U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

49–971 PDF 2009

NEIGHBORHOODS: THE BLAMELESS VICTIMS OF

THE SUBPRIME MORTGAGE CRISIS

HEARING

BEFORE THE

SUBCOMMITTEE ON DOMESTIC POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MAY 21, 2008

Serial No. 110–166

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

——— ———

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

SUBCOMMITTEE ON DOMESTIC POLICY

DENNIS J. KUCINICH, Ohio, Chairman

TOM LANTOS, California

ELIJAH E. CUMMINGS, Maryland

DIANE E. WATSON, California

CHRISTOPHER S. MURPHY, Connecticut

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

BRIAN HIGGINS, New York

BRUCE L. BRALEY, Iowa

DARRELL E. ISSA, California

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

CHRIS CANNON, Utah

BRIAN P. BILBRAY, California

JARON R. BOURKE, Staff Director

(III)

C O N T E N T S

Page

Hearing held on May 21, 2008 ............................................................................... 1

Statement of:

Been, Vicki, Elihu Root professor of law and professor of public policy,

co-director, Furman Center for Real Estate and Urban Policy, New

York University School of Law; Phyllis G. Betts, director, Center for

Community Building and Neighborhood Action, School of Urban Affairs

and Public Policy, University of Memphis; and John Talmage, president

and CEO, Social Compact ............................................................................ 29

Been, Vicki ................................................................................................. 29

Betts, Phyllis G. ........................................................................................ 59

Talmage, John ........................................................................................... 72

Kildee, Daniel T., treasurer, Genesee County, MI; and Nancy Floreen,

councilmember, Montgomery County, MD .................................................. 6

Floreen, Nancy ........................................................................................... 12

Kildee, Daniel T. ........................................................................................ 6

Mallach, Alan, senior fellow, National Housing Institute; Doug Leeper,

Code of Enforcement manager, city of Chula Vista, CA; and Dean

Baker, co-director, Center for Economic Policy Research .......................... 89

Baker, Dean ............................................................................................... 116

Leeper, Doug .............................................................................................. 96

Mallach, Alan ............................................................................................. 89

Letters, statements, etc., submitted for the record by:

Baker, Dean, co-director, Center for Economic Policy Research, prepared

statement of ................................................................................................... 119

Been, Vicki, Elihu Root professor of law and professor of public policy,

co-director, Furman Center for Real Estate and Urban Policy, New

York University School of Law, prepared statement of ............................. 31

Betts, Phyllis G., director, Center for Community Building and Neighborhood Action, School of Urban Affairs and Public Policy, University

of Memphis, prepared statement of ............................................................. 62

Floreen, Nancy, councilmember, Montgomery County, MD, prepared

statement of ................................................................................................... 14

Kildee, Daniel T., treasurer, Genesee County, MI, prepared statement

of ..................................................................................................................... 9

Leeper, Doug, Code of Enforcement manager, city of Chula Vista, CA,

prepared statement of ................................................................................... 99

Mallach, Alan, senior fellow, National Housing Institute, prepared statement of ........................................................................................................... 92

Talmage, John, president and CEO, Social Compact, prepared statement

of ..................................................................................................................... 74

(1)

NEIGHBORHOODS: THE BLAMELESS VICTIMS

OF THE SUBPRIME MORTGAGE CRISIS

WEDNESDAY, MAY 21, 2008

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC POLICY, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 2:10 p.m., in room

2154, Rayburn House Office Building, Hon. Dennis J. Kucinich

(chairman of the subcommittee) presiding.

Present: Representatives Kucinich, Cummings, Watson, Tierney,

and Higgins.

Also present: Representative Turner.

Staff present: Jaron R. Bourke, staff director; Jean Gosa, clerk;

Charisma Williams, staff assistant; Leneal Scott, information systems manager; Janice Spector, minority senior professional staff

member; John Cuaderes, minority senior investigator and policy

advisor; and Benjamin Chance, minority professional staff member.

Mr. KUCINICH. Good afternoon. The Subcommittee on Domestic

Policy of the Committee on Oversight and Government Reform will

now come to order.

Today’s hearing will explore the cost 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 5 minutes to make opening statements, followed by opening

statements not to exceed 3 minutes by any other Member who

seeks recognition.

And, without objection, Members and witnesses may have 5 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 is allowed to sit as

a member of the 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.

2

And I would like to thank everyone for their attendance.

The Domestic Policy Subcommittee of the Oversight and Government Reform Committee has held three hearings on the effects of

foreclosures since 2007. These include a 6-hour, 15-witness marathon hearing in March 2007, 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;

increasing crime; rise in municipal costs in police, fire due to vandalism and arson; increased demolition and building inspection

costs; increased legal expenses; increased demand on city social

service programs; and a direct loss of property tax revenues.

Economic researchers have found that the police costs for responding to criminal activity alone in vacant and abandoned

houses adds up to between $5,000 and $6,000 per property. With

demolition costs, the municipal cost per vacant property rises to

$19,227. If the property is subject to arson, the cost rises to

$34,199.

The collective cost to neighbors within a 150-foot radius of a

block in Chicago with a large concentration of vacant properties

amounted to $220,000 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.

There are significant costs borne by people who 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 neighbors, renters and taxpayers.

This Congress 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. 5818, the ‘‘Neighborhood Stabilization Act of

2008.’’ This bill creates a new Federal program to address the effects on neighborhoods caused by the foreclosure crisis. The bill authorizes $15 billion in grants and loans to be spent by localities on

a variety of strategies, including vacant-property acquisition, building rehabilitation and demolition.

The House agreed to an amendment, 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’t understand this, but I hope that today and tomorrow’s

3

hearing might do something to change his mind. For if we can’t

help the totally innocent, the neighbors of these vacant properties—and they are the innocent victims of the foreclosure crisis—

then who should we help?

Now, fortunately, we have some of the Nation’s leading experts

with us today and tomorrow to help explain the problem neighborhoods face and help guide a Federal response.

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 41 years ago. I started at the local level, at the

community level. I served on the Cleveland City Council many

terms, and I served the city as mayor. I realize at a local level the

kind of impact that this foreclosure crisis is 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 cause to

the whole community. Today, in some communities, there are hundreds and maybe even over a thousand.

Just imagine you’re a senior citizen who has taken care of your

property for your whole life, and the neighborhood around you

starts to change economically but you still take care of your property. And then you get into the subprime situation. We have all

these vacant properties all of a sudden. The equity that you had

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 also 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, the Buffalo area, with my colleague that has just joined

us, Congressman Higgins.

So does the gentleman from Ohio, do you have an opening statement?

Mr. TURNER. Well, thank you——

Mr. KUCINICH. I recognize Mr. Turner from Ohio.

Mr. TURNER. Thank you, Chairman Kucinich.

I appreciate you holding this hearing and you allowing me to

participate. It’s great to have two former Ohio mayors come together to look at the issue of what’s happening in our neighborhoods in Ohio. Unfortunately, it is a very negative picture. But I

appreciate what you’re doing to highlight this issue and to look at

solutions and what we can do.

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.

For the most part, individual foreclosures in and unto themselves

are not a community-wide issue. It becomes an issue when a community faces multiple home foreclosures in a concentrated area.

Under this scenario, the problem, if left untreated, can turn oncethriving neighborhoods into an area of blight. Statistics show that

this problem is encompassing both our inner-city neighborhoods

and suburban neighborhoods alike.

Fixing this problem will be easy. Although increased home foreclosures are a national problem, a one-size-fits-all solution is not

4

the answer. Addressing the foreclosure problem in Ohio will require a different solution than how we treat the same problem in

perhaps another State. If we are truly to assist in resolving the

foreclosure problem, then a Federal solution must be well thought

out with a formula that recognizes that 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 will 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 associated with home foreclosures. I look forward to working

with you.

And I have 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 of what was happening to families that were being

subject to foreclosure, with the 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 financial

markets.

In July 2001, he pushed forward a predatory lending ordinance

which was intended to assist our community. In 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 to neighborhoods to try to address some of the impacts of foreclosure and

abandonment.

And, Mr. Chairman, I just thank you for bringing this forward

and highlighting it so we can look at solutions and our real impacts

on our neighborhoods. Thank you.

Mr. KUCINICH. I thank the gentleman. It’s a pleasure to work

with him on this.

The Chair recognizes the gentlelady from California, Congresswoman Diane Watson.

Ms. WATSON. Thank you, Mr. Chairman. And thank you for holding today’s very important hearing about the subprime mortgage

crisis.

The mortgage 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 2008 surged 327 percent from 2007 levels. In the

terms of numbers, it means that there were 517 foreclosures every

day for 3 months.

If more is not done to restrain the trend of rising foreclosures,

I believe Congress will find that neighborhoods would have significant increases in vacated or abandoned houses; neighborhoods

would lose value; local governments would be overwhelmed with

having to deal with increases in crime; social service programs

would be in greater demand, which requires municipalities to

spend more; and losses in tax revenue from a declining propertyVerDate 11-MAY-2000 11:48 Jun 24, 2009 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 U:\DOCS\49971.TXT KATIE PsN: KATIE
5

tax base would help lead to the decline in 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 problem spilled 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 a concentration

of abandoned and vacant houses, which is not in the best interest

of our local communities or our Nation as a whole.

I look forward to hearing the testimony, Mr. Chairman, of our

panelists today and working with my colleagues to help our Nation

recover from the foreclosure crisis.

Thank you, and I yield back the remainder of my time.

Mr. KUCINICH. I thank the gentlelady.

The Chair recognizes the distinguished representative from the

Buffalo area, Congressman Higgins.

Mr. HIGGINS. Thank you very much, Mr. Chairman.

And I, like you, in representing the city of Cleveland and the city

council, I represented 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 20th century and,

over the past 30 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 these cities were once great. They can be

great again. But what fundamentally has to be addressed is the

issue of vacant and abandoned housing.

In the city of Buffalo, it’s a problem that’s pervasive and growing.

