code and normal issues of condemnation if it became a threat the you mention the issue of federal funding that can assist in that process but i'd like your your additional thoughts on is that there are things that we should be doing you know obviously that the mortgage industry highly regulated industry the foreclosure process is really a government run process in order to sustain the financial transactions what are your thoughts on what you see of the failure of lenders to step to the plate and some of the things that you might know that communities are doing that makes a difference well lenders secure their financial interest in a property with a mortgage which from our point of view and the way we modeled the created the michigan law is that that mortgage interest is an ownership interest the rights of ownership come with significant responsibility i think i'll probably hear some thoughts from from some of the subsequent panel members certainly alan mallett from the national housing institute we were just talking about this subject that we do need a system that recognizes that if a lender intends to secure its financial interest in property with an ownership interest with that ownership interest comes the responsibility of being a property owner that means that building code violations should be the responsibility of that property owner and i know we've seen certainly in cleveland with the great work that judge pianka has done and certainly in new york other housing court judges that have been willing to hold lenders responsible for that ownership interest to me that's critical  second point that you made initially title it's very important to create local authority to clarify title and this is one of the another sort of a one note johnny on land banks but it's one of the things that land banks can do that michigan land bank allows us to expedite a quiet title procedure on any property that we have interest in in ninety days so number one identifying those owners of interest holding them responsible as owners and then secondly being able to take their interest away from them if they choose not to be responsible property owners whether it's a mortgage lender or the actual occupant of the property the same standard to apply yes  or i think one thing to recall as well is when you have an abandoned property with code enforcement issues because it's been left alone even as the chain of title in it or just a sale is being addressed it sends a message it sends a message to every other property in the community it sets sends a message to the community that well you don't need to try if you're on the  it sends a message to the whole community we don't matter that my community and that is a very difficult thing to turn around as i said in my testimony billions of dollars have been of federal dollars have been spent on neighborhood revitalization to combat that very issue and this just starts it all over again i thank the gentleman i want to know we've been joined by congressman  to credit fairly and in a proper way and access to credit that's designed to benefit the lender in many cases the broker and does not achieve the desired social good and puts the lender in a position the purchaser in the position that they can really never dig their way out of many of these things issues are cultural many of the brokers are not regulated in the way that they should be and th e big issue as i think most people know is that there is no local financial institution interest in the property because of the way that these mortgages get bundled and sold  and who knows people from saudi arabia and upholding holding the credit it is an international market for items that used to be a local service and the local it's out of town investors and honestly other than ohio california massachusetts and new york we don't really want anybody investing in our property the issue for us been this liquidation model that has applied to previously to tax foreclosures and now is being applied to mortgage foreclosures where the properties themselves are not treated as part of somebodies landscape but they're treated as security and some security that is bought and sold in so the concept behind this sort of liquidation approach that we're very worried about ignores the fact that the underlying asset sits next to some family and is a part of the fabric of a community and that is that's problematic and that's why the notion of having local authorities making decisions about the actual disposition of the property to consider the interest of the residents of the local community and the market conditions are i think is a better approach i'm getting ready to hold a   just another comment mr chairman but in california we have a office of consumer affairs and i'm thinking now about getting someone within my legislature to put in a bill that would  the value of the popular will be john and in return for a guaranteed value of the security on that what is your opinion in your respective communities about whether or not lenders will voluntarily participate in that program as opposed to way and this is obviously the legitimate role for a federal support federal intervention for us as the community and i speak for people in flint and i speak for my land bank authority if we can get these properties  without having to purchase them at a price that essentially renders them useless to us we want to get control of these properties we have the capacity to manage them but we can't take them by purchasing them for whatever  the whatever the balance might be on a particular mortgage because in almost all the cases the properties with significant value have mortgage balance as well above what our market will bear so you obviously you put your finger on the problem if i happen to chair the state land bank authority and i purchased one hundred eighty four mortgage foreclosed properties from fannie mae by proposing to them that we buy them for one hundred seventy five dollars each and competed against i'm sure what were more significant cash bids we were able to secure those properties because we have something that other purchasers don't have the ability to manage that that real estate and to do it in a way that reduces the likelihood that more property in the surrounding landscape is going to see its values fall any any company that's going to be in business for more than the next twelve months better be thinking about how the disposition of their current assets is going to affect the remaining assets against which they have mortgages and if they fail to do that they do so at their own peril so thinking about these properties themselves as being the only properties that matter and  the cash return that they might receive on those properties being the only number they need to be concerned with is a is a foolish pennywise pound foolish approach and that's what we're seeing some of them do in the case of fannie mae they saw the light and were willing to work with us congressman i think from the banking perspective of course bankers can tell you but i think it would be my expectation that what i'm told is it's about guidelines clear direction and the ability to move property which is what we all want we want those properties back to occupied by family contributing to the community and the speediest time available if that benefits all players to thank the gentleman from massachusetts thank the panelists the subcommittee will be in contact with you and one of the things that we're going to be looking at subcommittee to my colleague this watching mr charity mr cummings the underlying question that we're moving towards here is that there has been a massive transfer of wealth upwards into the hands of a few taking money or you know away from people in the greatest investments their home taking money away from communities and in some of your remarks mr kildee you got into that i want to thank this we're going to be looking at that further because this is you know bottom line rock bottom issue here this transfer of wealth that's going on it's extraordinary thank you we will be in touch with you lorraine thank you for your testimony for your willingness to answer questions are going to move on to the next panel thank you and as we're moving on to the next hand i want to say how pleased we are to be joined by the congressman from maryland and particularly baltimore congressman elijah cummings who has been a critical part of the work of this subcommittee and looking at all issues that relate to the economy of cities and to the issues that relate to making sure that government is truly functioning for people in the inner city so mr cummings thank you for joining us and we're now going to move to the next panel  we're fortunate to have outstanding witnesses at our second panel i would ask that you be seated we have vicki being who is a professor of law and public policy at new york university school of law she's also also the director of the firman center for real estate nerve and policy research include affordable housing land use and predatory lending research has