May 2, 2016


Finding a way out of the county’s mortgage mess

LORAIN — With its boarded up windows and trash-filled yards, the house at 739 W. Ninth St. in Lorain is a neighborhood eyesore, but when Howard Goldberg saw the for-sale sign on the side of the house on a recent day, he called the toll-free number.

Goldberg, Lorain’s Community Development Department renewal director, frequently calls numbers of what he suspects are absentee owners of foreclosed homes. The sign said the mortgage payment for the dilapidated home is $300 per month with a $300 down payment.

“They’re carrying paper on a piece of junk,” Goldberg said after leaving a voice mail. “This is a classic case of an interim investor. It’s classic. There needs to be a way to make sure whoever’s selling this takes care of the property.”

About 10 minutes later, Goldberg got a call back from a man who identified himself as Tony Ramsey and said he was calling from California. Ramsey told Goldberg the mortgage is for up to 20 years, which works out to a total cost of $72,000. Ramsey said his Los Angeles-based company, Paladin Realty, self-finances and buys hundreds of foreclosed properties around the nation that are bundled by banks and sold in pools.

Ramsey said that if he can’t make arrangements with the foreclosed homeowner, he tries to sell the properties. He said he deals with prospective homeowners by phone and through the mail.

“We don’t necessarily look at credit reports. We just need to find out if the individual has the means to make the payments,” Ramsey told Goldberg, admitting he’s never seen the house in person. “We sell everything as is, and that’s why we can do it so cheap on the financing.” After the call, Goldberg said the idea that someone might pay $72,000 for a decrepit home that would require thousands of dollars to renovate is infuriating.

“A man from California is playing with properties in our town that he’s never looked at,” Goldberg said. “They’re preying on people with bad credit.”

Goldberg later said that while Paladin has a valid foreclosure on the property, the company doesn’t own it, and he was unsure why Ramsey was trying to sell it. Ramsey didn’t return calls for comment.

Neighborhoods are now dotted with empty foreclosed homes like the one at 739 W. Ninth St. in Lorain, or “shadow inventory” homes that have been foreclosed on or repossessed by banks but have not been put on the market. There are some 1.35 million homes that are part of the shadow inventory, and Ohio has one of the highest rates with about 64,479, according to RealtyTrac, a real estate website that tracks foreclosures.

In Lorain, one out of every 462 homes was in foreclosure in February, according to RealtyTrac. Elyria’s rate was one in 578. Both were worse than Lorain County’s overall rate of one in 616. Ohio’s was one in 543, and the national rate was one in 637.

Goldberg is one of many beleaguered city officials and nonprofit housing advocates around the nation trying to plug the dikes in the wake of a wave of foreclosures that are destroying communities one neighborhood at a time. Housing advocates say there are several ways to stabilize neighborhoods.

The first is to get lenders to write down principal payments of homeowners who are “underwater” — they owe more than their house is worth — at current market rates. Lenders — many of whom profited through risky investments and loans and were bailed out by taxpayers — would take a hit.

However, they would get some of their money back and people could stay in their homes, preserving neighborhood stability. In February, the federal government and five major banks reached a settlement of up to $25 billion over bank employees fabricating documents in foreclosure proceedings or improperly reviewing them. About $10.2 billion will go for principal reductions, the New York Times reported.

Ohio will receive $335 million of the settlement, according to a news release from Ohio Attorney General Mike DeWine. DeWine, who estimated that one in three Ohio homeowners is underwater, said about $102 million will go for refinancing loans. The estimated value of refinanced loans to underwater homeowners is about $90 million.

Settlement critics say it’s not nearly enough. About 10.1 million of the 55 million mortgage holders in the U.S. are likely to default by 2018, according to Laurie Goodman, senior managing director at Amherst Securities Group, a broker specializing in mortgage-backed securities. Goodman, who testified to Congress in September about upcoming defaults, said that the U.S. Treasury Department could make principal reductions mandatory as part of the Obama administration’s Home Affordable Mortgage Program.