This administration has withdrawn from its commitment to help

urban areas and has an obligation 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.

Mr. KUCINICH. I thank the gentleman.

I would ask the witnesses to come forward, Mr. Kildee and Ms.

Floreen.

While you’re taking your seats, I would like to let the Members

know and those who are in our audience know who is about to be

testifying.

Mr. Daniel Kildee is the treasurer of Genesee County in Michigan. Mr. Kildee initiated the use of Michigan’s new tax foreclosure

law as a tool for community development in neighborhood stabilization. He founded the Genesee Land Bank—that was Michigan’s

first land bank—and now serves as its chairman and chief executive officer. Mr. Kildee 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. Kildee is the nephew of

6

Congressman Dale Kildee, who is one of the highly respected Members of our U.S. Congress.

We welcome you, Mr. Kildee.

The next witness will be Ms. Nancy Floreen. Ms. Floreen is 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

Agencies.

Ms. Floreen is a county council member in Montgomery County,

MD. She serves as a member of the council’s Planning, Housing

and Economic Development Committee. Previously, she has served

as the commissioner of the 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 our witnesses to know, Mr. Kildee and Ms. Floreen, that

it is a 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 hands.

[Witnesses sworn.]

Mr. KUCINICH. Thank you very much.

Let the record reflect that each witness answered in the affirmative.

I would ask that each of the witnesses now give a brief summary

of your testimony. Keep the summary under 5 minutes in 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 of Congress.

Mr. Kildee, you are going to be our first witness. I want to thank

you, and I would ask that you proceed with your statement.

STATEMENTS OF DANIEL T. KILDEE, TREASURER, GENESEE

COUNTY, MI; AND NANCY FLOREEN, COUNCILMEMBER,

MONTGOMERY COUNTY, MD

STATEMENT OF DANIEL T. KILDEE

Mr. KILDEE. Thank you, Mr. Chairman.

And thank you for your leadership on this issue. You and other

members of the committee obviously have helped to bring 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 have experienced 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 vacant and abandoned properties to a higher level of

consciousness. So it’s, first of all, my hope that the current conversation taking place surrounding the mortgage crisis will lead to

more fundamental reforms that place a higher value on the urban

landscape generally.

I’m from Flint, Michigan and, as the chairman said, the home of

myself and my Congressman, Dale Kildee. Flint is the birthplace

of General Motors. We once had 79,000 people working for the

same company in our city. We had a population in 1960 of 197,000.

7

Today it’s about 115,000 people. And so, while we have a lot of anxiety about the 5,000 or 6,000 mortgage foreclosures that are pending in our own community right now, we’ve been dealing with vacant and abandoned property for quite some time.

When we lost 40 percent of our population over 30 years, those

people who left did not take their houses with them. And they left

behind a landscape that has seriously deteriorated.

The cost of that abandonment is what concerns us. Seventy percent of the fires that take place in Flint, Michigan, take place in

an abandoned house. So 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 have 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 $29 million of delinquent

taxes in the county. Last year, it was $37 million of delinquent

taxes. And, this year, there are $49 million in unpaid taxes in Genesee County. All of it being exacerbated by the fact that literally

thousands of properties held by lenders or servicers are not paying

their taxes.

In my community, about 5 or 6 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 foreclosure 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-foreclosed 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

7,400 properties in the last 6 years into our land bank authority,

12 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 cost to local government, with the reduction of the tax base and the uncollected taxes 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 250,000. We’ve got 150,000 users paying to maintain that

system. The stress on local government is enormous.

And the loss of private equity, 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.

8

This is a problem—interesting now that places like Flint and

Dayton and Buffalo and others, Cleveland for sure, that have been

associated with the problem of vacant and abandoned property historically, this is a problem now being experienced 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, in our case, 5,000, 6,000, 7,000 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 5,000 new abandonments or 5,000 distressed sales coming into our marketplace are frightening.

What we have to avoid, I think, in our community and 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 31st, through the tax foreclosure system, on 1,194 properties. Over 300 of them had mortgages on them,

and they’re upside down in value. Those lenders have passed that

problem on to us. We’re willing to accept it, but we would 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 would like to talk to you about them as

well.’’

This 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 you assistance with as you

deliberate on this very important subject.

Thank you.

[The prepared statement of Mr. Kildee follows:]

9

10

11

12

Mr. KUCINICH. I thank the gentleman for his very fluid and comprehensive statement about the underlying economic crisis that is

occurring in urban communities and in cities and, of course, in

your own county of Genesee, with respect to the concomitant effects

of the subprime mortgage fiasco.

I look forward to the testimony of the next witness, Ms. Floreen.

I would ask that you proceed, and please keep your statement to

5 minutes or less. Thank you.

STATEMENT OF NANCY FLOREEN

Ms. FLOREEN. Thank you, Mr. Chairman.

Mr. 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 local elected officials

who have 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 2008, providing $15 billion in urgently needed loans 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 counties will be able to use this funding for the purchase and rehab of vacant and foreclosed homes. 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. Kildee, certainly the chairman’s comments at the beginning. There’s very little to add. But across the

United States, this problem threatens billions of Federal dollars invested in neighborhood revitalization over the years. It is a fact

that foreclosed homes drive down the value of surrounding problems. And the sooner that we solve this problem, the less collateral

damage we’ll have with depreciating home values.

This cuts directly to what’s the mainstay of local 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 600,000 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 in Montgomery County, Maryland, right up the road, we’ve

not been immune to the housing crisis. Notice of foreclosure sales

in my county have increased from 68 during the first quarter of

2007 to 918 during the first quarter of 2008, an increase of 1,250

percent—nothing like Mr. Kildee’s numbers, but nonetheless for us

this is huge.

A total of 611 notices of mortgage loan default were issued in the

first quarter, compared with 103 in the first quarter of 2007, an increase of nearly 500 percent.

We’re trying to deal with this by participating in the Maryland

HOPE Hotline for residents facing foreclosure. We’ve been offering

homeownership and foreclosure solution sessions across the county.

We’ve partnered with the State to provide assistance to residents,

13

and contributing money to nonprofits to provide counseling to

homeowners.

But we’re also using our own money on matching State contribution to develop a credit enhancement program to encourage local

banks to refinance loans for individuals subject to foreclosure who

might require special underwriting criteria.

But like many local areas across the country, we’re grappling

with 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, Montgomery 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. It will take more than a local or State

remedy to curb the decline. The funding provided by H.R. 5818 is

timely, targeted and temporary.

We’ll work closely with members of the conference committee as

they reconcile the House and Senate bills. The Senate version provides an emergency appropriation of $4

billion in Community Development Block Grant funds to be allocated based on a formula to be developed within 60 days of enactment. We’ll be urging the conferrees to, one, utilize the CDBG program as the program to deliver assistance, as in the Senate bill,

with 70 percent of the funds to entitlement cities in urban counties.

CDBG grantees are intimately familiar with that program. The

funds made available under the bill are for the very types of activities that they carry out on a regular basis.

No. 2, we’ll work with you to provide that funding for foreclosure

relief and mitigate be in the form of grants for ease of administration.

Three, we’ll work with you to permit the funds to be used to assist families with earnings up to 140 percent of median income,

with 25 percent of the funds to be used by households at 50 percent

of median.

We’ll work with you to permit 5 percent of the funds to be used

for administrative costs. This is consistent with CDBG funding

made available to respond to Hurricanes Katrina and Rita.

Thank you very much for your favorable consideration of our

views.

[The prepared statement of Ms. Floreen follows:]

14

15

16

17

18

19

20

21

Mr. KUCINICH. I thank the gentlelady for her testimony.

I would like to begin with asking Treasurer Kildee some questions.

In some ways, you might be the ideal witness to answer this

question. Can you tell the committee what lessons may be drawn

from Genesee County’s experience with both a vacant and abandoned housing problem and a noninterventionist Federal Government?

Mr. KILDEE. The most significant lesson that we 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 is 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 and essentially disaggregate the inventory that is the subject of our concern.

In our case, initially, it was tax-foreclosed properties. There are

valuable properties that get lost through foreclosure. That’s why

people make those odd infomercials. The idea would be, though, to

not allow the lenders to do the very same thing.

Mr. KUCINICH. You have a data base where you can literally see

who got into the subprimes, who has come out in the secondary

market here, who the speculators are, is that right?

Mr. KILDEE. Right. And 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 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.’’

Mr. KUCINICH. What kind of Federal aid or Federal assistance or

tools would be required by local jurisdiction to strengthen their position vis-a-vis the speculators, the banks that are involved with

these subprimes?

Mr. KILDEE. No. 1 would be to have an efficient public entity that

can acquire and then manage and dispose the properties. That’s

critical.

Second 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 play an important role—takes advantage of the

more diverse real estate market within the region. And so a city

does not have to essentially get stuck with those properties 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——

Mr. KUCINICH. By stepping forward the way that you do, do you

think that you do a better job than traditionally private sector or

real estate tasks—that you can do a better job than what the private sector is doing?

22

Mr. KILDEE. I think so. But I would say, which private sector?

Because there’s all sorts of markets for 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 and 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, to the property flipper.

Mr. KUCINICH. Right. So with the land bank, you have one paradigm. Let’s say you don’t have a land bank. Can jurisdictions without land banks adequately address significant numbers of vacant

properties? How do they do it?

Mr. KILDEE. Well, I think it’s up 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. It’s

too easy an issue for somebody to avoid unless you have an entity

specifically designed for that purpose.

Mr. KUCINICH. Thank you.

Councilmember Floreen, as you know, Congress passed a bill to

help neighborhoods in need. The bill has a veto threat against it.

While I would like to be optimistic about the bill’s future, will you

tell the committee what happens to neighborhoods if the bill is not

enacted and if the market alone, the market alone, is relied upon

to deal with the growing problem of vacant and abandoned properties?

Ms. FLOREEN. Thank you, Mr. Chairman.

Well, it’s very evident that we have left it to the market.