been published in numerous journals including a two thousand and four article in cityscape entitled impact and housing dr batches moving to her position at the witness table dr betts is the director of the center for community building and neighborhood action at the university of memphis she's over ten years of experience working with community development organizations and agencies for work revolves around sustaining neighborhood housing markets and enhancing quality of life in low to moderate income neighborhoods mr john talmage mr talmage is the president and c e o of social impact und er his leadership that social compact under his leadership social compact performs market research and analysis of inner city neighborhoods throughout the country the goal of this effort is to generate new tools and practices that will contribute innovation in the field of community development prior to joining social compact mr talmage served as the deputy director for economic development for the city of new orleans where the focus of his work was business development i want to thank the witnesses for appearing before the subcommittee today i would ask just to let you know it's our policy to swear in witnesses i would ask that you stand raise your right hand that as in the previous panel each witness give a statement five minutes or less in duration your entire statement will be included in the record of the hearing i am grateful for your presence here and i would ask that  effects of mortgage foreclosures and vacant properties few urban problems have been more vexing or more threatening than the huge number of mortgage foreclosures plaguing our communities to understand better how and whether the government should intervene in this crisis the firman center has undertaken several studies to examine the extra costs that foreclosures impose foreclosures obviously harm the homeowners who are threatened with losing their homes as well as their creditors but if foreclosures also harm third parties such as neighbors the broader community and the renters of the properties that are in foreclosure the justification for government intervention in the crisis becomes all the more compelling to assess the extra effect foreclosures have on neighbors and the broader community we examine the impact that the filing of a foreclosure notice has on the sales prices of nearby properties and to assess the harms foreclosures might impose on renters in buildings going into foreclosure we examine the characteristics of the buildings that were entering foreclosure in two thousand and seven in new york city an estimated how many of those buildings house tenants who would be dislocated bore the four by the foreclosure i will briefly describe our findings on each of those issues our research shows that foreclosures depress the sales prices of nearby properties properties near homes and building entered the foreclosure process on average sell at lower prices than comparable properties in the same neighborhoods that are not near homes in foreclosures foreclosures in new york city are highly concentrated in specific neighborhoods in order to assess the effects that foreclosures had on the neighboring properties we separated new york city's neighborhoods into two groups high exposure neighborhoods in which the median property sold was near properties that were in the  closure process versus low exposure neighborhoods in which the medium home sale was near only one property in the low exposure neighborhoods the sales prices of homes within five hundred feet of just one or two properties for which a foreclosure notice had been filed in the prior twenty four months was almost two percent lower than the prices of similar properties in the same neighborhood but not near a foreclosure sales prices of homes within five hundred feet of or of three to five properties that were in foreclosure were almost three percent lower than the prices of comparable properties that were not near a foreclosure in the high exposure neighborhoods properties again sold for less than comparable properties in the same neighborhood but near fewer recent foreclosures the discount was higher for properties near larger numbers of foreclosures are work accordingly provide strong evidence that neighbors bear significant costs when a homeowner loses his or her property to foreclosure local governments in turn loose tax revenues efforts to help stem the tide of foreclosures and to assist local governments in putting those foreclosed properties back into the hands of responsible families accordingly maybe justified by the extra ill effect that foreclosures have on property values our research also documents that foreclosures have an impact on another group of collateral victims are data on notices of foreclosure filed in two thousand and seven in new york city reveals that sixty percent of the properties going into foreclosure in two thousand and seven were two to four family buildings or multifamily buildings a conservative estimate is that those buildings house at least fifteen thousand renter households if those properties are sold at auction those households will face eviction and will bear the costs and dislocation of finding a new home new york city isn't exceptional in this regard other researchers have also documented that multifamily buildings make up a significant portion of the foreclosures throughout the northeast our results show that foreclosures not only harm the homeowners in creditors involved but also hurt neighboring properties the community itself and the tenants in those buildings whatever the outcome of the debate over the desirability of assisting homeowners facing foreclosure or their creditors therefore there is justification for intervening in the foreclosure crisis to protect those third party who are results reveal are bearing a significant part of the cost of foreclosure thank you thank you for that very significant qualification appreciated is that we proceed thank you mr chairman members of the committee i'm coming from memphis tennessee we're not new york city we're not southern california buffalo cleveland or baltimore to begin my message i want to say that all of our markets are different house bill fifty eight is a good bill because it allows for that flexibility it may not be veto proof if it's not we need something similar and i want to share with you a little bit of our data from memphis to underscore the need for flexibility and also for a funding formula that takes into account flexibility from market to market two points everyone has underscored and i think knows in their gut that the impact of foreclosures on neighborhoods is debilitating i'm going to show some examples secondly the data that we used to underscore a funding formula and terms of what will go to states and how states will distribute money within the states needs to be equitable in terms of regions of the country different kinds of cities different kinds of housing markets and i want to say just a couple of words about the apparent database of choice first american and i think that my colleague mr talmage will follow up on that the debilitating impact of foreclosure to point one we're one of those areas of the country that didn't just get hit our foreclosure rate has been going up slowly  since two thousand in two thousand and seven we had almost twelve thousand foreclosure notifications for a total in that eight year period if over sixty one thousand foreclosure  notifications this is the equivalent of twenty five percent of our single housing stock are single family housing stock and that's where we're hardest hit we don't see what was at present again twenty five percent of our single family housing st subprime lending escalated between two thousand and four and two thousand and five going up from twenty five percent to forty percent of all mortgage loans in shelby county and that includes our suburban area and clearly we're tracking sub prime and foreclosures and the neighborhoods that are hardest hit are hit both by subprime lending and by foreclosures hardest hit areas actually are those areas that we would call middle class neighborhoods middle class neighborhoods with modest priced housing where people moving from lower income neighborhoods are looking for a higher quality of life these are the neighborhoods that are most heavily impacted that are going to have the greatest impact on our tax base in memphis and shelby county and where this kind of intervention can make a difference if we take a triage approach this kind of bill can make a big difference in memphis neighborhoods i'd like to put up a map to please which is the other map the one on the bottom and if you could two min this is memphis and shelby county i'm sometimes asked from folks in the northeast if that's the mississippi river and so i'm going to say yes that is on the left of the map  downtown and the center city area is right there on the river and then radiating north from the river north memphis south is south memphis those are traditional low income areas most of our foreclosure there