Lorain attorney Zach Simonoff, who’s been representing distressed homeowners since 2009, agrees. Simonoff said lenders have too much discretion. He said that in many cases loan writedowns should be mandatory by banks.

“Because they’re the ones who forced the price rise,” he said. “Just getting cash and giving it to the states to decide how they’re going to assist mortgagees, I don’t think’s going to help until the banks are required to do actual modifications that are enforceable under law.”

Another option is allowing foreclosed homeowners to become renters in their homes with the option of taking out a mortgage on the home in the future if it were financially viable.

“The costs of rerenting it aren’t there, no one has to move, and the borrower has some ties to the area,” Goodman said. “For those borrowers who want to stay and can afford to do so at a current rental level, that is the best execution all around.”

The third way is through the creation of land banks. A land bank is a government entity that would try to obtain federal taxpayer money to raze or rehabilitate homes. There are some 3,000 blighted homes in the county that need to be demolished, according to Jim Rokakis, executive director of Thriving Communities Institute, a Cleveland-based group that is creating land banks around Ohio. Land bank advocates expect Lorain County to create a land bank later this year.

“You can get the money, get control of these properties, take them down (and) you’ll add to the value of properties left,” Rokakis told Lorain City Council members on Feb. 13.

Lorain officials are also considering adoption of a vacant property registry to increase accountability for upkeep of homes in foreclosure. Modeled after a registry in South Euclid, the Lorain registry would require yearly registration for $100 by the owner, agent, lessee or party in control of any vacant building or mortgagees who have filed pending foreclosure actions. They would be required to make monthly inspections to ensure properties are up to code. Since the registry was approved in South Euclid in March 2010, some 300 homes have come into compliance or are in stages of compliance, according to South Euclid Building Inspector Rick Loconti. About 200 of those properties have been sold.

“It’s an excellent tool to stabilize neighborhoods,” Lorain’s Goldberg said.

‘So many bad guys’

However, even if these approaches were adopted, city officials and homeowner advocates concede foreclosures remain a massive problem. They say the foreclosure predicament didn’t happen overnight and won’t be resolved quickly.

The foreclosure problem dates back to deindustrialization that began in the 1980s hitting Rust Belt communities like those in Lorain County hard. It caused substantial job losses and subsequent foreclosures over the last 30 years. But the full effect of foreclosures wasn’t felt until Wall Street came up with a novel way to repackage debt.

Mortgages, along with bonds and car loans and other securities, were bundled into collateralized debt obligations that were sold to investors such as hedge funds and public pension funds and investment companies. By packaging junk bonds with legitimate loans, the CDOs received triple-A ratings from the ratings agencies, which were being paid by the big banks and investment companies.

This created an incentive for the subprime loan industry. Subprime lending with no income, no asset loans and adjustable rate mortgages skyrocketed in the once-staid banking industry.

“There’s so many bad guys in this story. It’s incredible,” said Lorain County Clerk of Courts Ron Nabakowski, who watched county foreclosures explode in the 2000s. “There’s so many people who should be in jail for what they did.”

Nabakowski, a banker from 1963 to 1971, said he never made a loan to someone whom he believed wasn’t good for it. But with “yield spread premiums,” mortgage brokers received fees from lenders for high-interest loans to borrowers who paid smaller up-front fees.

“People came in who couldn’t qualify for a 4 percent rate, but if you got them in at a 6 percent rate, you got to keep the difference,” Nabakowski said. “Mortgage brokers all over the damn country were moving on up into higher tax brackets on the basis of stealing from people they were doing business with.”

According to the statistics, in 2006 Lorain County had 2,116 foreclosures compared to 533 in 1996, a 297 percent increase.

Higher interest rates and balloon payments in the later years of adjustable rate mortgages helped trigger the housing market collapse and Great Recession. They virtually guaranteed foreclosures on homeowners who often lacked income and understanding of complicated mortgage paperwork.

“Was I one of those people that probably shouldn’t have had a home? I don’t know. I was making good money at the time,” said Allen Keslar, whose Baldwin Avenue home in Elyria has been foreclosed on and is under water. “I don’t think I was taken advantage of. I just think I was naive and ignorant going into buying.”