Mr. KUCINICH. That what?

Ms. FLOREEN. We have left it to the market already. And we’re

seeing the effects of that. There is no question.

Mr. KUCINICH. Could you elaborate?

Ms. FLOREEN. Well, the market that this has been left to is a

market that, in many cases, has preyed upon people who cannot afford the situations in which they’ve been led.

It has 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. Latinos 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 communities of interest that are particularly hit hard by this.

There is no question that decisions have been made, structures

have been created that have led people into a situation which we

are collectively faced with having to redefine and solve for the benefit of the communities around those homes.

Mr. KUCINICH. Thank you.

The Chair recognizes Mr. Turner for questions.

Mr. TURNER. Thank you, Mr. Chairman.

And I want to thank both of you for what you’re doing on a local

level, what you’re doing in taking some of the best practices and

23

describing it to others and 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 were talking,

that I think bears some additional discussion is the issue of when

a property becomes a target for foreclosure and that process of foreclosure and, oftentimes, the resulting process of title problems that

ensue and then the attempt to return that property back to productive use.

When I served as mayor of Dayton, before even the foreclosure

crisis occurred, when we would have abandoned properties in

neighborhoods I would have people ask me, you know, what is the

biggest problem that you have with abandoned properties? And the

answer sounded boring and esoteric, but it’s the truth, and it’s title.

Tomorrow someone could not just go, grab that property and fix it

up and put it back to productive use. There 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 incidence, it’s

just compounding itself. And as you mentioned, Mr. Kildee, a lot

of these properties being upside-down, when 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 it’s gone to sheriff’s sale and no one

has purchased it, perhaps it’s gone to sheriff’s sale and the bank

itself has purchased it—that 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 lender’s obligation, largely contractual, to the individual that

they had the loan, they would have either lower increased 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.

Mr. Kildee, you mentioned the issue of Federal funding that can

assist in that process, but I would like your additional thoughts on

if there are things that we should be doing.

Obviously, the mortgage industry, a 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

of that communities are doing that makes a difference? Mr. Kildee.

Mr. KILDEE. Well, lenders secure their financial interest in a

property with a mortgage, which, from our point of view, and the

way we modeled or created the Michigan law, is that mortgage interest is an ownership interest. And the rights of ownership come

with significant responsibility.

I think you will probably hear some thoughts from some of the

subsequent panel members, certainly Alan Mallach 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

24

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, the point that you made initially on title, it’s very important to create local authority to clarify title. And this is one—I

know I’m sort of a one-note Johnny on land banks, but it’s one of

the things that land banks can do. The Michigan Land Bank Act

allows us to expedite a quiet title procedure on any property that

we have interest in in 90 days.

So, No. 1, identifying those owners of interest, holding them responsible as owners; and then, second, 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 ought to apply.

Mr. TURNER. Ms. Floreen.

Ms. FLOREEN. Yes, sir. 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 a chain of title or just

a sale is being addressed, it sends a message, it sends a message

to every other property in that community.

It sends a message to the community that, ‘‘Well, you don’t need

to try. If you’re on the edge, why not do it too? And why should

we clean up that graffiti? And why should you cut your grass? And

why should you fix those broken steps? And why should you respect your neighbor’s need for noise control?’’ All the kinds of

things, as you know, that make a huge difference in the quality of

life within a community. ‘‘Why should children listen to their parents?’’

I don’t mean to overextend the analogy, but the fact remains that

it sends a message to the whole community that we don’t matter,

that my community doesn’t matter. And that is a very difficult

thing to turn around.

As I said in my testimony, billions of Federal dollars have been

spent on neighborhood revitalization to combat that very issue.

And this just starts it all over again.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. KUCINICH. I thank the gentleman.

I want to note that we’ve been joined by the Congressman from

Massachusetts who represents the city of Lynn, among other areas.

Congressman Tierney, after Congresswoman Watson has a

chance to ask questions, we’ll go to you and then Mr. Higgins, if

that would please the committee.

Congresswoman.

Ms. WATSON. Thank you, Mr. Chairman.

This goes to the Honorable Nancy Floreen.

In your town, in the communities, what happens at the point of

contact with the consumer and the bank? I’m wondering how do

these people get these subprime loans when they might make

25

$1,500 a month and the loan is for a property that costs $175,000?

What happens at that point?

Ms. FLOREEN. Well, the issue of predatory lending is one that

we’ve been struggling with in Maryland for quite some time. And,

as you know, there is a tradeoff between the issue of access to credit fairly and in a proper way and access to credit that’s designed

to benefit the lender and, in many cases, the broker and does not

achieve a desired social good and puts the purchaser in a position

that they can really never dig their way out of.

Many of these issues are cultural. Many of the brokers are not

regulated in the way that they should be.

And the big issue, as I think most people know, is the fact that

there’s no local financial institution interest in the property because of the way that these mortgages get bundled and sold. And

who knows if people from Saudi Arabia end up holding the credit?

It is an international market for items that used to be a local service and the local banks that would serve these folks.

Ms. WATSON. You led right into my next question that I wanted

to know. And then also, Mr. Kildee, whose uncle is usually my

seat-mate on the floor, a person I really respect. But, the two of

you, have you seen an influx of foreign investment into the housing

market? And if you have, how significant has that investment been,

do you know? Either one.

Mr. KILDEE. I’m in a community where there’s disinvestment. We

don’t have significant investment. What I have seen is something

perhaps not quite as insidious as foreign investment but it’s outof-town investors. And, honestly, other than Ohio, California, Massachusetts and New York, we don’t really want anybody investing

in our properties. [Laughter.]

The issue for us has been this liquidation model that has applied

previously to tax foreclosures and now is being applied to mortgage

foreclosures, where the properties themselves are not treated as

part of somebody’s landscape but they’re treated as security on

some security that is bought and sold.

And 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’s problematic.

And that’s why the notion of having local authorities making decisions about the actual disposition of the property, that consider

the interest of the residents of the local community and the market

conditions, I think is a better approach.

Ms. WATSON. I’m getting ready to hold a huge forum on this

issue. And we have bankers, and we have all aspects of the consumer market and, as I said, the housing market. And I’m trying

to get my staff to build it up so we can get a thousand people there,

because this has been the No. 1 concern in areas of my district.

And I see the prey is on the lower socioeconomic areas and seniors. And people are losing their homes and calling my office,

‘‘What can I do?’’ So we want to get the information out there from

the experts.

And we do have a set of bills going through that might address,

but probably we need to do more overseeing of the regulators.

26

But that’s why I ask you, Madam Councilwoman, what happens

at that point of contact where a person will sign on that line and

they have those balloon payments, you know, and they just can’t

handle them, and there we are, foreclosed?

Ms. FLOREEN. If I might observe, as well, Congresswoman Watson, consumer counseling is going to have to be an area where we

devote tremendous attention to, and in many languages, and forcing people, really, to read the materials that they’re provided and

to be able to make the right financial decisions and understand the

fiscal issues that they are getting themselves into.

Ms. WATSON. Just another comment, Mr. Chairman.

In California we have an Office of Consumer Affairs, and I’m

thinking now about getting someone within my legislature to put

in a bill that would require a division that will deal with property

ownership and so on under the Department of Consumer Affairs.

And we need that intermediate group where people can be educated before they sign on that line. So thinking that through, I

think we’ll have something that we can present.

Thank you, Mr. Chairman.

Thank you, witnesses.

Mr. KUCINICH. And I would like to have an ongoing discussion

with the gentlelady about that. I think that we need to look for

more solutions and dealing with it at a local level.

The Chair recognizes Congressman Tierney from Massachusetts.

Thank you.

Mr. TIERNEY. Thank you very much.

Thank you both for being here today. I think you give a very

good picture of what’s going on out there.

Mr. Kildee, I probably don’t have to but I want to add my voice

to the chorus of people that tell you how much your uncle is respected and relied upon in this institution for his knowledge and

his work ethic.

Mr. KILDEE. Thank you.

Mr. TIERNEY. So it’s a pleasure to serve with him.

The legislation that we’re talking about that may be vetoed, in

a nutshell it talks about voluntarily writing down the value of the

property and the mortgage on it 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, in fact, voluntarily participate in that

program, as opposed to needing probably the stick of sorts of letting a bankruptcy judge have the same authority if they don’t voluntarily participate?

Mr. KILDEE. Well, that’s really the question that I think we’re all

trying to get our arms around. If there is some way—and this is

obviously the legitimate role for a Federal, for 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 balance might be on a particular

mortgage, because, in almost all the cases, the properties with sigVerDate 11-MAY-2000 11:48 Jun 24, 2009 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 U:\DOCS\49971.TXT KATIE PsN: KATIE
27

nificant value have mortgage balances well above what our market

will bear.

So, obviously, you put your finger on the problem.

Mr. TIERNEY. Do you have a feel for your community banking, establish with your lenders out that way as to whether or not they

would voluntarily participate?

Mr. KILDEE. Local lenders, for sure. And in the case, for example,

of Fannie Mae, I happen to chair the State land bank authority,

and I purchased 184 mortgage foreclosed properties from Fannie

Mae by proposing to them that we buy them for $175,000 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

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 company that’s going to be in business for more than the

next 12 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 foolish, pennywise but 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.

Mr. TIERNEY. Thank you.

Ms. FLOREEN. Congressman, I think from the banking perspective—of course the bankers can tell you—but I think it would be

my expectation. What I’m told regularly is it’s about time and it’s

about predictability.

Mr. TIERNEY. About time and what else?

Ms. FLOREEN. The time in which a property is not generating

revenue for them, and predictability of the process and if there are

clear guidelines, clear direction and the ability to move properties,

which is what we all want. We want those properties back, occupied by families contributing to the community, in the speediest

time available. That benefits all players.

Mr. TIERNEY. Well, thank you both.

Mr. Chairman, I yield back.

Mr. KUCINICH. I want to thank the gentleman from Massachusetts and thank the panelists.