is driven by high cost refinance loans oftentimes second generation folks who are taking out equity when parents die and that's a different kind of situation that will require different kind of remedy than what we're seeing in what we call the areas of the horseshoe you can see the darker the teal is where our greater number of foreclosures are and in the north arc and the south park in that horseshoe foreclosure driven by subprime lending which we can document is moving out to our suburban area in fact if you see the light or tail color that's a suburban area that's a different animal but it's foreclosure nonetheless and requires the kind of intervention that you're talking about we're doing a neighborhood by neighborhood survey and problem property audit and that will be the next map we're looking at the conditions of foreclosed properties and all of the other properties in the neighborhood for comparison purposes and it's become quite clear that foreclosures are driving blight in these middle class and by middle class we're talking about one hundred twenty thousand dollar houses which are actually quite nice in memphis you know this this is a different market and if these markets go then go memphis and shelby county this is mendenhall a state in mendenhall of states in two thousand and seven the red parcels are the foreclosed parcels in mendenhall estates thousand parcels all single family and this particular neighborhood sixty five foreclosed parcels six point five percent of the single family housing stock fifteen percent of them were vacant when we surveyed them in the last month and in the neighborhood as a whole the other crosshatch parcels are showing signs of neglect when we drill down to look at other vacant properties in this neighborhood we found for the twenty two that we looked at that were in the worst shape they were virtually all foreclosures from two thousand and five and two thousand and six some of them had moved into the investor market others had been vacant the whole time neighborhood stabilization a public problem foreclosure mitigation a private trouble if the two are combined we can begin to move forward just a final note on the first american database when we have compared what's in that database which according to its own documentation covers about fifty percent of the subprime mortgages national when we compared the number of mortgages b database with the home mortgage disclosure act sub prime mortgages were finding that in heavily hit neighborhoods only about twenty five percent of the mortgages seemed to be in the first american database our theory on that is that these are modest mortgages modest neighborhoods and they don't appeal as much to investors in terms of some of these securities instruments  john will be looking at that and if there's a difference of say five seven ten if we compare memphis tennessee to new york city that's going to result in a in a major flaw in the funding formula we want to have to deal with that flaw that is we want this bill we want this bill to be implemented in conclusion thanks for the opportunity to contribute to this discussion and i want to say that our neighborhoods in memphis tennessee depend on it and i'm going to speak for new york city i think the same is there as well thank you i think the general a to mr talmage please proceed with your testimony about that thank you for inviting me because i think this highlights the problems that we have with understanding economic conditions and inner city neighborhoods in the united states that our own work in social compact has found that in your own city of cleveland w attention or understanding of the market conditions of inner city america this has impacted the household level as well as the neighborhood level and recent work in harlem we found that forty percent of addresses don't have credit scores associated with them in the city of san francisco thirty three percent don't and so this lack of absence this lack of information has created a diversity in the commercial lending sector but risks as to prince and the residential and it's based on the same lack of documented information about communities and i just have to say before i talk about the foreclosure issue that while the scope of the hearing certainly is appropriately focused on the impact of foreclosures the scale of the problem extends bill's over to a broader me development challenge around retail what  partnership we're all trying to face every day in peril because the lack of understand we have a neighbor in the neighborhood level in our own work we've had to create a tool that allows us to understand the foreclosure impact because certainly not building will be drawn to these numbers as we begin to propagate them depending on national data we're not going to have the full understanding of what's going on in fruitvale oakland or south central l a or places like  that because of this we've had to create a response where we have partnered with a variety of private sector partners such as poppy advises us and now the ohio first american core logic and university partners to begin to build out our own tools so that we can now assess the market value of every home of the save detroit the foreclosure value of that same home value of that same home the impact on adjacent properties the impact on city taxes and what not and do that in a real time meaning because as of detroit begins to address their own foreclosure issues with their own foreclosure office and whatnot they have to have a dashboard to go to understand what the impact of this problem is and just to sort of put this in perspective when you look at the statistics are being put out there about wayne county which detroit is located and where the center for responsible lending estimates of the impact on every unit in wayne county has been a seven hundred dollar impact the fact of the matter is if you look at the foreclosure data itself fifteen thousand dollar impact and this is not on a two hundred thousand dollars home this is on a sixty thousand dollars home so on average the foreclosure impact has been almost twenty five percent the market conditions for market rate housing the sixty five thousand transactions have been conducted in the last two years has led to a depressed ten percent impact across the board on every single home so that to the extent to the point that the panel has made that this is now spilling over greatly on the adjacent properties on other parts of the market and i think that until we can create the tools that allow us have the scale understanding of what the individual impact is on households and on neighborhoods that we can't create the level playing field and i have to stress that our own work having information to be a place where people stakeholders can come together to understand what the existing conditions are to agree only what that information is is inefficient to try to find lots of other solutions without having that common understanding what neighborhood conditions are and so i think that the kind of tools we're talking about phyllis is talking about that others will talk about create the existing conditions that we can all agree on and then we can build solutions from that thank you for i think the gentleman we're going to move to questions now to talk about the appropriateness of federal intervention progress or being you've stated that there's justification for intervening in that i think you said directly to protect neighbors tenants  communities as you may know ever there is opposition to federal intervention on the grounds that intervening creates a moral hazard in your opinion does the specter of a moral hazard arise in a federal intervention help neighbors and if it does what are your thoughts about it could you bring to make sure that john and bring closure i'm sorry the problem of moral hazard usually you know is considered to be the situation where a decision maker is able to escape the costs of some of their decision and therefore make take riskier options  right neighbors of these properties the tenants of these properties in the community weren't involved in the decision whether or not to take out this loan or whether or not to grant this long right so they're suffering from extreme ill effects or are suffering from costs that they had nothing to do with now i'm not saying that moral hazard won't in some way affect the future decisions of those people i mean if a neighbor sees you know one of their neighbors being rescued in some sense then they may make more risky decisions but you're trying to balance here the problem of these extra ill effects being imposed upon people who are part of the decision which is the classic reason that we always support government intervention right and you're trying to balance that very real need to protect those third parties who weren't part of the decision against the moral hazard that that may be involved down the road and  for closure driven blight will not be reversed by a market correction that foreclosure driven blight is a public issue requiring public policy