Keslar, 40, said he was making about $40,000 per year installing drywall in new and remodeled homes when he bought his home in 2005. Work had always been plentiful. Keslar recalls his father, Jim Keslar, also installed drywall and was always working, so the housing collapse in 2007 came as a shock.

Keslar lost his job and declared bankruptcy in 2009 and his home was foreclosed on in 2010. He owes $95,539 on his home.

Foreclosures, which dropped 19 percent in the county last year compared to 2010, are expected to increase this year on the heels of the $25 billion settlement.

However, Keslar, who found work as a painter in July, may get to stay in his home. He applied for $25,000 from the Hardest Hit Fund, federal taxpayer money distributed by the states for distressed homeowners. Since its launch in 2010, the fund has provided some 4,000 Ohio homeowners with $34 million as of early February, according to the U.S. Department of Treasury.  If Keslar gets the money, RWLS Mortgage, which holds his mortgage, will forgive the remaining $75,539 he owes.

Because RWLS purchased Keslar’s mortgage for pennies on the dollar from GMAC, the company stands to make a profit, said Mindy Cooper Wright, Lorain County Urban League housing director. Cooper Wright works with foreclosed homeowners like Keslar to try to keep them in their homes.

“What the housing market needs to be turned around is to have servicers forgive principals and reduce principal balances,” Cooper Wright said. “This program with the state of Ohio is wonderful.”

Keslar, who would have to pay the money back if he moves within five years, is ecstatic.

“The last five years have been like a total roller coaster ride,” Keslar said. “I’m ready for something good to start happening and build on that.”

‘We’re trying to rebuild’

If Keslar can keep his home, it will avoid ending up like the foreclosed home at 941-951 Washington Ave. in Lorain. That house is typical of what happens when a foreclosed property is neglected.

The backyard of the partially boarded up home is littered with empty bottles and cans and graffiti is on the walls. Inside, the house has been stripped of everything of value. Fiberglass and broken fixtures litter the floor, and plywood is peeling from the ceiling and walls.

Goldberg said an investor bought it in foreclosure and quit on it after realizing there was no money to be made from flipping it.

“They sell these things and trade them (and) it puts a lot of pressure on us,” Goldberg said. “The lender shouldn’t have been able to sell this. They should have had to tear it down.”

The house, which sold for $75,593 in 2003, was bought by Lorain officials in 2010 for $4,900. They will use federal taxpayer dollars from the Neighborhood Stabilization Program to demolish it.

Since 2009, 59 Lorain homes have been demolished and 16 homes have been rehabilitated, with nine of those either sold or with a sale pending, Goldberg said. Elyria has demolished 44 homes and rehabilitated 13 homes, four of which have been sold, according to Angie Byington, Elyria Community Development director.

Lorain Mayor Chase Ritenauer, a land bank supporter, said the stabilization program puts too much emphasis on rehabilitating foreclosed homes over demolishing them. However, there are some potential success stories involving rehabilitation like the foreclosed house at 958 Lakeview Drive.

Goldberg said it previously sold for over $100,000. Fannie Mae, the quasi-public mortgage financing agency that backs private lenders with taxpayer money, sold it to Lorain officials for $16,100.

Goldberg said the home will be renovated or rebuilt. It will then be resold to someone with good credit who agrees to take home ownership training rather than being sold to a landlord or flipper. The home must be owner occupied for at least 15 years.

Next-door neighbor Ron Feldkamp, who moved into his home in 1962, said he’s relieved about what Lorain officials are doing, which he said will keep property values up.  Feldkamp watched the house slowly deteriorate as flippers got ahold of it in recent years. He worried about the effect on the neighborhood.

“It’s been a great neighborhood. My kids grew up here. My grandkids grew up here,” he said. “It’s a shame what happened to this house.”

Goldberg said the house becoming blighted rather than refurbished or rebuilt could’ve ruined the whole block. He said it’s an example of an uphill battle, but one worth fighting.

“This is a national problem, not a Lorain problem, but we’re being forced at a cost to do something about it,” he said. “We’re trying to rebuild ownership and stabilize.”

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