The subcommittee will be in contact with you. And one of the

things that we’re going to be looking at is to try to quantify the

transfer of wealth that’s occurring here. Because the underlying

question—and to members of the subcommittee, to my colleagues

Ms. Watson, Mr. Tierney, Mr. Cummings—the underlying question

that we’re moving toward here is that there has been a massive

transfer of wealth upwards in the hands of a few, taking money

away from people whose greatest investment is their home, taking

money away from communities. And, in some of your remarks, Mr.

Kildee you got into that.

28

I want to thank this panel. We’re going to be looking at that further, because this is 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—Mr. Kildee, Ms. Floreen, for your testimony, for your willingness to answer questions.

We’re going to move on to the next panel. And as we’re moving

on to the next panel, 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 in 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 on our second panel.

I would ask that you be seated.

We have Ms. Vicki Been, who is a professor of law and public

policy at New York University School of Law. She’s also the director of the Furman Center for Real Estate and Urban Policy. Her

areas of research include affordable housing, land use, and predatory lending.

Ms. Been’s research has been published in numerous journals,

including a 2004 article in Cityscape entitled, ‘‘Impact Fees and

Housing Affordability.’’

Next, Dr. Phyllis Betts. As Dr. Betts is 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 has over 10 years of experience working with community development organizations and agencies. Her work evolves

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 CEO of Social Compact, Inc. 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 to 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.

Just to let you know, it’s our policy to swear in witnesses. I

would ask that you stand and raise your right hands.

[Witnesses sworn.]

Mr. KUCINICH. Let the record reflect that each witness answered

in the affirmative.

And I would ask, as in the previous panel, that each witness give

a statement 5 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 we begin with Ms. Been. Please proceed.

29

STATEMENTS OF VICKI BEEN, ELIHU ROOT PROFESSOR OF

LAW AND PROFESSOR OF PUBLIC POLICY, CO-DIRECTOR,

FURMAN CENTER FOR REAL ESTATE AND URBAN POLICY,

NEW YORK UNIVERSITY SCHOOL OF LAW; PHYLLIS G. BETTS,

DIRECTOR, CENTER FOR COMMUNITY BUILDING AND

NEIGHBORHOOD ACTION, SCHOOL OF URBAN AFFAIRS AND

PUBLIC POLICY, UNIVERSITY OF MEMPHIS; AND JOHN TALMAGE, PRESIDENT AND CEO, SOCIAL COMPACT

STATEMENT OF VICKI BEEN

Ms. BEEN. Chairman Kucinich and all the members of the subcommittee, I am honored to be here today to share with you findings from the Furman Center’s research on the external 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 Furman Center has undertaken

several studies to examine the external 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 external effects foreclosures have on neighbors and

the broader community, we examined 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 examined the characteristics of

the buildings that were entering foreclosure in 2007 in New York

City and estimated how many of those buildings housed tenants

who would be dislocated 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 buildings that have

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 15 properties that were in the

foreclosure process; versus low-exposure neighborhoods in which

the median home sale was near only one property.

In the low-exposure neighborhoods, the sales prices of homes

within 500 feet of just one or two properties for which a foreclosure

notice had been filed in the prior 24 months was almost 2 percent

lower than the prices of similar properties in the same neighborhood but not near a foreclosure.

Sales prices of homes within 5,000 feet of three to five properties

that were in foreclosure were almost 3 percent lower than the

30

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.

Our work accordingly provides strong evidence that neighbors

bear significant costs when a homeowner loses his or her property

to foreclosure. Local governments in turn lose 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 may be justified by the external effects that foreclosures have on property values.

Our research also documents that foreclosures have an impact on

another group of collateral victims. Our data on notices of foreclosure filed in 2007 in New York City reveals that 60 percent of

the properties going into foreclosure in 2007 were two- to four-family buildings or multifamily buildings.

A conservative estimate is that those buildings house at least

15,000 renter households. If those properties are sold at auction,

those households will face eviction and will bear the cost and dislocation of finding a new home.

New York City isn’t exceptional in this regard. Other research

has 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 and 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 parties who our results reveal are bearing a significant part

of the cost of foreclosures.

Thank you.

[The prepared statement of Ms. Been follows:]

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

Mr. KUCINICH. Thank you for that very significant quantification.

Appreciate it.

Ms. Betts, please proceed.

Ms. BETTS. Yes. Thank you, Mr. Chairman.

Mr. KUCINICH. Can you get a little bit closer to that mic?

And, staff, could you make sure that mic is on.

STATEMENT OF PHYLLIS G. BETTS

Ms. BETTS. Thank you, Mr. Chairman, members of the committee.

I’m coming from Memphis, TN. 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 5818 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 for market to market.

I’ll speak to 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. Second, the data

that we use to underscore a funding formula in 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 data

base of choice, First American, and I think that my colleague, Mr.

Talmage, will followup 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 2000. In 2007, we had almost

12,000 foreclosure notifications for a total in that 8-year period of

over 61,000 foreclosure notifications. This is the equivalent of 25

percent of our single housing stock, our single-family housing stock,

and that’s where we are hardest hit.

Mr. KUCINICH. Excuse me, what was that percent again?

Ms. BETTS. Twenty-five percent of our single-family housing

stock.

Mr. KUCINICH. Thank you.

Ms. BETTS. Our subprime lending escalated between 2004 and

2005, going up from 25 percent to 40 percent of all mortgage loans

in Shelby County, and that includes our suburban area. And clearly, we’re tracking subprime and foreclosures. And the neighborhoods that are hardest hit are hit both by subprime lending and

by foreclosures.

Our 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 the 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.

60

I would like to put up map two, please, which is the other map.

The one on the bottom.

And if you could zoom in.

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. Our downtown and

center city area is right there on the river.

And then radiating north from the river is north Memphis, south

is south Memphis. Those are our traditional low income areas.

Most of our foreclosure there is driven by high cost refinance loans,

often times second-generation folks who are taking out equity when

parents die. And that’s a different kind of situation that will require a different kind of remedy than what we are 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 arc 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 lighter teal color, that is a suburban area. That is a different

animal, but it is foreclosures none the less and requires the kind

of intervention that you’re talking about.

We’re doing a neighbor-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 has become quite

clear that foreclosures are driving blight in these middle class—and

by middle class, we’re talking about $120,000 houses, which are actually quite nice in Memphis. So, you know, this is a different market. And if markets go, then so go Memphis and Shelby County.

This is Mendenhall Estates. In Mendenhall Estates, in 2007, the

red parcels are the foreclosed parcels in Mendenhall Estates; 1,000

parcels, all single family, in this particular neighborhood; 65 foreclosed parcels, 6.5 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

crosshatched parcels are showing signs of neglect.

When we drilled down to look at other vacant properties in this

neighborhood, we found, for the 22 that we looked at that were in

the worse shape, they were virtually all foreclosures from 2005 and

2006. 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 CoreLogic data base.

When we have compared what is in that data base, which, according to its own documentation, covers about 50 percent of the

subprime mortgages nationally, when we’ve compared the number

of mortgages by zip code from that data base with the Home Mortgage Disclosure Act subprime mortgages, we’re finding that in

these heavily hit neighborhoods, only about 25 percent of the mortgages seem to be in the First American data base. Our theory on

that is that these are modest mortgages, modest neighborhoods,

61

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 5,

7, 10 percent, if we compare Memphis and Tennessee to California

or New York City, that’s going to result 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,

TN, depend on it.

And I’m going to speak for New York City, I think the same is

there as well.

Thank you.

[The prepared statement of Ms. Betts follows:]

62

63

64

65

66

67

68

69

70

71

72

Mr. KUCINICH. I thank the gentlelady.

Mr. Talmage, please continue with your testimony.

STATEMENT OF JOHN TALMAGE

Mr. TALMAGE. Thank you, Mr. Chairman, and thank you for inviting me to participate in this hearing because I think what it

does——

Mr. KUCINICH. Would you please bring that mic up a little bit

closer, so that we can all hear you clearly?

Mr. CUMMINGS. Is it on?

Mr. TALMAGE. There we go. How about that?

Thank you for inviting me because I think this highlights the

problems that we have with understanding economic conditions in

inner city neighborhoods in the United States, that our own work

at Social Compact has found that in your own city of Cleveland,

when we worked there in 2002, we found 100,000 people not counted by the U.S. Census that lived in Cleveland. In African-American

neighborhoods in Miami, we’re finding 95 percent higher populations than have been documented by the U.S. Census.

And I think there is very little attention or understanding of the

market conditions of inner city America. This has impacts at the

household level as well as the neighborhood level. In recent work

in Harlem, we found that 40 percent of addresses don’t have credit

scores associated with them. In the city of San Francisco, 33 percent don’t. And so this lack or absence—or this lack of information

has created risk adversity in the commercial lending sector but risk

exuberance in the residential lending sector, but it is 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 appropriately focused

on the impact of foreclosures, the scale of the problem extends,

spills over to a broader community development challenge around

retail. There is emerging evidence now that’s beginning to correlate

the correlations with obesity and diabetes rates and the lack of access to full service groceries. Those grocery stores are imperiled in

underserved markets. There is a group of evidence that is beginning to emerge on the incidents of crime and the saturation of

pawn shops and payday lenders and whatnot. And those numbers

will continue to increase as our neighborhoods are imperiled.

So those same kind of conditions and these same kinds of challenges that we as a community, whether it is the Urban Institute

or Social Compact or the NNIP Partnership, are all trying to face

everyday are now imperiled because of the lack of understanding

we have at the neighborhood level.

In our own work, we’ve had to create a tool that allows us to understand the foreclosure impact, because just this week, when we

were out at the International Council of Shopping Centers with a

variety of cities discussing this work with retailers, they were all

interested in what is the foreclosure impact in Detroit or in Cleveland or whatnot. So the 15,000 stores that they may be closing this

year and certainly not building will be drawn to these numbers as

we begin to propagate them. But by depending on national data

sets, we’re not going to have the full understanding of what’s going

on in Fruitvale, Oakland, or South Central LA or places like that.