interventions as as you know the administration seems to be strike that this is to view for the moment what is your view is the future of neighborhoods distressed by the subprime mortgage meltdown if they have only the market to correct their problems and no federal intervention i think one of the witnesses earlier was talking about how some properties can be really integrated into housing stock by the market and typically those are going to be the more valuable properties i'd like to connect that with the discussion here of moral hazard in that the brokerage system of independent mortgage brokers and independent mortgage companies that part of a dysfunctional mortgage market  highly fraught with moral hazard the absence of fiduciary responsibilities on part of brokers with their clients and so on that form of market failure is in fact what  are at at this point in time such that an intervention that can make a difference in neighborhoods that are on the cusp and intervention that could help revitalize some neighborhoods that are closer this isn't a public policy issue i want to go back to professor you have found that the amount of decrease in housing that can be attributed to the foreclosure of neighboring property according to the concentration of varies according to the concentration of foreclosures for the record will you explain to the subcommittee the difference between looking at the concentration on one hand versus the number of foreclosures on the other well you have to really look at both because obviously a neighborhood that's affected by tremendous concentration of foreclosures is destroyed right i mean it's it's very seriously impacted but in terms of figuring out the overall effect of foreclosures you also have to look at the number of properties that are being affected so think of it as if you have one hundred foreclosures all concentrated in one neighborhood versus  hundred foreclosure spread out throughout the city right the hundred foreclosures that are spread out throughout the city might in fact have a greater overall dollar cost because they're near more properties they're driving down the values of more property so you really have to look at both the question of concentration and the total number affected by the foreclosures just a final follow up question in the research that you've been involved in shows that the depression of housing values increases as the number of foreclosed property in close proximity increases would be typical that in a given county or metropolitan statistical area or state you would find certain neighborhoods that have higher concentrations of foreclosures in others or is it typical that you year half of the foreclosures were in just nine of those neighborhoods they're very highly concentrated and the neighborhoods in which they are concentrated are the ones that have high rates of subprime lending high rates of people of color both blacks and hispanics high rates of other kinds of risky lending so they're not evenly spread they're very concentrated according to race and geography thank you very much i'm going to go to congress who watch and just really quickly thank duration that a property remains in that we see in this one over to the fis well the main factor that affects whether a property goes becomes vacant is the strength of the housing market right where you've got hot markets strong strong demand then the property will be purchased or rented out you know fairly quickly so the strength of the property market is really the main determinant but other things that will come into play is but again the concentration it's likely that the concentration of other foreclosed properties will affect it because they add to the housing supply right they make many more houses be available to the purchaser who's looking so that may  affect the propensity of a property to actually go into vacancy in terms of how long they stay in vacancy is get it's going to be the strength of the property market which is going to depend upon things like the supply of the housing what's going on in the broader market so it really depends very strongly on the state of the market and of course those things are related the more foreclosures the more risk that the market is going  looking at at least a half hour maybe forty minutes so why don't we generally try to be back here by twenty after four and then we'll proceed with another round of questioning from the witnesses in a second panel then we'll go to the next panel i just want to what you think about this though in this break that work that's coming up again i want i would like to have further discussion about this idea of the wealthy accelerating upwards there is a massive transfer of wealth going out somebody is making a lot of money here already already made a lot of money you know we could we could be looking all the way up the hedge funds and but the as is usually the case on capitol hill there's always a number of things going on simultaneously members will have transcripts of these hearings so they can follow them we're going to proceed with another round committee will come to order i would like to go back to professor b and you stated that there are differences between the effects of foreclosures and vacant buildings and hot markets versus core markets what do you support differences between foreclosures and vacant properties occurring in one market or the other and in what ways should federal intervention diff for those so called harbor school markets and you think the amount of capital basis should be any different for a market versus cool market is we could start stop start by defining terms your market a hot market is is one in which property prices are generally appreciating or at least stable but generally it's considered the property prices are appreciating the difference between the hot market and cold market in terms of foreclosures is that if the market is hot if you can turn around and sell your property when you  win a borrower goes into distress can't afford the loan has some you know personal crisis that makes them unable to afford the loan they can usually sell the property and walk away without going into foreclosure or risking their credit rating in that kind of thing if it's a cold market and there's no market for the property then they don't have that option and so they may very well been in foreclosure because they can't sell the property so the other difference between hot markets and in cold markets is that once property does go into foreclosure in a hot market it's less likely to sit vacant for a long time because the bank is going to be able to sell it there's going to be a buyer at auction or there's going to be what we call a short sale you think there's any difference to those markets be treated differently in terms of providing any kind of intervention well i don't think so i think you have to be very careful there for a couple of reasons one is that you have impacts from foreclosures on neighboring properties even in hot markets i mean the research that i reported was in new york city new york city have been knock on wood a very hot market up until now but you still see impacts of foreclosures and that's because even though a property isn't remaining vacant org or going through the entire foreclosure process the maintenance is still often lowered the stability of the neighborhood is lower so it still has an it sends a message thank you talmage you've done a lot of work in detroit cleveland among other places there are there's a long suffering locations were rising have been a problem has the fact that these cities have preexisting vacancy decrease has changed much more rapidly than other places such as cities on the east coast how would foreclosures that occurred let's say in two thousand or a little later show up that led the m s a in the number of transactions for the last five years me that the number of home sales that were being transacted was the highest rate of any of the surrounding communities the number of new housing anything we could have forecasted today so you see a velocity trend occurring that we haven't seen the bottom yet professor being i think i remember in your discussion and maybe missed out into it as well the greatest amount of sub prime loans went into areas that have been primarily already african american in many cities like in my city of cleveland we've seen other counties similarly situated perhaps in communities that you talked about shelby county go back a little bit thirty years ago or a little bit longer president carter saw the community reinvestment act come forward affirmative obligation on the part of lending institutions to lend money into communities that had previously been denied credit or been readline is it in any anyone here regulated in a different way the local retail banks have been able to stick with the most lucrative business locally and basically have not been held accountable  for the kind of lending neighborhood to neighborhood that was originally envisioned by by the community reinvestment act the breach was failed by this other set of lenders and some of us in fact talk about predatory greenline it was on them and who cares what happens afterwards i mean at some point somebody did that at some point and we're going to keep tracking that in this committee what i'd like to do and i'd like members of the panel if you find an area that  looking at in the communities that you worked with or that you study we'd appreciate any kind of amendment to your testimony that we could include in what you've already contributed which has been pretty significant mr attorney did you a of the facts you want to think about the neighborhood and unit that maps on him perfectly but maps on best is typically a census track now you don't always have data by a census track and then you tend to go up to a zip code level and then to a county level but you really want to start at the neighborhood in the neighborhoods across a city are very very different so if you look at a city as a whole or a county as a whole you're going to miss a lot of variation in what it is that those neighborhoods ne think we just want to put something on the record it's somewhat simplistic to all of us and if we want to bring these things down to the values laid down to the level of the neighborhood pocketbook on this if the neighborhood equity in a house that was about twenty percent of value and then  we've seen what that looks like it looks like the bronx in the seventy's where you have neighborhoods that are pockmarked by a mad abandoned buildings and it's very hard to get that neighborhood back together the second major societal consequence is that these are neighborhoods that during the eighty's in the ninety's and this decade we've poured massive amounts of city state and federal investments in and that's going to be lost that's taxpayers money that you know is going to be lost and it's not just government money but it's private investment it's foundation investment that's all being wiped out with the gentleman you you know in connection with that this is a very significant part of our discussion because i go back to my own neighborhood my own district in cleveland and for example there's an area called for city park there were several parks in the community and you can see when there's a decline in the residential housing stock the infrastructure the public infrastructure experiences a similar decline so there is a lot of value and you can actually see it and that's something that when we talk about the transfer of wealth that's a that the value of the strip in detroit was about a billion dollars do you have an estimate of what you think it is nationwide now but we have a methodology to get to that thank you very much i  electricity telecommunications that's all there if people are if no one if there's a substantial decrease in a population area because of foreclosures there is a loss of revenue to those companies and also infrastructure can deteriorate as well and which requires greater repairs and you could you can see the damage when you go to some of these communities so it can be a public loss of revenue which you the qualification that you bring to this discussion extremely important and it's going to be very useful as this committee continues to go further we're going to dismiss the second panel thanks for the subcommittee and call the next panel forward thank you very much thank you  panel's taking its place we're fortunate to have outstanding witnesses on our third panel we have mr allen malik is the senior fellow at the national housing institute his work focuses on housing and community development policy issues including vacant and abandoned property issues housing investment strategies market based urban regeneration in two thousand and six mr mallock published a book on abandoned property strategies and titled bringing buildings back turning abandoned properties into community assets mr doug leeper is the code enforcement manager for the city of chula vista california he's owner of the code enforcement solutions consulting firm over the course of his career mr leeper has supervised the enforcement of thirty thousand cases eleven hundred warranted abatements and two hundred seventy five warranted demolitions mr dean baker is the director of the center for economic and policy research has previously worked as a senior economist at the economic policy institute and assistant professor at bucknell university dr baker is off numerous books and articles including his recent publication entitled the united states since nineteen eighty dr baker and his ph d in economics from the university of michigan i want to thank the witnesses for appearing in front of the subcommittee today it's the policy of the committee on oversight and government reform swear in all witnesses before they testify please rise and raise your right hand do you solemnly swear the testimony that you're about to give is the truth the whole truth and nothing but thank you very much gentlemen let the record reflect that the witnesses have answered in the affirmative and i would ask as in previous panels that each witness give an oral sex testimony a summary of your testimony keep the summary under five minutes in duration please keep in mind that your complete written statement will be included in airing record so we won't miss a word of what you have to tell us mr mallock if you'd like to start and please pull that microphone close so we can h which are so often overlooked i'd like to suggest that tackling this issue really requires two separate types of action one is to enable capable local governments and nonprofits to get control of properties so they can be properly maintained and properly used but the other part is actions to minimize the harm that vacant properties do while they're vacant beef and before they can be re used and i'd like to touch on both of these very quickly every city town county in this country has the ability to minimize harm from vacant properties through its code enforcement and nuisance abatement resources at every state gives communities power in these areas but many communities don't do this for a number of reasons one they lack the resources for effective code enforcement secondly their program or poorly organized or ineffective th for financial or other reasons they're unwilling to use their powers particularly to step in where the owners will maintain their properties and the foreclosure issue is added a fourth problem which i think a previous speaker alluded to which is this extended period of limbo where nobody is responsible and while i know chula vista has attacked this issue in most parts of the country it's not being addressed because there is no law no body of law that clearly makes lenders who have initiated foreclosures take on the responsibility for properties if the borrower has vacated the property and without this in many states which have judicial foreclosure process ease the process can take anything from nine months to over two years from the point where the foreclosure starts till the point where title actually passes and during this period these properties typically fall in limbo there are abandoned they deteriorate and by the time that title passes if it ever does pass which in many cases is not the case because in some communities and i know this happens in cleveland lenders will initiate the foreclosure but may not aggressively pursue it and the property will sit in limbo essentially forever so cities need help in developing the ability to enforce their codes to undertake nuisance abatements to go after the people who are responsible and hold them accountable and this is something where the federal government is not going to be able to do it but a very small amount of money directed at building local capacity and helping them in this area could reap enormous dividends in terms of helping to mitigate harm the so can there isa is a question of controlling the properties and here i would differ from a previous speaker with respect to the weak market versus strong market or hot versus cold issues in hot markets first if a property goes into foreclosure in palo alto or scarsdale new york the lender is going to make sure that it maintains its value and once title passes the odds are it will go very quickly into the hands of an of a responsible buyer there really is less need for money to acquire properties on the part of the public sector or the nonprofit sector where there is a strong market environment in cleveland in detroit in buffalo the lenders are not doing that the properties are going into limbo and money is needed resources are needed to acquire those properties if they're not going to continue to do harm community so i think there is a significant difference in that respect between hot markets and cold markets but i think the other issue is that money is not the only issue yes local governments nonprofits need money to acquire properties but at this point in many cities the capacity both to acquire maintain manage and dispose of properties responsibly simply does not exist if you gave money in many cities they would