73

We’ve had—so because of this, we’ve had to create a response

where we have partnered with a variety of private-sector partners

such as Property Advisors out of Cincinnati, Ohio; First American

CoreLogic; and University Partners to begin to build out our own

tools so that we can now assess the market value of every home

in the city of Detroit, the foreclosure value of that same home, the

abandon value of that same home, the impact on adjacent properties, the impact on city taxes and whatnot, and do that in a real

time meaning, because as the city of Detroit begins to address their

own foreclosure issues with their own foreclosure office and whatnot, they have to have a dashboard to be able to understand what

the impact of this problem is.

And just to sort of put this in perspective, when you look at the

statistics that are being put out there about Wayne County, which

Detroit is located in, where the Center for Responsible Lending estimates that the impact on every unit in Wayne County, there’s

been a $1,700 impact. The fact of the matter is, if you look at the

foreclosure data itself it is a $15,000 impact. This is not on a

$200,000 home; this is on a $60,000 home. So on the for—on average, the foreclosure impact has been almost 25 percent.

The market conditions for market rate housing, the 65,000 transactions that have been conducted in the last 2 years, has led to a

depressed 10 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 to have the skill to understand what the—the

individual impact is on households and on neighborhoods, that we

can’t create the level playing field. And I have to stress that, in our

own work, having information to be a place where people, stakeholders can come together to understand what the existing conditions are, to agree at least on what that information is; it is inefficient to try to find lots of other solutions without having that common understanding of what neighborhood conditions are.

And so I think that the kind of tools that we’re talking about,

that Phyllis is talking about, that others are going to talk about

creates the existing conditions that we can all agree on, and then

we can build solutions from that.

Thank you, sir.

[The prepared statement of Mr. Talmage follows:]

74

75

76

77

78

79

80

Mr. KUCINICH. I thank the gentleman.

We’re going to move to questions now to talk about the appropriateness of Federal intervention.

And Professor Been, you’ve stated that there is justification for

intervening, I think you’ve said, directly to protect neighbors, tenants and communities. As you may know, however, there is opposition of 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 to help neighbors? And if it

does, what are your thoughts about it?

Ms. BEEN. The problem of moral hazard——

Mr. KUCINICH. Could you bring—make sure that’s on and bring

it closer.

Ms. BEEN. Oh, I’m sorry.

The problem of moral hazard usually, you know, is considered to

be this situation where a decisionmaker is able to escape the cost

of some of their decisions and therefore may take riskier actions.

Right?

The neighbors of these properties, the tenants of these properties

and the community weren’t involved in the decision whether or not

to take out this loan or whether or not to grant this loan. Right?

So they are suffering from external effects. They 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 external effects being imposed upon people who weren’t 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, you know, the

moral hazard that may be involved down the road——

Mr. KUCINICH. You said that——

Ms. BEEN [continuing]. Balancing test.

Mr. KUCINICH. You said that foreclosure-driven blight will not be

reversed by a market correction, that foreclosure driven blight is a

public issue requiring public policy interventions. As you know, the

administration seems to be—strike that.

This is to Ms. Betts. You’ve said that, with respect to foreclosuredriven blight, that it requires public policy interventions. As you

know the administration seems to be taking a different view for the

moment. What, in 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?

Ms. BETTS. I think one of the witnesses earlier was talking about

how some properties can be reintegrated into the housing stock by

the market. And typically those are going to be the more valuable

properties.

I would 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 was highly fraught with moral hazard. The

absence of fiduciary responsibilities on the part of brokers with

81

their clients and so on, that form of market failure is in fact what

put us where we are at this point in time, such that an intervention that can make a difference in neighborhoods that are on the

cusp, an intervention that could help revitalize some neighborhoods

that are closer to the precipice, an intervention that can make a

difference in inner-ring suburbs. I think that the overall cost of this

hasn’t adequately been calculated by those who would say that this

isn’t a public policy issue.

Mr. KUCINICH. I want to go back to Professor Been.

You have found that the amount of decrease in housing values

that can be attributed to the foreclosure of neighboring property

values, according to the concentration of—varies according to the

concentration of foreclosures. For the record will you explain to this

subcommittee the difference between looking at the concentration

of foreclosures on one hand versus the number of foreclosures on

the other?

Ms. BEEN. 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 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 100 foreclosures all concentrated in one neighborhood versus 100 foreclosures spread out

throughout the city; right? The 100 foreclosures that are spread out

throughout the city might in fact have a greater overall dollar cost

because they are near more properties. They are driving down the

values of more properties.

So you really have to look at both the question of concentration

and the total number affected by the foreclosures.

Mr. KUCINICH. Just a final followup question, here. 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 it be typical that in a given county or metropolitan statistical area or State, you’d find certain neighborhoods

that have higher concentrations of foreclosures than others, or is

it typical that you would find foreclosures equally distributed over

large areas?

Ms. BEEN. No, foreclosures are very, very concentrated.

For example, in New York City, we have what we call 55 neighborhoods. In the last year, half of the foreclosures were in just nine

of those neighborhoods. They are 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 are not evenly spread, they are very concentrated according to race and geography.

Mr. KUCINICH. Thank you very much.

I’m going to go to Congresswoman Watson.

Ms. WATSON. Just real quickly. Thank you, Mr. Chairman. I

think you probably alluded to my questions.

What factors affect the likelihood that a property going into foreclosure will end up vacant? And what factors affect the duration

82

that a property remains vacant? And let me send this one over to

Professor Been.

Ms. BEEN. 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, again, the concentration. It is 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

is looking. So that may affect the propensity of a property to actually go into vacancy.

In terms of how long they stay in vacancy, again, 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 is 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 to fall.

Ms. WATSON. Mr. Chairman, thank you so very much for this

hearing.

We’ve got votes on the floor, so I’ll yield back my time.

Mr. KUCINICH. I thank the gentlelady.

We’re going to take a recess since there are votes.

At the conclusion of votes, we’ll come back, and I’m sure that’s

true of the other Members who have been present.

Do we know how many votes there are?

Four?

I would say we’re probably looking at at least a half hour, maybe

40 minutes. So why don’t we generally try to be back here by 20

after 4, and then we’ll proceed with another round of questioning

from the witnesses in a second panel, and then we’ll go to the next

panel.

I just want you to think about this, though, on this break that’s

coming up. Again, I want—I would like to have a further discussion

about this idea of the wealth accelerating upwards. There is a massive transfer of wealth going on. Somebody is making a lot of

money here, has already made a lot of money. You know, we could

be looking all the way up to hedge funds, and—but there are all

kinds of other players. So I want to talk to you a little bit about

that when I come back.

Thank you.

This committee is in recess subject to the call of the chair. See

you right after the votes.

[Recess.]

Mr. KUCINICH. The committee will come to order.

I would like to go back to Professor Been.

You’ve stated that there are differences between the effects of

foreclosures and vacant buildings in hot markets versus cool markets. What are the important differences between foreclosures in

vacant properties occurring in one market or the other? And in

what ways should Federal intervention differ in those so-called hot

83

versus cool markets? And do you think the amount of aid, say on

a per capita basis, should be different for a hot market versus a

cool market?

And if we could start by defining terms here. Hot market.

Ms. BEEN. OK, a hot market is one in which property prices are

generally appreciating or at least staying stable. But generally it

is considered the property prices are appreciating.

The difference between a hot market and a cold market in terms

of foreclosures is that if the market is hot, if you can turn around

and sell your property when you—when 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, risking

their credit rating and 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 then end

up in foreclosure because they can’t sell the property.

So the other difference between hot markets and 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.

Mr. KUCINICH. Do you think there is any difference—should

those markets be treated differently in terms of providing any kind

of Federal aid or intervention?

Ms. BEEN. 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 impact from foreclosures on neighboring

properties even in hot markets, meaning the research I reported

was in New York City. New York City has 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 or going through the entire foreclosure process, the maintenance is still often lower, the stability of the neighborhood is lower.

Mr. KUCINICH. Right.

Ms. BEEN. So it still has an—sends a message. Right?

Mr. KUCINICH. Thank you.

Mr. Talmage, you’ve done a lot of work in Detroit, Cleveland, St.

Louis, among other places. These are long-suffering locations where

rising vacancies have been a problem.

Has the fact that these cities had preexisting vacancy problems

at all, has it insulated them at all from the effects of the subprime

mortgage meltdown?

Mr. TALMAGE. No, I don’t think it’s insulated it. In fact, I

think——

Mr. KUCINICH. Exacerbated it?

Mr. TALMAGE. Exacerbated it. You know, in the case of Detroit,

where you’ve declined from a population of 2 million to 1

million——

Mr. KUCINICH. Could you make sure that mic is on?

Mr. TALMAGE. Yes, sir. I this better?

Mr. KUCINICH. OK, that’s good.

Mr. TALMAGE. In the case of Detroit where you—the population

has fallen from 2 million to 1 million in 50 years, that you already

84

had a blighted property situation to begin with, whole tracts of the

city are blighted; that by adding another 35,000 foreclosures onto

those rolls in the last 2 years, that the velocity of decrease has

changed much more rapidly than other places, such as cities along

the East Coast.

Mr. KUCINICH. How would foreclosures that occurred let’s say in

say 2000 or, you know, a little later show up today in neighborhoods? Would they be vacant? Would they be owner occupied?

Mr. TALMAGE. Would they be vacant or owner-occupied? I think

that the foreclosures——

Mr. KUCINICH. What was it like in 2000?

Mr. TALMAGE. In 2000, you had—you had new, I’ll use Detroit as

my example. The city of Detroit had led the MSA in the number

of transactions for the last 5 years, meaning that the number of

home sales that were being transacted was the highest rate then

of any of their surrounding communities.

The number of new housing permits and rehabilitation permits

led that MSA as well for the same period. The foreclosure rate, and

you can see the velocity of the number of homes that were provided

high-cost loans increased from 2003 to 194, and then 195, and then

196. And that velocity has increased more, you know, and at tremendous speed. So I think that when there really—we’re going to

see 60,000 foreclosures in the city of Detroit this year, that impact

will have a much higher impact on values of other community assets, whether it’s households or not, than anything we could have

forecasted today. So you see a velocity trend occurring that we

haven’t seen the bottom yet.

Mr. KUCINICH. Professor Been, I think I remember in your discussion, and maybe Ms. Betts got into it as well, the greatest

amount of subprime loans went into areas that have been—that

are primarily minority, African-American, in many cities, like in

my city of Cleveland. We have seen other counties similarly situated, perhaps in communities that you talk about in Shelby County.

Ms. BEEN. Yes.

Mr. KUCINICH. Let’s go back a little bit, 30 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 red lighted. OK? Is it in your—in your—in your

estimation or anyone here, was the—the lending institution certainly knew where they weren’t spending money. Is it possible that

someone just—you know that lending institutions looked at a map,

in your estimation, and determined, well, you know, we haven’t

loaned money here, and we’re not in compliance with the Community Reinvestment Act. We’ll package these subprime loans, send

them out there, and who cares if anybody can pay them off or not.

Have any of you thought about that at all.

Anyone want to try?

Ms. BETTS. I’ve actually looked at that quite a bit. Our local retail banks, which are the ones that were to be scrutinized under

the Community Reinvestment Act——

Mr. KUCINICH. Talk closer to the mic, ok, bring the mic closer.

85

Ms. BETTS [continuing]. Our local retail banks are responsible for

less than 20 percent of the originations, mortgage originations in

Shelby County. The slack has been taken up by the national independent mortgage companies, most of which are not depository institutions, which are 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 the Community Reinvestment Act. The breach was filled

by this other set of lenders. And some of us, in fact, talk about

predatory green lining. It was almost as though we drew a green

line around these particular neighborhoods and targeted them for

these particular kinds of loan products.

Mr. KUCINICH. I would like—does anyone else have a response to

that?

Mr. TALMAGE. I would just echo that I think Phyllis is absolutely

right, that, in Cleveland, it wasn’t the actions of Key Bank, or in

Detroit—I mean, by larger numbers than what she was saying in

Memphis, that the amount—the number of loans, the percent of

loans that were given by the unregulated broker community far exceeded what national averages were. So I think that if you were

to look at, you know, a market in itself or a census block in itself

of where those loans originated from, that you would come back

and say it is clearly the unregulated community.

Mr. KUCINICH. I think it is really important for this subcommittee to, as we get deeper into this issue of subprime, to look at

where the mortgages originated. They may vary community by

community, but clearly, at some point somewhere in some market,

somebody made a decision and said, if we can write tens of millions

of dollars in subprime loans, forget the documentation. We can

then sell those upstream, capitalize 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 would like to do, and I’d like the members of panel, if

you find and area that you think is worth looking at in the communities that you’ve worked with or that you studied, we’d appreciate

any kind of amendment to your testimony or addendum that we

could include in what you’ve already contributed, which has been

pretty significant.

Mr. Tierney, did you have a followup question?

Mr. TIERNEY. Just a couple of wrap-up questions.

Mr. KUCINICH. Yes, please.

Mr. TIERNEY. Ms. Been, if we wanted to identify the external effects of foreclosures, what would be the appropriate unit of analysis? Would a zip code level be better than a county? Would a census

tract be better than a zip code, or would a block be better than a

census tract? What’s the right analysis of vehicle to use there for

purposes of where we should direct the Federal funds?

Ms. BEEN. Generally, in thinking about the external effects, you

want to think about the neighborhood. And the unit that maps on,

imperfectly, but maps on best is typically a census tract. Now, you

don’t always have data by a census tract. And then you tend to go

up to a zip code and then to county level, but you really want to

86

start at the neighborhood. I mean, 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 need.

Mr. TIERNEY. In keeping with that, I think we just ought to put

something on the record of what’s simplistic to all of us. And if we

want to bring these things down to the—the values right down to

the label of neighborhood pocketbook on this, if a neighbor had equity in a house that was about 28 percent of value, and then his

house lost that 28 percent of value because the property next to it

was vacant, they would essentially be wiped out. They’ve lost all

that savings. They’ve lost whatever wealth they had in their house;

right?

Ms. BEEN. They’ve lost—if they try to sell the house, they certainly will not make as much as they would otherwise.

Mr. TIERNEY. Right. If that’s all they had, they’re obviously in

pretty dire straites. So I think that the record can reflect that foreclosure crises, when you have a lot of vacant properties, they

robbed a number of neighbors of their wealth on that?

Ms. BEEN. Yes.

Mr. TIERNEY. So the long-term consequences for a community

like that, what societal consequences of these neighbors losing their

equity in that way do you foresee?

Ms. BEEN. Well, I think the societal consequences are several

fold. One is, when we see what that looks like, it looks like the

Bronx in the 1970’s, where you have neighborhoods that are

pockmarked by abandoned buildings. And it is very hard to get

that neighborhood back together.

The second major societal consequence is that these are neighborhoods that, during the 1980’s and the 1990’s and this decade,

we 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 is not just government money, but

it’s private investment, it’s foundation investment that’s all being

wiped out.

Mr. KUCINICH. Would the gentleman yield?

Mr. TIERNEY. Yes.

Mr. KUCINICH. You know, in connection with that, this is very

significant part of our discussion, because I can go back to my own

neighborhood, my own district in Cleveland, and for example, there

is an area call the Four City Park area. 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 lots of value. You

can actually see it. And that’s something that when we talk about

the transfer of wealth, that’s a transfer of wealth from the public,

away from the public.

So, Mr. Tierney, thank you. I yield.

Mr. TIERNEY. Ms. Betts, Mr. Talmage, do you want to add anything to that or have we pretty much covered that ground?

Ms. BETTS. I would just underscore that, in a lot of markets, and

I would look at medium-size cities in the South and Midwest in

particular, not so-called rust-belt cities, where middle-income

neighborhoods that didn’t get actually a lot of the Federal money

87

and that have been a substantial source of the tax base and the

primary source of wealth-building for all of those families in the

middle, that if we increasingly have upscale neighborhoods and

downscale neighborhoods, then the impact on the individual families will be difficulty in wealth-building that can be passed from

generation to generation. And the impact on neighborhoods will be

that if you’re not in an upscale neighborhood, then you’re going to

be experiencing a lot of the issues that the neighborhoods that Professor Been has talked about have experienced for years. And I

don’t think that’s where we want to go with our cities.

Mr. TIERNEY. Mr. Talmage.

Mr. TALMAGE. I would—also I think that the unit of analysis

should always be at the block group level if not the household level.

I do think that the data exists. It is hard to come by. It is not necessarily formatted for this use, but I think that’s something that

can be addressed.

But on the social impact, I think one of the things that we see

in the cities that we’re working with around the country is that

there is a tremendous amount of pressure on cities to begin decommissioning neighborhoods, to remove public services from entire

communities. And you know, this is something that the Bronx

thought about back in the 1970’s. And I think that kind of public

policy agenda, it could have a long-run consequence that would accelerate some of the household wealth impacts that we’ve seen—

we’ve seen over the last decade by for—not forcing but asking

neighborhood communities or individual households to relocate to

other neighborhoods where they are not connected to or whatnot.

And I think that is the law of unintended consequences that if we

don’t sort of grapple with it now, understand what the impact is

at the household level and at the neighborhood level, that some of

these very bad public policy decisions will move forward.

Mr. TIERNEY. Thank you.

Mr. Chairman, may I ask one more closing question over my

time a little bit here.

Mr. KUCINICH. Of course.

Mr. TIERNEY. Mr. Talmage, in your written testimony, you

thought that the value of the equity stripped in Detroit was about

a billion dollars.

Mr. TALMAGE. Yes, sir.

Mr. TIERNEY. Do you have an estimate of what you think it is

nationwide?

Mr. TALMAGE. No, but we have a methodology to get to that.

Mr. TIERNEY. I bet you do.

Thank you very much.

I yield back, Mr. Chairman.

Mr. KUCINICH. I thank my colleague.

Again continuing this discussion about infrastructure, I mentioned a park and how that’s deteriorated. But also think about

this in terms of neighborhoods because you have an investment of

a public infrastructure, a water system, a sewer system, electricity,

telecommunications; that’s all there.

If people are—if no one’s—if there’s a substantial decrease in the

population of an area because of foreclosures, there is a loss of revenue to those companies. And also the infrastructure can deterioVerDate 11-MAY-2000 11:48 Jun 24, 2009 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 U:\DOCS\49971.TXT KATIE PsN: KATIE
88

rate as well and which requires greater repairs. You can see the

damage when you go into some of these communities. So it can be

a public loss of revenue, which actually can turn around and increase the cost to other ratepayers if it is a utility, because you

know what, you have less ratepayers. And it can increase the cost

of water and sewer as well. So you have a cycle here of cost transfers that just sometimes seems not to end.

I’m grateful for the panel’s participation. We’ll have some followup questions from the committee staff after this hearing, I can assure you. And the quantification that you bring to this discussion

is extremely important, and it is going to be very useful as this

committee continues to go further.

We are going to dismiss the second panel with the thanks of the

subcommittee and call the next panel forward. Thank you very

much.

As the third panel is taking its place, we’re fortunate to have

outstanding witnesses on our third panel.

We have Mr. Alan Mallach, 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 2006, Mr. Mallach published a book on abandoned property strategies entitled, ‘‘Bringing Buildings Back: From Abandoned Properties Into Community Assets.’’

Mr. Doug Leeper is the code enforcement manager for the city of

Chula Vista, CA. He’s owner of the Code Enforcement Solutions

consulting firm. Over the course of his career, Mr. Leeper has supervised the enforcement of 30,000 cases; 1,100 warranted abatements; and 275 warranted demolitions.