not be able to spend it responsibly a second or third issue rather which is equally important is getting the people who control these properties to the table to my knowledge at this point while there have been a few transactions around the country where vendors or servicers have sold small bundles of properties after they've taken title to nonprofits or local governments like the michigan state land bank i don't think there's been a single case where a local government or a nonprofit has successfully negotiated the sale of paper the mortgages prior to foreclosure with a lender and yet if you wait to the point when it's an aria or real estate owned property and then only then start negotiating the odds are that the property will have significantly deteriorated a recent national survey of realtors found that over fifty percent of the oreo properties that got into the hands of realtors had already suffered significant property damage and this is a cross section of not just of the cleveland's in detroit's but of the las vegas's in the palo alto as in the san diego's so unless we can figure out a way or put it differently congress can figure out a way to motivate lenders servicers the people in the financial industry to negotiate seriously and responsibly with people who will take the paper and take responsibility for these properties we will see this problem continue to mushroom and again and this goes also the question of how resources  allocated this is this is not an issue that is even for all foreclosures all foreclosures are bad but foreclosures in las vegas ultimately will be resolved by the economic growth in the job growth in the las vegas area foreclosures in dayton or buffalo will not be so again thank you for your attention and i hope that this is useful you very much properties ordinance they can property registration ordinances are nothing new and have been existing in some cities for decades that you list ordinance had a slightly different reason and focus the black hole or the limbo we've spoke of before between default and foreclosure sale when in many cases the home sits empty the borrowers are gone and the lender won't take responsibility for it this is the period of time when a great deal of damage can and deterioration can occur although the lenders claim they have no rights to the property prior to the actual foreclosure sale we found the opposite to be true this truth came in the way of a standard clause within the mortgage contract commonly referred to as the abandonment and waste cla simply put the clause allows lenders to secure and maintain property against desolate vandalism theft and waste the borrower stops making payments and moves out in short they abandon the property lenders don't like to exercise this right and in many cases won't admit that it exists the chula vista ordinance nicknamed the good neighbor ordinance simply requires the lenders to secure and maintain their investment which in turn help stabilize the ne surrounding neighborhood in short be a good neighbor after all what would they want done if it was across the street from their house or next door to their child's school they would want to maintain to the neighborhood standard that's what our ordinance requires security and maintenance to the neighborhood standards as the committee is aware a law without consequence is merely words on paper the consequences for violation of the chula vista ordinance range from criminal prosecution not feasible in most cases fines or abatement chillis to did not budget for becoming the gardener and property manager for the two thousand plus vacant abandoned properties we have now and with the downturn in the economy whatever we're calling it we don't have the means to do it now our single best option to gain the attention of the lenders was monetary fines and penalties because it couldn't force manager my bottom line is people quality of life neighborhood livability the lenders bottom line is dollars so until that became more expensive for them to ignore us than to properly maintain their properties they continued to ignore us early on we were informed by the lending industry that we couldn't pass such a law and that they would adhere to it registrations were slow at first but with the first round of penalties ranging from three thousand to ten thousand dollars per property lenders soon acknowledged that the city of chula vista meant business currently there are approximately four hundred fifty properties registered to a vista most are in compliance with an in with the neighborhood standard and are posted will require posting of the name and phone number of a local contractor responsible for the upkeep of the property so neighbors don't have to rely on the city to call they can call directly to the responsible party if there's a problem with the property unfortunately the rate of foreclosures and vacant properties has accelerated past six a day but our staffing remains the same i was forced to realign resources and suspended forstmann on other important issues to address the disgrace of abandoned properties and if it continues at this rate i'll have to do it again leaving other issues unaddressed one of the reasons these are difficult to deal with is the research required to track down the current beneficiary of the mortgage these notes rarely stay with the party of issuance they are bought sold and traded like baseball cards rarely if ever does the new beneficiary be the lender a mortgage company a trust or security record their newfound interest in the property this leaves the local jurisdictions grasping at straws in an attempt to locate someone anyone that will t holding an interest in the property one of our first problem properties came by way of a thirty thousand dollars fine for noncompliance while the initiator the originator of the loan argued with the ada to they sold it with as to who was responsible the property set vacant and vandalize for three months before they finally decided they then spent sixteen thousand dollars to bring the property in compliance and asked that i waive their fines and penalties i did not do in part to its new as ordinates receive some press and attention from other cities almost two hundred cities throughout the nation the california state assembly is considering passing legislation based on two of this does ordinance the cost to local jurisdictions from this foreclosure fallout is near in do homeowners dues go unpaid in services go on and on like when taxes reduced property taxes increased calls for service through theft vandalism fraud an arson increased insurance rates for neighbors reduction  and other city services and displaced renters was recently contacted by a young lady by the name of esther who was in a panic there was a default notice on her door she was very upset because her husband is currently deployed to the united states navy and she didn't know what to do we were able to get her in touch with the lender that holds the note but all the while the landlord has been cashing their checks the u s conference of mayors department of housing and urban development and the mortgage bankers association all agree that one of these vacant abandoned and maintained homes can have a negative in financial impact for other homes within an eighth of a mile what will be the impact of to be of ten thirty  these impacts are not only financial but are also emotional as the american dream turns into a neighborhood nightmare as brand new neighborhoods slip into blighted ghost towns as other existing neighborhoods that sob redevelopment as a light at the end of the tunnel find that that light is now the train of foreclosures and abandoned properties i can't tell you the cost of my city not yet anyway i do know the problem is beyond my sleepy little san diego suburb it's national red states and blue i've heard estimates that we as a nation may see as many as two million to three million foreclosures that's equal to every single family home in the state of missouri or at a rate of three point seven five people per home that's the entire population of georgia by all means the best answer is to keep as many borrowers better stated homeowners who occupy the homes in their homes as possible short of that it will be left to the local jurisdictions to fight the war against vacant abandoned properties and as any battle requires weapons like chula vista and troops on the ground which none of us at least none of the cities i've talked to are prepared for thank you i thank the gentleman for his testimony mr baker thank you thank you chairman consentual i appreciate the opportunity to address the committee i'm going to take a little different tack and i think most of the other witnesses have in the sense that what i want to talk about is a concrete measure that i think would directly affect the amount of foreclosures the number of foreclosures we're seeing by simply changing the rules on foreclosure and the essence of this is actually i call this a known to run concept that we give people facing foreclosure the option to stay in their home