Mr. Dean Baker is the cofounder and codirector for the Center

for Economic Policy Research. He has previously worked as a senior economist at the Economic Policy Institute and assistant professor as Bucknell University. Dr. Baker has authored numerous

books and articles, including his recent publication entitled, ‘‘The

United States Since 1980.’’ Dr. Baker earned his Ph.D. in economics from 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 to swear in all witnesses before they testify.

Please rise and raise your right hands.

[Witnesses sworn.]

Mr. KUCINICH. 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 testimony, a summary of your testimony, keep the summary under 5 minutes in duration.

Please keep in mind that your complete written statement will

be included in the hearing record, so we won’t miss a word of what

you have to tell us.

Mr. Mallach, if you’d like to start.

89

STATEMENTS OF ALAN MALLACH, SENIOR FELLOW, NATIONAL

HOUSING INSTITUTE; DOUG LEEPER, CODE OF ENFORCEMENT MANAGER, CITY OF CHULA VISTA, CA; AND DEAN

BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC POLICY RESEARCH

STATEMENT OF ALAN MALLACH

Mr. MALLACH. Thank you Mr. Chairman and members of the

committee.

Mr. KUCINICH. And please pull that microphone closer, so we can

hear you.

And if staff would assist Mr. Mallach in making sure that the

microphone is on.

Please proceed.

Mr. MALLACH. First, I want to commend the committee for tackling this issue and also for focusing on the neighborhood and property aspects of these issues, which are so often overlooked.

I would 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 reused. But the other part is actions to minimize the harm that vacant properties do while they

are vacant and before they can be re-used.

I would 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. And 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. Second,

their programs are poorly organized or ineffective. Third, for financial or other reasons, they are unwilling to use their powers, particularly to step in where the owners won’t maintain their properties.

And the foreclosure issue has 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 is 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 judiciary foreclosure

processes, the process can take anything from 9 months to over 2

years, from the point where the foreclosure starts to the point

where title actually passes. And during this period, these properties typically fall in limbo. They 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

90

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 second area is the 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 that it will

go very quickly into the hands 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 are not going

to continue to harm the 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 a 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 lenders 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 where it is

an REO, a 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 50 percent

of the REO properties that got into the hands of realtors had already suffered significant property damage. And this is a cross section, of not just the Clevelands and Detroits, but of the Las

Vegases and the Palo Altos and the San Diegos.

So unless we can figure out a way—or to 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 to the question of how resources

are 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 and the job

growth in the Las Vegas area. Foreclosures in Dayton or Buffalo

will not be.

91

So, again, thank you for your attention, and I hope that this is

useful.

[The prepared statement of Mr. Mallach follows:]

92

93

94

95

96

Mr. KUCINICH. Thank you very much, Mr. Mallach.

Mr. Leeper, please proceed.

STATEMENT OF DOUG LEEPER

Mr. LEEPER. Thank you, Mr. Chairman. It’s an honor to be here,

and it’s an honor to represent the code enforcement profession

throughout the United States.

In anticipation of the record number of potential foreclosures on

the horizon, the city of Chula Vista drafted and passed an abandoned residential properties ordinance. Vacant property registration ordinances are nothing new and have been existing in some

cities for decades. The Chula Vista 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 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 clause. Simply put, the clause allows lenders to secure and

maintain property against 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 helps stabilize the

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 it

maintained to the neighborhood standard. That’s what our ordinance requires: security and maintenance to the neighborhood

standard.

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.

Chula Vista did not budget for becoming the gardener and property manager for the 2,000-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 with monetary fines and

penalties.

As a code enforcement manager, my bottom line is people, quality of life, neighborhood livability. The lenders’ bottom line is dollars. So until it 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 wouldn’t adhere to it. Registrations were slow at first, but with the first round of penalties

ranging from $3,000 to $10,000 per property, lenders soon acknowledged that the city of Chula Vista meant business.

97

Currently there are approximately 450 properties registered in

Chula Vista. Most are in compliance with the neighborhood standard and are posted. We require posting of a 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 suspend enforcement 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 it a lender, a mortgage company, a trust

or a 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 admit to holding an interest in

the property. One of our first problem properties came by way of a $30,000 fine

for noncompliance while the initiator, the originator of the loan, argued with the entity they sold it with as to who was responsible.

The property sat vacant and vandalized for 3 months before they

finally decided. They then spent $16,000 to bring the property in

compliance and asked that I waive their fines and penalties. I did

not.

Due in part to its new focus, Chula Vista’s ordinance received

some press and attention from other cities, almost 200 cities

throughout the Nation. The California State Assembly is considering passing legislation based on Chula Vista’s ordinance. The cost

to local jurisdictions from this foreclosure fallout is near incalculable: HOA dues, homeowners’ dues, go unpaid and services go undone; delinquent taxes; reduced property taxes; increased calls for

service through theft, vandalism, fraud and arson; increased insurance rates for neighbors; reduction in other city services; and displaced renters.

I 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 with the

U.S. Navy, and she didn’t know what to do. We were able to get

her in touch with the lender who 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, unmaintained homes

can have a negative financial impact for other homes within an

eighth of a mile. What will the impact of 2 be, of 10, of 30?

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 saw redevelopment as a light at the

98

end of the tunnel find 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 2 million to 3 million foreclosures. That’s

equal to every single family home in the State of Missouri. Or at

a rate of 3.75 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.

Mr. KUCINICH. I thank the gentleman for his testimony.

[The prepared statement of Mr. Leeper follows:]

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

Mr. KUCINICH. Mr. Baker, thank you.

STATEMENT OF DEAN BAKER

Mr. BAKER. Thank you, Chairman Kucinich. I appreciate the opportunity to address the committee.

I’m going to take a little different attack than 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 and number of foreclosures we’re seeing by simply

changing the rules on foreclosure. And the essence of this is—actually I call this an own-to-rent concept that we give people facing

foreclosure the option to stay in their home as a long-term tenant.

And a version of this was actually introduced just today by Representative Grijalva in the form of a Saving Family Homes Act of

2008. And I would argue that this is, in effect, the most effective

way available 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 laws so that we set a

date, I believe in the law it’s July of last year, July 2007, that

mortgages issued prior to July 2007, 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 home was

purchased, and it also only applied to owner-occupied homes.

And one of the nice aspects of this is that owner-occupied clause,

we know this is frequently exploited. Very often people are not always honest in claiming that they are owner/occupants. In this

case that 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 as a tenant is not really worth anything. So

in that sense it’s a very nicely targeted measure.

The other aspects of it, it requires an appraisal of the fair market

rent. This also is easily done. We have a well-developed appraisal

system. 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 Bureau of Labor 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 no new bureaucracy. 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 can be implemented without delay. We

don’t have to put this in place and then wait for 3 months, 6

months to make sure that we have the administrative apparatus

to deal with it. As soon as Congress were to pass the law, it could

immediately take effect.

Now, the benefits, I think, are very direct and very clear. First

and foremost, obviously it assures housing security, that in the

event you have a homeowner that likes their home, they like the

schools, they like the neighborhood, they have the option to stay

there as a tenant. It also means that the house doesn’t go vacant,

117

obviously, if they’re staying there, so we don’t have the problem of

vacant property being stripped, being vandalized, being used as a

crack house, etc., the issues that have already being raised. We

don’t have that problem.

Also, and I think this is very important, perhaps the most important part of it, is I actually think it will secure home ownership,

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 a very long period

of time. Recognizing that this is a much less 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 puts some muscle behind the exhortations that President

Bush and others have made urging lenders to do just that. So I

argue that in many ways this would accomplish exactly what we

want as 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’ll mention one economist in particular that raised it

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 would just say on that is that I view the sanctity of

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 can mention in the recent past was that when they recently

changed the bankruptcy law, they chose to apply that retroactively

to debt that was incurred under preexisting bankruptcy law. So in

that particular case, in the case where we changed the law in a

way that was adverse to debtors, Congress apparently was not concerned about the sanctity of contract. So I would say that need not

be, you know, an overriding concern; an important concern, but

need not be an overriding concern.

Last, just in commenting on this, I have talked about this around

Washington and around the country a fair bit, and I point out that

this is actually an idea that has attracted a lot of bipartisan support. Some of the strongest proponents are actually fairly conservative Republicans. I will mention Desmond Lachman, who is a fellow at the American Enterprise Institute, who has been a very

strong proponent of this proposal. Another person of some prominence, Andrew Samwick, 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 quick, very costless, very bureaucracyfree way of dealing with the most immediate and worst effects of

this problem.

So I’ll conclude my testimony. I just do want to add I would very

much welcome the opportunity to address the question you raised

118

with other witnesses about moral hazard. I think that’s an interesting—some things you may find interesting on that topic.

Mr. KUCINICH. Thank you very much, Dr. Baker.

[The prepared statement of Mr. Baker follows:]

119

120

121

122

123

Mr. KUCINICH. Lets go to questions of the panel. I would like to

begin the discussion with Mr. Leeper about property maintenance.

Your city is holding the lenders responsible for upkeep of vacant

properties. I think people on this subcommittee would be interested

to know how does the city of Chula Vista hold Wells Fargo, for example, a $48 billion company, number 41 on the Fortune 500, how

do you hold them accountable?

Mr. LEEPER. My father told me that money talks. All mine says

is good-bye.

Mr. KUCINICH. There’s another part of that equation then.

Mr. LEEPER. That’s true. And we don’t walk. I have contacts in

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 that Wells Fargo Home Mortgage holds this note, I have an

e-mail address and a direct phone number now to someone in Des

Moines, Iowa, where their problem property division is, that has

shown such interest that they’ve actually flown out to Chula Vista

to look at our city and see what the impacts are.

Mr. KUCINICH. Do you issue fines to scofflaws?

Mr. LEEPER. Yes, we do.

Mr. KUCINICH. And have you sued to enforce your ordinance?

Mr. LEEPER. We have liened properties. Our liens are going as

a special assessment on the property taxes, and they are paid.