as a long term tenant and a version of this is actually introduced just today by represent a privia in the form of the saving family homes act of two thousand and eight and i'd argue that this is in effect the most effective way of a lable to congress to stem the looming foreclosure crisis the basic concept is very simple we simply put in a clause that at least temporarily changes the foreclosure rate laws so that we set a date to believe in the law it's july of last year july of two thousand and seven mortgages issued prior to july two thousand and seven if they go into foreclosure the homeowner would have the option to stay in their home as a tenant paying the fair market rent and this would be very carefully targeted it would only apply to occupants of homes that sold for less than the median price in the area at the time the homes purchases and also only apply to owner occupied homes and one of the nice aspects of this is that that owner occupied clause we know this is frequently exploited very often people are not always honest in claiming that their owner occupants in this case really will not do you any good you are only going to benefit if you actually are in fact an owner occupant otherwise the right to stay there is a tenant is not really worth anything so in that sense it's a very nicely done very nicely targeted measure the other aspects of it it requires an appraisal of the fair market rent this also  easily done we have a well developed appraisal system for for sale prices you would simply do the same determining what the market rent for a house would be and that would in turn be adjusted by the consumer price index which is readily available each year from the  statistics it also has a very nice feature it requires no tax dollars we don't have to go running around trying to take money from programs for low income tenants it requires no tax dollars it doesn't require any government money to fund it it requires everything is already in place it's simply part of the foreclosure structure we don't have to set up a new bureaucracy and that also means that it could be implemented without delay we don't have to you know put this in place and then wait for three months six months to make sure that we have the administrative apparatus to deal with it as soon as congress would pass the law it could immediately take effect now the benefits i think are very direct and very clear first and foremost obviously matures housing security that in the event you have a home owner that likes their home they like the schools they like the neighborhood they have the option to stay there as a tenet it also means that the house doesn't go vacant obviously they're staying there so we don't have the problem of vacant property being stripped being vandalized being used as a crack house you know  have already been raised we don't have that problem also and i think this is a very important perhaps the most important part is i actually think it will secure homeownership because the point here is you make foreclosure a much less attractive option for the lender they can't simply throw the person out on the street they're stuck with the tenant for long period of time recognizing that this is a much less attraction option attractive option the lender is far more likely to sit down and try to negotiate terms with the homeowner that will keep them in the house as a homeowner which i think is everyone's first best solution and this in effect put some muscle behind the exportations that president bush and others have made urging lenders to do just that so i argue that in many ways this sort of accomplish exactly what we want is a very well targeted and costly measure let me answer one objection because i've discussed this with many economists and the objection that most often has been raised and i mention one economist in particular raised that a few weeks ago when we were testifying together larry summers the former treasury secretary complained that he thought it was good this would be the best way to keep people in their home but he objected because he felt this would interfere with the sanctity of contract and what i just say and that is that i view the same today a contract also as being very important but i will note that there are certainly times where congress has felt it was appropriate to override concerns about sanctity of contract and the most obvious case that i could mention in the recent past was that when they recently changed the bankruptcy law they chose to apply that retroactively to debt to debt that was incurred under a preexisting bankruptcy law so in that particular case in the case where we change the law in a way that was adverse to creditors congress apparently was not concerned about the same today of contract so i would the that need not be you know an overriding concern an important concern but need not be overriding concern lastly just in commenting on this i have talked about this around washington around the country a fair bit and i point out that this is actually an idea that attracted a lot of bipartisan support some of the strongest proponents are actually fairly conservative republicans i mentioned doesn't lockman was a fellow at the american enterprise institute has been a very strong proponent of this proposal another person of some who was a top economist in president bush's administration again was a very strong proponent we in fact coauthored a column on it advocating this sort of solution so just to sum up i think that in principle we can do something here that offers us a very very quick very cost less very bureaucracy free way of dealing with the most immediate and worst effects of this problem so i'll conclude my testimony there just to want to add i would very much welcome the opportunity address the question you raised with other witnesses about moral hazard i think that's an interesting some things you may find interesting on that topic thank you very much dr baker go to questions of the panel i'd like to begin with a discussion with mr lieber about property maintenance your city is holding the lenders responsible for upkeep of vacant properties i think people subcommittee would be interested how does the city of chula vista hold wells fargo for example a forty eight billion dollar company number forty one on the fortune five hundred how do you hold them accountable my father told me that money talks all mine says goodbye there's another part of that  that's true and we don't walk i have contacts and wells fargo now that i can call directly when we find a property the hardest part is finding who owns the note now but once we find it it that wells fargo home this note i have an e mail address and direct phone number now to someone in des moines iowa where their problem property division is that has had shown such interest that they've actually flown out to chula vista to look at our city and really what the i keeping up with the problem with this ordinance we were initially it has gone to where i have to add staff now take them off of other items that are as important but do municipalities need additional funding for code enforcement in a word yes this is one of those issues that relates to hide and we in the past we had a general revenue sharing that cities could then draw from and determine what their needs were and be able to play money accordingly but if you would you agree that if cities are going to be empowered to deal effectively if i could add to that up first i agree one hundred percent i think they do need additional resources but they also and i i think is particularly the case in the older cities in the midwest in the northeast they also need enforcement departments to organize their work so they're not complaint driven but systematic their ability to use the kind of technology that increases their efficiency and gets away from creating mounds of paper that typically get lost federal government have any role in that at all they could well i'll say two things one certainly financial help could be done the other thing and i know the federal government has done this in the past in other areas is condition other assistance on getting your local house in order so that you have to have a properly functioning code enforcement and nuisance abatement operation in order say to be eligible for property acquisition or demolition money what about incentives required in dealing with the real estate industry part and what about incentives that may be required in dealing with the real estate industry are you concerned about creating a moral hazard and would you characterize what you know any aspect of what we're talking about here is being a bailout i i am very concerned about a moral hazard issue there and i find myself very much torn because i think unless and this has to be done i think at the national level  define for people who may have just joined us what you mean by moral hazard moral hazard is essentially where you bail out somebody who has misbehaved and thereby give the rest of the universe encouragement to similarly misbehave in anticipation that they