Mr. KUCINICH. And are you keeping up with the problem with

this ordinance?

Mr. LEEPER. 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——

Mr. KUCINICH. Do municipalities need additional funding for

code enforcement?

Mr. LEEPER. In a word, yes.

Mr. KUCINICH. This is one of those issues that relates to HUD.

And 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 apply money accordingly. But would you agree that if cities are

going to be empowered to deal effectively with the effects of the

subprime scandal, that housing enforcement is where it begins?

Mr. LEEPER. Yes. Code enforcement is a very——

Mr. KUCINICH. Code enforcement.

Mr. LEEPER. Code enforcement is a very integral cog in the

wheel.

Mr. KUCINICH. Mr. Mallach, did you want to get in on that?

Mr. MALLACH. If I could add to that, first I agree 100 percent.

I think they do need additional resources, but they also—and I

think this is particularly the case in the older cities in the Midwest

and the Northeast—they also need significant help building their

capacity to do it right, using technology so they can operate efficiently.

Mr. KUCINICH. What capacity needs to be built?

Mr. MALLACH. Well, the skills, the skills of the inspectors; the

ability of the code enforcement departments to organize their work

so they are not complaint-driven, but systematic; their ability to

use the kind of technology that increases their efficiency and gets

away from creating mountains of paper that typically get lost.

124

Mr. KUCINICH. Does the Federal Government have any role in

that at all?

Mr. MALLACH. 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.

Mr. KUCINICH. What about incentives required in dealing with

the real estate industry?

Mr. MALLACH. Pardon?

Mr. KUCINICH. 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 any aspect of

what we’re talking about as being a bailout?

Mr. MALLACH. 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.

Mr. KUCINICH. Would you define for people who may have just

joined us what you mean by ‘‘moral hazard?’’

Mr. MALLACH. A 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, too, will be bailed out.

Mr. KUCINICH. Give us an example.

Mr. MALLACH. Well, again, suppose if—and this is an extreme

case—suppose the Federal Government offered to buy out people’s—these mortgages that are now under water at 100 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 industry has done so for the past 8 or 10 years, and the

Federal Government would bail them out.

Mr. KUCINICH. Thank you.

I want to ask Mr. Baker here before I go to Mr. Tierney, as an

economist what would you say to the objection raised by the administration that the bill that Congress just passed, H.R. 5818, creates

a moral hazard and constitutes a bailout; what would you say?

Mr. BAKER. I think there can be some issues of moral hazard, but

that’s going to be true in almost anything the government does,

that there’s always some issues. I think in this case they’re 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 moral hazard involved in the

Federal Reserve Board’s recent actions vis-a-vis the investment

banks, because this really goes very much to the heart of the housing crisis we’re seeing.

What Ben Bernanke, the Chair of the Federal Reserve Board,

said is that he’s going to come to the aid 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 overleveraged. They’re paying no price for that. They’re shareholders, they’re top executives.

125

They made enormous fortunes from overleveraging themselves,

something I think almost everyone agrees on. And Ben Bernanke

said that the Fed, the agent of the government, the central bank,

is going to hold them harmless.

Second, the investors, we talk about the international investment

flows, these people obviously didn’t know what they were doing.

What the market is supposed to say is, well, then, you lose your

shirt. But what Ben Bernanke 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 investment banks didn’t become so

overleveraged, we wouldn’t have seen the sort of run-up in housing

prices, the sort of explosion of subprime lending. That couldn’t have

happened. So that’s a moral hazard very much at the heart of the

story, and to the best of my knowledge, the Bush administration

has been very silent on it.

Mr. KUCINICH. Thank you, Mr. Baker.

Mr. Tierney.

Mr. TIERNEY. Thank you.

Just so you will know, people in my district didn’t miss that.

When I go around to community meetings, they get that right

away.

Mr. BAKER. That’s good.

Mr. TIERNEY. What about the Bear Stearns clients all got bailed

out, and here we are worried about an individual homeowner, and

what’s the difference on that?

Mr. Baker, I’m interested in your proposal. You mentioned you

target only those houses that have a value less than the median

price of the market in that area; is that what you said?

Mr. BAKER. That’s correct.

Mr. TIERNEY. Explain to me why that is.

Mr. BAKER. Again, this is something obviously in actual passage

you would decide who you want to benefit from it. But my idea in

tying it to the median home price in the area, and I believe Representative Grijalva stuck to that in his bill, is that you want to

help the people who are sort of least able to deal with the problems

themselves.

Now, if you envision 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 would want to have

that be higher. But I think at some point—and if we’re talking

about million-dollars homes, we might sort of bristle at the idea

that these people aren’t able to take care of themselves.

Mr. TIERNEY. It just seemed a little arbitrary for me, because at

some point if somebody is just over the edge, and I didn’t know if

there was some other rationale for that. I think we may want to

look at how we measure that, because certainly some people might

pay a little more than median value but still be in just as much

trouble in sort of an equivalent fault issue on that. But thank you

for the answer on that.

126

So it seems to me with that sense of a situation where the lender

is not getting paid back on their loan, but they foreclosed, they

can’t get the people out of the house, if they don’t foreclosure and

the person rents it, their fair market value of the rent may not

equal what they were getting on their loan, and how does that not

become a confiscation of their property?

Mr. BAKER. Well, it’s certainly a loss 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 a few years back, that there you had people who

took out debt under one set of bankruptcy rules, which were comparatively lenient, and then the government changed that. And to

my knowledge at least—now, maybe there’s 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 free to 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.

Mr. TIERNEY. I was going to ask you if you happened to have

some lawyers look at that in terms of the constitutional implications of taking on that. If they basically have somebody paying less

than their value, there’s not really sort of an enforcement mechanism. It’s actually you’ve disallowed them the use of their property

and stopped them from enforcing their mortgage to them and giving them less in return.

Mr. BAKER. The lawyers I have spoken to on that, I’ve spoken to

a number of lawyers, in their view they thought it would be upheld

in the courts since they are getting compensation. So it’s not a

question that they are getting nothing. They are getting compensation. They aren’t getting as much compensation as they would like,

but they are getting compensated.

Mr. TIERNEY. Let me just ask each of the other gentlemen what

your thoughts are on that proposal.

Mr. MALLACH. First, 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 both

houses of the New Jersey State Legislature which, among other

things, would enact a similar provision.

But I think there’s one difference, and which I think responds to

your issue, which the way it’s written under the New Jersey bill—

and this hasn’t been 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 domicile, then the owner would be given 60 days notice, which is the

requirement under the State antieviction law, and then would be

required to vacate in order that the new buyer could move in. So

in that case the lender 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.

127

The owner should be allowed to remain in the property as a tenant

as long as they can.

Mr. TIERNEY. Mr. Leeper.

Mr. LEEPER. I’ve had conversations with some of the folks in the

lending industry that are actually, at least in Chula Vista, considering leaving those people in the property, because then it’s not vacant and subject to our ordinance, which I’m all for. Occupied properties fall victim to theft and vandalism far fewer, at a lesser rate

than unoccupied properties. They’re generally more maintained,

and they don’t become the rotting tooth in the smile of the neighborhood. So anything that they can do to continue to keep the

neighborhood as stable as possible, be it an own-to-rent or even

leaving good solid renters in, you know, while the property is being

marketed to somebody who wants to use that residence as an

owner-occupied would be a good thing.

Mr. TIERNEY. Mr. Baker, what do you say to Mr. Mallach in New

Jersey’s adjustment to your proposal?

Mr. BAKER. Obviously a lot would depend on what’s on the table

and what’s politically feasible, and you’re the better one to answer

that than me. But I think that would be certainly a very big improvement over current law. Now, it gives less security to the

homeowner who is facing foreclosure, so I would prefer 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 of time, and it does certainly address the problem that

we won’t have the property going vacant, so it does get us much

of the way there.

Mr. LEEPER. According to the real estate industry, occupied properties are more marketable as well, so it maintains the value and

helps retain the value of the entire neighborhood.

Mr. TIERNEY. Mr. Chairman, I have to leave, but I want to tell

you I want to thank you for having this hearing and for the excellent witnesses that you presented, and thank all of them. You really help us think through this issue and bring it down to the neighborhood level where it affects us all. And so thank you for your

time. Thank you for your patience in waiting through the votes

that unfortunately interrupt us in these afternoon hearings, but I

want to congratulate you. And thank you on the hearing, Mr.

Chairman.

Mr. KUCINICH. Well, Mr. Tierney, as always your participation

helps make a difference in a hearing. Thank you for being here.

Before we wrap this up, I just have one question I want to direct

to Mr. Baker. We’re talking about moral hazard, and it seems that

the administration or the discussion of H.R. 5818 are concerned

about the moral hazard of benefiting the so-called actors in maybe

bad faith who would somehow benefit from a bill that would make

someone not whole, but return someone’s financial position. Does

the concept of moral hazard seem to apply to Wall Street in this

case?

Mr. BAKER. Well, obviously they’re not concerned about the aspect of moral hazard applying to Wall Street. You know, again,

there has been, I think, fairly explicit on the part of the Federal

Reserve Board and Chairman Bernanke an attempt to minimize

128

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, so arguably that’s a positive aspect. But at

the same time one could easily talk about putting in place policies

that prevent a financial collapse while at the same time extracting

some toll on the bad actors.

Mr. KUCINICH. If the buyer is to be aware, is the lender to be

prudent?

Mr. BAKER. 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 wouldn’t have half the problem we have today.

Mr. KUCINICH. Thank you very much.

I’m Dennis Kucinich, Chairman of the Domestic Policy Subcommittee of Oversight and Government Reform. Today’s hearing

has been entitled, ‘‘Neighborhoods: The Blameless Victims of the

Subprime 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. This subcommittee is going to continue to probe this matter deeply, as well

as to, as we have had, recommend 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 in 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 the residential

vitality restored to many of our communities.

This committee stands adjourned. Thank you.

[Whereupon, at 5:25 p.m., the subcommittee was adjourned.]

Æ