do give us any well again suppose if it is an extreme case suppose that the federal government offered to buy out people's mortgages that are now underwater at one hundred cents on the dollar that would send a message to everybody involved in the financial world that they could conduct their business the way the subprime in the has done so for the past eight or ten years and get away and the federal government would bail them out thank you i want to ask mr baker here when i go to mr t as an economist what would you say to the objection raised by the administration that the bill that congress passed h r fifty eight eighteen creates a moral hazard constitutes a bailout what would you  say you can be some issues a moral hazard but that's going be true in almost anything the government does that there's always some issues i think in this case that relatively limited i would just point out it's ironic that this administration would get upset about the moral hazard in that case but they've been completely unconcerned about the mall hazard involved in the federal reserve board's recent actions because of the the investment banks because this really goes very much to the heart of the housing crisis we're seeing what ben bernanke the the chair of the federal reserve board said is that he's going to come to the aid of the investment banks in the sense that he will back them up if they get into trouble this does two things on the one hand it gives the investment banks a free ride in having been very heavily over the leverage they're paying no price for that their shareholders their top executives they made enormous fortunes over leveraging themselves something i think almost everyone agrees on and ben bernanke has said that the fed the agent of the government the central bank is going to hold them harmless secondly the investors we talk about the international investment flows these people obviously didn't know what they're doing what the market is supposed to say is well then you lose your shirt but what ben bernanke has said is no the federal government through its central bank is going to come in and guarantee your bad debts so that's a huge aspect of moral hazard that's really very much at the center of this problem because if they didn't mindlessly provide that money and if the cent if the investment banks had been comes home over look over leverage we want to seen the sort of run up in housing obviously in an actual passage you would decide who you want to benefit from it but my idea and tying it to the median home price in the area and i believe represented vala stuck to that and his his bill is that you want to help the people who are sort of least able to deal with problems themselves now if you go in vision going to higher priced homes we might say that those people bear more responsibility for their own actions now whether the median price is the best place to cut that off that's you know a judgment call maybe you'd want to have that be higher but i think at some point if we're talking about million dollar homes we might serve you know bristle at the idea that these people are able to take care of themselves and the laboratory for me because that is some point  rent may not equal what they were getting on their and how does that not become a confiscation of their property well it's certainly a loss for the for the lender they are going to be taking a loss on the property and the issue here is you know what sort of enforcement mechanisms is the government prepared to make available to the lender and in this case again i would make the analogy to what happened with the reform of the bankruptcy law few years back that there you had people took out debt under one set of bankruptcy rolls which were comparatively lenient and then the government changed that and to my knowledge of this now maybe there is a court case i'm not familiar with but to my knowledge at least that's not been contested at all in court they said the government was freed change the enforcement rules after the fact so there certainly is an aspect here that the lenders will take a loss because obviously they're not getting their preferred course of enforcement so they are taking a loss but they are being compensated but you know again i'm not a lawyer here i don't  voters and giving them lesser returns i mean i don't the lawyers i have spoken to on that i have spoken to a number of lawyers did in their view they thought it would hold it would be upheld the court since they are getting compensation so it's not a question that they're they're not they're getting nothing they're getting compensation they're asking as much compensation as they would like but they are getting compensated i just ask you general what your thoughts are on that proposal first because i think it's basically a very good idea and in fact i should mention that i've been working with a coalition in new jersey and we have recently gotten a bill introduced in the both houses of the new jersey state legislature which among other things would enact a similar provision but i think there is one difference and which i think response to your issue which is the way it's written under the new jersey bill and this has become law yet clearly is that the owner would be allowed to remain in the property as a tenant and pay the fair market rent except if the lender who had taken title to it subsequently sells it to a party who wants to use it for their own dhamma cyle then the owner would be given sixty days notice which is the requirement of the state anti fictional law and then would be required to vacate in order that the new buyer could move in so in that case the own the land that has no loss whatsoever because at the point when the lender is ready to have the property actually be utilized the former owner has to vacate but the principle is still the same the owner should be allowed to remain in the property as a tenant as long as they can leave i've had conversations with some of the lending folks in the lending industry that are actually and least until a vista considering leaving those people in the property because then it's not bacon and subject to our ordinance which i'm all for occupied properties fall victim to theft investment bandolim far fewer you know at a far lesser rate than than unoccupied properties they're generally more maintained and they don't become the the rotting tooth in the smile of the neighborhood  anything that they can do to continue to keep the neighborhood as stable as possible be it unknown to rent or even leaving a good solid renters in you know while the property is being marketed to somebody who wants to use that to answer that than me but you know i think that would be certainly a very big improvement over current law now it gives less security to the homeowners facing foreclosure so i would prefer you know something that gives them the option to stay there as a long term tenant but certainly that would be much better than the situation as it is now because in many cases they will be able to stay there for a substantial period time and it does certainly address the problem that we won't have the property going vacant so it does give us much of the way there according to the real estate industry occupy properties are more marketable as well so it  hazard seem to apply to wall street in this case well obviously not concerned about the aspect the moral hazard applying to wall street you know again there's been i think fairly explicit on the part of the federal reserve board chairman b an attempt to minimize the harm that wall street has suffered in this crisis which arguably has some positive aspects to it i mean none of us want to see a financial collapse you know so arguably that's a positive aspect but same time one could easily talk about putting in place policies that prevent a financial collapse while the same time i'm extracting some toll on the bad actors if the buyer is to be where is the letter to be prudent absolutely i mean that's exactly the point here the lenders are not being asked to suffer we've stepped in to prevent the lenders from suffering and again if the lenders had acted with good sense we went have to have half the problem we have today thank you very much dennis kucinich chairman of the message policy subcommittee where the subcommittee of oversight and government reform today's hearing has been entitled neighborhoods the blameless victims of the sub prime mortgage crisis this has been one of a series of hearings this subcommittee examining the impact of the subprime mortgage fiasco on the neighborhoods of our nation subcommittees going to continue to probe this matter deeply as well as to as we have had recommended legislative changes and legislative improvements that will somehow provide some remedy as some of you have worked out in your respective communities i want to thank all of the witnesses for their testimony for their patience today and what has been a very long hearing and i want to let you know the subcommittee will continue to be in touch with you and your staff as we continue our work to see